Centralized vs. Decentralized Systems in Supply Chain Management

06.28.2021

centralized-vs-decentralized-systems-in-supply-chain-management

Deciding between centralized and decentralized supply chain management systems requires asking yourself a few questions: Where are your customers located and what is important to them? What types of products are they demanding? What is your budget and are there things you can start doing right now to cut costs? If you’re looking to shift to decentralized operations, do your current suppliers approve of that? Do you even have the right infrastructure to make that shift in the first place?

After reflecting on the answers to these questions, you’re ready to get down to the nitty gritty of transforming your supply chain. In this blog, we’ll provide a brief overview of the advantages and disadvantages of both centralized and decentralized supply chain management systems, and discuss the idea of combining the two into a “hybrid” supply chain.

Centralized Supply Chain

A centralized approach to supply chain management tends to be the most common for businesses in virtually every industry. In a centralized system, you’ll typically find a single business headquarters and/or a single warehouse full of departmental managers in areas like logistics, distribution and procurement. These managers are responsible for overseeing their specific area throughout the entire supply chain from this central office. If the organization is large, there may be multiple hubs, but these will be spread far enough apart to handle production lines in different time zones.

Advantages of Centralization

Having a central authority make all of the most important business decisions offers greater transparency and efficiency than you would find with a decentralized system. Cross-functional collaboration and communication is encouraged, in turn facilitating the standardization of systems and business processes, and the development of your company culture for greater long-term stability. If you decide to change your processes, rebrand, or upgrade your equipment or technology, retraining employees and implementing those upgrades become exponentially quicker. 

Centralized sourcing can help you develop economies of scale for more bargaining power with suppliers, thereby reducing the number of suppliers you’re relying on. With fewer suppliers to worry about, less redundancy in staffing, and only one set of production, operation, maintenance and utility costs to pay for, your overall costs will be significantly reduced. Finally, any problems that arise can be quickly identified and resolved by the relevant managers or personnel.

Disadvantages of Centralization

A centralized supply chain does also have its downsides. For one thing, while centralized operations may be better from your perspective, it’s sometimes worse from your customers’ perspective. With a single point of distribution, customers will find their shipping costs going up as you’re forced to deliver products further and further away from your main hub. 

Additionally, you’ll find that the staff in your central office have limited knowledge of location-specific problems. It becomes more difficult to recruit and onboard talent from outside of the headquarter’s immediate geographical region. Depending on specific business protocols, if executive approval is required before any major business decision can be made, this will inevitably result in slower response times at the plant level, either because of time zone differences, too-complex communication channels, or corporate hierarchies. Another unfortunate reality is the increased vulnerability to disruptions caused by natural disasters and other catastrophic events, as all of your products, staff and information are located in one place.

Decentralized Supply Chain

In the decentralized approach to supply chain management, business operations shift from the corporate center to be closer to the consumer. Each plant, warehouse or node in the supply chain is given greater autonomy in decisions regarding purchasing, distribution, and selling different products in different markets. Now, more than ever, customers expect fast deliveries and prompt service. Decentralized supply chains are agile enough to keep up with the ever-fluctuating demand and rising expectations of consumers in industries like ecommerce, pharmaceuticals, food distribution and medical equipment.

Advantages of Decentralization

Risk diversification and mitigation is perhaps the single greatest benefit to a decentralized supply chain. By decentralizing order fulfilment and shipping, the supply chain develops greater flexibility and resilience in handling localized, regional issues affecting supply and production and makes you more competitive in your market. There’s no need to panic if management in one location makes a poor decision as the other locations are less likely to be affected.

If software and automation technology are properly integrated, the ability to monitor inventory in real-time between all locations can alleviate some of your concerns about warehouses running out of stock, as inventory can easily be obtained from other locations. While these are all great outcomes for you, the most meaningful benefit of decentralization is the one your customers realize. The decentralized approach allows you to better serve any specific area’s customer demand with faster shipping times, reliable, local customer service, and budget-friendly same-day or next-day delivery.

Disadvantages of Decentralization

Of course, just like a centralized system, a decentralized system has its own downsides as well. Data is not as easily or as frequently shared amongst individual plants and business units in the supply chain, making it difficult to achieve transparency and data visibility. Decision makers at each location may have their own production goals or business objectives, limiting control over the overarching business operations. Corporate culture is likely to be somewhat diluted in each location, especially if the locations are spread throughout the country and have little contact with each other on a regular basis.

There is sometimes a lack of collaboration between raw material suppliers, warehouses, retailers and production sites, and this can lead to a decrease in managerial bargaining power with suppliers and partners as suppliers often want to ship in bulk to a single location, as opposed to multiple, smaller shipments. Finally, you’ll find that raw material costs, as well as operational costs associated with managing multiple facilities and hiring workers, will be higher. 

Hybrid Supply Chains: Getting the Best of Both Worlds

In a hybrid supply chain system, the major strategic decisions that are most valuable to stakeholders are made centrally, while operational decisions are made by individual sites, warehouses and plants, so as to maximize the benefits to the consumer. You get to enjoy all of the advantages of a decentralized system with the added benefit of having a corporate center that can help overcome complex, large-scale issues. And, while it remains more expensive to staff and maintain a centralized facility, you’ll manage to save on transportation costs in the long run -- a tradeoff many organizations would be happy to make.

Transforming Your Supply Chain with DATASCOPE WMS

DATASCOPE WMS works closely with customers looking to build brand new, greenfield centralized distribution centers, as well as customers looking to grow and optimize their existing ones. We offer consulting on how to optimize material flows and warehouse layout, the best material handling equipment to use, and how to maintain a centralized data source where all members of your team can easily share pertinent data with other branches of your chain. Our cloud-based systems make data visibility more transparent and data storage more secure.

DATASCOPE WMS also works with customers who are group companies needing an effective inter-branch transfer system. Running on SYSPRO, our Supply Chain Transfer (SCT) and Goods in Transit (GIT) modules have been developed to improve the speed and accuracy of movements from one center to another. SCT's are loaded into SYSPRO, but the picking, packing and releasing of these orders is handled in DATASCOPE WMS.


Whether you’re looking to decentralize, centralize or become a hybrid, DATASCOPE WMS has solutions for each option. Schedule your demo today to see how our WMS can be incorporated in your supply chain!


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