Centralised vs. decentralised supply chains — the pros and cons

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It’s a new age, and modern businesses must adapt their supply chain to the times. But what does that mean?

Thanks to modern technology, decentralising your supply chain is now a potentially viable option. But what is a decentralised supply chain, what are the pros and cons, and why is it different to a centralised supply chain?

What is a centralised supply chain?

A centralised supply chain is the traditional supply chain model, featuring a central headquarters and warehouse based in a single location. If a company managing its supply chain centrally has too great an area to cover for one base (i.e. the United States) it may have more than one location – for example an east coast and west coast base. Notably, though, these are still large, centralised hubs, controlled by the HQ entity.

From a supply chain management standpoint, a centralised supply chain operation is typically managed at the headquarters – which handles all up and downstream decisions. This HQ will feature procurement, distribution and other logistics officers who handle the work of the entire network.

Advantages of a centralised supply chain

1. Limited operational costs

By managing the entire supply chain from a central location, organisations can monitor their operational costs and work hard to stay within a limited budget. For example, with only one physical warehouse there is only one set of physical warehouse costs, like maintenance, utilities and so forth (not to mention staff). This can lead to lower storage costs overall.

2. Easier to standardise

Anyone who has tried to standardise a decentralised business will tell you it’s not always the simplest task. So, when organisations focus their costs on a centralised system and decide it needs standardising in some way, there are fewer people to retrain, fewer systems to update, fewer facilities to rebrand, etc.

3. Easier to make improvement

On top of being easier to standardise, centralised operations can also be easier to upgrade. Whether this is hiring new staff, purchasing new assets or upgrading existing technologies (i.e. moving to an automated supply chain or investing in inventory management software), there are fewer facilities needing upgrades.

4. High availability of products

Warehousing all products in a central facility can lead to greater availability of said products, as they are always at hand. Organisations can bank a large amount of inventory depending on their seasonal needs and managers can keep a close eye on stock levels to ensure there are no problems.

5. Decisions made centrally

Organisations that desire tight control over their operations may benefit from a centralised supply chain due to the nature of central decision making. Core, highly trained leaders can make strategic decisions based on the changing requirements of the business in a relatively efficient and easily managed manner, as there is only one location to lead.

6. Potential for lower shipping costs upstream

As you likely know, a lot of suppliers prefer to ship in bulk to a single location. FTL shipping to a single location can cut costs and increase logistics efficiency, meaning some upstream partners may be more willing to negotiate better deals to a company with a central warehouse as opposed to a decentralised one — which we will explain below.

Disadvantages of a centralised supply chain

1. Potential for higher shipping costs downstream

Suppliers may enjoy shipping to one location, but operating out of a single hub can make it more costly to ship products in a timely fashion to the end customer – especially over great distances. In an era of increasing shipping competition (where one-day and two-day shipping are becoming expectations), any delay in shipping times or any increase in shipping costs at the customer level could harm business competitiveness. Logistical challenges may also restrict an organisation’s ability to produce rush jobs in the event of a customer emergency – another potential harm to competitiveness.

2. Limited flexibility to move into new markets

Agility is often a key component of organisational growth, and a company that has anchored itself to a major, centralised hub may struggle to remain agile in a changing market (or to take advantage of new markets) if they are not convenient to the location, or if the location cannot support said market (i.e. poor availability of suppliers).

3. Limited disaster planning

There’s a reason that the old adage says not to put all of your eggs in one basket. Organisations that rely on a single hub are at greater risk of calamity (i.e. natural disaster). Any damage done to the hub could greatly impact the entire business because everything is in one place.

Read more: Recommendations for Managing Supply Chain Risks and Challenges

decentralised supply chain Do you need a centralised supply chain or a decentralised supply chain — or a hybrid of both?

What is a decentralised supply chain?

In a decentralised supply chain, operations are spread out over a series of nodes in a network. Often these nodes are small offices and warehouses, designed to be situated closer to the organisation’s end customer. There may still be a ‘central’ HQ and perhaps even a central warehouse, but they take on more of a support role for the individual nodes, which can be specialised to suit their environment (i.e. only stocking certain products and not the entire range, depending on customer needs).

Sometimes, companies don’t even own their nodes. Indeed, it’s relatively common for organisations that wish to expand but which can’t afford their own premises to outsource certain operations to partners who already have the correct facilities. They may even rent warehouse space that is shared with other companies.

Decisions in a decentralised supply chain can still be made centrally and rolled out across the network, but often the nodes are given a degree of autonomy to be able to manage their own unique business requirements. Typically this will involve the purchasing of supplies and distribution of goods, and may include some strategic autonomy depending on how different the node locations are to head office.

Advantages of a decentralised supply chain

1. Potential for lower costs at the local level

One of the primary benefits of a decentralised supply chain is that it can drastically cut logistical costs at the local level. Operations are situated near the end customer, bringing those shipping costs right down. Nodes that can also access local suppliers may also be able to limit inbound costs, too.

2. Increased flexibility

Where centralised hubs could not, decentralised nodes can act in a more flexible manner. If there is an opportunity in a local market they have the semi-autonomy to manoeuvre into that space and potentially trial new products (see below). Also, if an organisation is already well-practised in managing its supply chain from afar, it may find it easier to extend its reach into new markets that open up where it has no existing node – especially if it utilises outsourcing opportunities to begin with.

3. Better customer service

Decentralised companies can try to offer better customer service in two areas: shipping times and trust. Of course, by situating their operations near the end customer, organisations are better able to offer those faster shipping times that people expect. They can also call themselves a local business or at least advertise that they have local customer service staff, which may help build trust in the community.

