CENTRALIZE VS DECENTRALISE SUPPLY CHAIN PROCESSES
The debate to centralize or decentralize procurement processes is that organisations have been having for years; however, in supply chain processes context little has been written and said in my opinion (I did google it!). In recent years big organisations have observed a move towards centralized supply chain processes.
In this blog I have tried to explain my view of the benefits and drawbacks of a centralized approach, presenting similar perspective on decentralize approach of supply chain processes. Here, we look at arguments for and against and also some example of natural central processes and natural plant processes.
Centralize Supply Chain Processes
Centralize Supply Chain Processes are those that can be managed from a remote location, can serve multiple sites, and drive synergy by serving multiple sites. They provide for less duplication of resources and provide efficiency and effectiveness by managing key processes centrally. In some cases it can save money and bring economies of scale. Some examples of the example of centralize supply chain processes that can be managed centrally are shown in below image.
Processes like Sales Inventory & Operations Planning (SIOP) , Forecasting and Master Scheduling are pretty common in some organisations. By using appropriate tools demand forecasting can be aggregated from all sales subsidiaries and then distributed to the supply plants or warehouses to do rough cut capacity planning and materials requirement planning. By doing demand aggregation there is higher chances to reduce demand variation and bull whip effect in upstream of supply chain. In other example logistic management & its related spend can be managed centrally on a global level, by doing that companies can get bigger voice with the supply base. It also reduces duplication; more spend visibility and the ability to make the most of organizational spend.
We can also argue that centralize supply chain processes can improve moral in supply chain team and made better use of highly talented supply chain professionals. There is also a potential to maximize the total cost of ownership; the ability to better prepare for new product introduction and development; information in the items master maintenance should be reliable and up-to-date; and there is huge potential for targeted development of supply chain competencies.
However, there are also drawbacks to central supply chain processes approach. There’s too much reliance on technology as opposed to human capital and skills, which could be disastrous as local knowledge is missing. To make it work the organisation requires heavy investment in information technology and systems which could be costly. This is supposed to reduce paper flow, but policies and procedure to make it work could potentially create more paperwork and red tape.
Other disadvantages potentially include too much power vested in one individual, innovation being stifled as supply chain processes become too prescriptive, and possibility it will take too long to identify systems errors and bugs!
Decentralize Supply Chain Processes
Decentralize supply chain processes can be defined as processes that must be performed in the plant because they involve physical interaction with the material. There processes are the ones where the decision-making is ‘localized’. It involves supply chain managers, planners, manufacturing teams, health and safety team and possibility trade management folks. Some examples of the example of centralize supply chain processes that can be managed centrally are shown in below image.
There are number of advantages of this approach, such as empowering employees, encouraging creativity and allowing many minds to work on the same problem. Speed of doing this is also a big advantage. Decision making process can be very quick and reflect local operating dynamics. For example receiving, shipping and assembly decisions there is shorter approval process when required, faster access to support and speedier replacement of defective material and quality issues, either product or processes quality.
Furthermore, there is no heavy investment is needed up front, managers are able to use first-hand knowledge and experience to improve their areas and there’s more accountability. Decentralize supply chain processes provide less bureaucratic with less power vested in one individual. Errors can be quickly rectified quickly & easily in items master. There is a reliance on human capital and associated skills as opposed to technical platform.
In terms of disadvantages decentralize supply chain processes can result in duplication of effort in number of areas, longer planning cycles and create inefficiencies in key process. There is a danger than local buyers and planner will become paper pushers and/or expeditors with no real commercial or strategic experience & responsibilities.
Another big disadvantage is silo mentality which could become norm. There’s also the potential for corruptive practices, maverick approach to supply chain processes and mostly commonly master data can be compromised. Moreover, there is less preparedness for new product development and less utilization and development of talent pool.
Like most things in life there is no right or wrong answer to select which approach is correct and they most importantly Centralize or Decentralized approach are not mutually exclusive. In some cases, it might be worth considering hybrid approach to make the best of both worlds. For example, central origination can create set of policies and procedures for all plants and key strategic decisions are made centrally. And then it will pass on to plant to follow or adhered too.
If you have any questions about the Supply Chain Processes manage centrally or decentralize or have any experience applying it in your life or business, leave your thoughts in a comment below—I’d love to hear from you
As per the stated info on centralization and decentralization , I too agree on forecasting and planning part should be handled centrally, which can help in easy stock transferr at times of variation in demand and delay in dispatched by supplier
VMI model can also implemented with suppliers by central forecasting, which can dwindle the stock maintaince at plant
Mithun, very valuable comments specially regarding VMI model.
Mudassir, you are forgot to specify the main problem of centralization of procurement. It is the managing and maneuvering of cash flows. And as result, besides is other, is the elimination or drastic reduction of opportunities for theft of money by the implementers on the ground.
And decentralization of procurement is mainly used when very large the removal of parts of the business from the mother company. To branches are delegated to purchasing is not the whole range of products, but only a part. Usually this is writing in the regulations and often is indicator is the price of purchased products. But it is one of indicators only. Could be many other of indicators.
Your are conclusion is basically correct.
Foat, I don’t claim to know everything!
Both theories contains pros and cons. It’s up to higher management to seek which one is suitable to their objective. Off course nothing is good or bad, its your expertise to set and select pace of different concepts which suits your product and business plan.
I think the basic differences have been brought out nicely. There is no one solution which is universally applicable with all benefits only. But there are specific areas where one or the other will be found more useful. Some of these could be like:
1. FOR HIGH VALUE ITEMS LIKE ‘A’ CATEGORY items, Centralisation saves a lot of money. Cost is saved in establishment/manpower expenses, getting better response from vendors because of bulk orders and better prices too, using expertise in procurement etc. are some of the areas in favour of centralisation.
2. However, where manufacturing operations involve variety of products from unit to unit, Decentalisation is a better option. While utilising local knowledge, it saves on time for procurement, logistics cost in transportation, better control and coordination with the production units and better inventory management, which are clear benefits over a centralised system.
3. As a compromise, in very large organisations like Railways in India, what is generally practised is that for common usage items of large values/large consumption, orders are processed centrally, with provision to identify area wise consumption and supplies to be delivered to the users as per their requirement on some agreed freqency. For items of dprcific nature used by the unit alone, decentralised procedures are authorised and results monitored from a central location.
Thanks for detailed. feedback
Abid Hussain Aftab
Very Valuable piece of Information, One Addition once New Product need to launched in the Market where there is now updat information about New Product trend, It must be manage centrally instead of decentralized way.
I certainly agree Abid, NPI should be managed centrally.
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Glen Dy Ceballos
I think a centralized approach present more advantages over a decentralized one. The master is the heart of supply chain and should be standardized all across the org. Here are my 5 cents on the disadvantages of a decentralized supply chain process 1. Duplicates are possible! It is costly to have a single item having multiple codes with different description. 2. Analytics is compromised – consumption patterns, average costing, stocking levels, etc. -are greatly affected and difficult for purchasing to come up with a strategic sourcing. 3. Prone to corruptive practices on non-stock direct, VMI and consigned inventories. Just to name a few
I fully agree with you when you say there is no good or bad solution in terms of centralizing or decentralizing. It depends of the context of the company, of the IT maturity, of the geographical implementation, and of teh supply chain maturity. My point of view is that the supply chain organization should not be determined for ever, it should evolve with the context, focusing on more centralized processes for some periods of times, on more decentralized processes for some others, depending on the company issues and strategy. But the supply chain strategy must remain centralized !