The best performing supply chain operations in the world didn’t start out as highly efficient profit centers. Through struggle and sometimes failure, leading companies have refined, adapted, and improved processes to meet the needs of the organization and customers. If you look back at companies such as GE or Apple, the supply chain that the company was built upon is far from anything you might recognize in today’s supply chain. This is due largely to major advancements in information technology, which enable companies to process much more information at a much faster pace then before, and the adoption of global supply chain operations which are connecting the entire supply base involved with delivering products to end customers.
Supply Chain operations have undergone eras of centralization, decentralization, and mixes of both strategic approaches. Each approach has its own unique advantages and disadvantages depending on the type and complexity of the organizations supply chain operations. Today, we will look at the benefits and drawbacks of each organizational structure and the recent adoption of a hybrid supply chain, where strategic functions are centralized and operational functions are decentralized.
First, let’s examine the core definitions, benefits, and drawbacks of a centralized, decentralized, and hybrid supply chain organization.
The concept of centralization is to have a supply chain group in a central location that oversees and manages operations for the organization. By having the key supply chain roles in sync with one another in one location, the supply chain strategy and execution of the strategy becomes seamless. Organizations that are looking to reduce their total supply chain costs tend to take a more centralized approach to ensure there is less redundancy and aggregated decision making.
- Enables standardized common processes across all business units
- Provides economies of scale for bargaining power and increases visibility into spend management
- Reduces suppliers, and increase efficiency by leveraging Tier structure of supply base
- Enables rapid change management and global process change, thus reducing time and impact of supply chain disruption
- Supports data management and tracking across each business unit and echelon of the supply chain
- Reduces redundancy in staffing therefore lowering total operating costs
- Delays response time on key decisions that need to be made for each business unit or at the plant level because of time zones, availability, and executive approval
- Centralized groups have difficulties taking into account the unique business structures that different business units or plants have to operate under
- Centralized decision-makers do not have all the necessary information to make critical decisions to benefit the organization
The concept of decentralization is to have supply chain groups at the business unit level or plant level oversee and manage operations for their specific business unit. By having key supply chain roles in sync with one another at individual locations, the supply chain strategy and execution can be proactive to that unit’s operations while being reactive to critical situations. Organizations that highly value customer service tend to take a more decentralized approach to supply chain to ensure the right people have decision making authority to maximize customer satisfaction.
- Allows each business unit to have authority to make critical timing decisions that have a major impact on the organization
- Diversifies risk throughout the organization. If one central authority makes a poor decision, it will generally affect each business unit operating under that decision
- Gives authorities to “experts” who understand the local or regional business and make business decisions based off each business structure that is unique to them
- Empowers decentralized authority to continuously innovate and seek continues improvement to daily business operations that can be shared company wide
- Creates silos of spend and data management across the individual business units and plants
- High potential of incentive misalignment between the delegating authority and delegates
- Decreases bargaining power when different suppliers are used for the same or similar commodities
- Decreases visibility into supplier, customer, and spend management
- Lose control over operational functions at the corporate level
In a hybrid structured supply chain, strategic functions are centralized and operational functions are decentralized. When utilizing a hybrid structure, the decisions that have high risk (strategic), cost, and impact will be executed at the centralized (headquarters) level whereas the decisions that have low to medium risk (tactical & operational), cost, and impact will be executed at the decentralized level (plants). In this structure, strategic functions are centralized for cost considerations (valuable to stakeholders) and operational functions are decentralized to maximize customer service (valuable for customers).
- Centralization of strategic functions allows for economies of scale and lowers cost
- Decentralization of operational functions enhances the ability to provide better customer service and lower transportation cost
- Hybrid supply chain structures allow companies to optimize all areas of their supply chain to lower costs, mitigate risk, and provide exceptional customer service
Adopting a Hybrid Structure
From strictly a cost perspective, studies show that the centralization or decentralization of all functions do not result in the lowest cost supply chain. In a centralized structure, transportation costs are typically going to be higher and customer service is going to decrease. In a decentralized structure, raw material and operations costs are typically going to be higher because of redundancy in staffing as well as lower buying power among commodities. A hybrid strategy is the balance and combination of both centralization and decentralization within an organization. By centralizing strategic functions such as sourcing and long-term capacity, and decentralizing operations functions such as order fulfillment and shipment handling, global supply chains can maximize customer requirements while lowering total supply chain costs as a percentage of sales.
Moving forward, the days of complete centralization and decentralization within global organizations will soon become obsolete. Due to the increasing competition, and advancements in technology, becoming stagnant in a fast paced environment will no longer suffice. In the past, we have seen large industrial product manufacturers focus solely on cost reduction because of the low demand variability and consumer products focus solely on customer service because of the high demand variability. No longer will superior cost or customer service win market share in the global economy, it has to be both. In the marketplace today, we are seeing this hybrid structure come to life where cost and customer service are the driving factors behind consumer purchasing decisions. Now is the time to align your global supply chain into a hybrid structure, and maximize the output of centralized and decentralized functions into a hybrid structure to increase customer service and lower total supply chain costs.