Should you centralise or decentralise supply chain operations?

13 October 2020

Covid-19 has reignited a debate over the merits of centralising or decentralising supply chain operations, according to an industry analyst.

Ken Chadwick, research vice president at Gartner, said the pandemic had “changed the game” and supply chain professionals needed to “think differently” about their supply network and consider an organisational redesign.

Speaking at the Gartner Supply Chain Symposium, Chadwick said: “As Covid has challenged our supply chains and our thought process around whether or not we're organised correctly, should we be more centralised or should we be more decentralised? 

“Even before Covid, we found that a lot of companies were considering reorganising, but Covid has changed the game. It's likely that... a significant amount more companies would say that they're considering organisation redesign as a result of some of the impacts that they've seen coming out of Covid.

“Either they need to reduce costs, or they need to restructure in response to different channels, or they need to consider their supply network a little bit differently.”

Chadwick said centralisation meant functions report up into a single global hub of supply chain management, while decentralisation is business differentiation, meaning every business unit owns its own functions and is managed from local level.

He recommended companies reassess their network organisation by “defining a new business and operating model … and considering the evolving operating mindset of your business when you're thinking about what you're trying to accomplish. Those then come together in the notion of an organisational design, supply chain span of control, and the scale of work.”

There are positives and negatives to both operating models, so professionals need to tailor it to their business.

Centralisation drives standards and efficiencies as it’s owned by one global supply chain leader from an integrated management hub, enabling better strategic alignment, cost efficiency, and end-to-end visibility. However, working from a centralised hub could result in loss of local knowledge, the use of generic solutions, and slower decision making.

Chadwick said: “We have global hubs that are driving activities like analytics, sourcing and logistics, all reporting into a chief supply chain officer. There are a lot of benefits to that strategic alignment across all of those functions, ensuring that since they report into the same leader, they have the ability to have aligned goals and objectives.

“We see cost efficiency and shared service organisations where we can take transactional work, and put them into one hub so that we can process accounts payable or accounts receivable or customer fulfilment and orders a lot more efficiently. Hopefully there’s better visibility, as by aggregating all of that information up, we can see what's going on around the entire supply chain network, and make better balanced trade-off decisions.”

Meanwhile, decentralisation enables differentiated business, customised solutions, local accountability and faster decision making, but leaves management vulnerable to fragmented decisions, and lack of visibility and expertise.

Chadwick said: “We're in-country, right there at the facility, where we can take accountability for the decisions and the growth and the challenges that we have. 

“The problem is that there are a lot of fragmented decisions at an enterprise level, or even at a regional level when we have these kinds of business unit splits. For example, we may not be optimising all of our manufacturing network appropriately, or all of our raw material inventory.”

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