4. Test new products at a smaller scale

Nodes are a perfect testing ground for new products. With a limited audience that the local owners understand very well, decentralised facilities can trial out new products with a captive test audience, check the data, and report back to HQ on the success or failure.

5. Ability to stock greater inventory amounts

It’s common that warehouses in a network will be smaller than what they might have been were the supply chain centralised. However, with enough warehouses spread out around the region (or world), chances are the company can make and/or stock a greater amount of inventory than were it confined to fewer premises. This could enhance its ability to deliver products to its customers even if one warehouse happens to, for example, suffer a stockout due to unpredicted demand. If one warehouse runs out, there are more available.

6. Reduced disaster risk

An additional benefit to our point above, companies stocking their products across locations can help mitigate some of the risk of disaster. Should one node become damaged or otherwise inoperable, its peers can spring into action to limit the impact on customers and, thus, profitability.

Disadvantages of a decentralised supply chain

1. Increased operational costs

More facilities mean more building costs, more staff, more insurance. Even outsourcing to partners has a degree of cost, and for some companies, this extra burden on the budget can prove too much.

2. Potential to increase inbound costs

As we noted earlier, suppliers aren’t always keen to split shipments across locations. This may mean companies that can’t find local suppliers may not be able to negotiate the best rates, or could have to pay the extra shipping fees that come with LTL shipments spread out across a network.

3. Potentially less control

For some organisations, the agility that comes with operating semi-autonomous nodes is a breath of fresh air that allows them to react quickly to new opportunities and changing conditions. The flip side is that companies that desire strong central control may find it more difficult, potentially more sluggish, to roll out new initiatives (i.e. standardisation) which could prove frustrating, slow or costly.

Read more: The Beer Supply Chain in 2021 and Beyond

So what’s better: Centralised or decentralised supply chain operations?

You can probably guess that this is a ‘how long is a piece of string?’ question.

What it boils down to is whatever the organisation in question needs. Many companies find having firm, centralised control over their entire supply chain improves cost and strategic efficiencies and help them achieve higher profits. That extra control allows them to steer the ship in a very precise direction.

On the other hand, other companies find that centralising operations can harm their customer service options or reduce competitiveness against more agile peers, which outweighs any potential gains had in strategic efficiency.

Then you have your third option, which is adopting a hybrid somewhere between the two. You can learn more about what that might look like in our case study below.

Important factors to consider when choosing a supply chain model are:

  • What do your customers want?
  • Where are they located?
  • Are fast shipping times vital for them?
  • How flexible is your budget?
  • Are there local suppliers in your prospective node regions that could cut inbound costs?
  • Will your existing suppliers be willing to negotiate supplying for a decentralised network?
  • Do you have the infrastructure (i.e. IT systems) to connect a decentralised network?

supply chain technology Inventory management software and automation are two things that will enable you to succeed.

What technology do you need to enable a decentralised supply chain?

So, let’s say you’ve chosen to decentralise. What technologies are you going to need in order to make it work?

Two of the big key industry terms to consider are inventory management software and automation.

Supply chain management software

By spreading your operations out over a greater number of facilities, immediately you’re going to hit logistical challenges. Understanding the peaks and troughs of a new audience, finding suppliers, monitoring stock levels, fighting shrinkage in multiple locations – if these factors cannot be managed in an efficient and interconnected manner, you run the risk of bleeding cash out of your new locations. You may not even notice that said cash is haemorrhaging.

Modern inventory management software designed for decentralised supply chains could, therefore, be vital. What you’re looking for is a software platform that can plug into each of your individual facilities to help them talk to each other in real time. In addition, this software should connect to the rest of your common systems to monitor inventory levels and customer purchase habits, so help you build an accurate picture of the demand you face in each location.

Automation

If something can be automated, chances are it will help to do so.

Automation is not just the act of installing robots to do what a person used to, such as in a factory line. Automation is a broad term that covers any piece of technology, hardware or software, designed to handle repetitive, menial tasks so that your staff can focus on more value-adding activities.

For example, imagine building automation into your new inventory management system. This is a computer algorithm that would watch your entire business and everything coming and going from each node, and automatically make certain decisions based on your parameters. For example, perhaps the computer sees that stock is getting low in Location A and there’s an expected spike in seasonal demand, so it orders new stock without human intervention. Or perhaps there’s a disaster in Location B and you need to have a host of now-unfulfilled orders – the computer could help you find the stock you need at other nodes and forward it on to Location B’s customers.

Case study: Pinjarra Bakery

Western Australia’s Pinjarra Bakery is a success story in switching to a hybrid supply chain model.

Before joining Unleashed, Pinjarra was managing multiple store locations with a centralised model based on spreadsheets and manual data entry. Needless to say, it was time-consuming and proving highly inefficient – especially for their distribution manager.

So, Pinjarra made the switch. First, they upgraded their spreadsheets to smart inventory management software to better handle data entry and visibility. Then by also utilising Unleashed’s B2B Store portal, they could hand product purchasing autonomy to their individual stores – no longer needing to manage stock orders at their central hub with the old Excel system. The individual stores were able to order stock automatically from Pinjarra’s hub, and the hub could quickly generate purchase orders for the relevant suppliers with no need for extra data entry.

In this way, Pinjarra Bakery was able to create a hybrid centralised/decentralised supply chain model, operating out of a smart central hub while utilising automation to improve efficiencies between the hub and the network.

Read the full story: Pinjarra Bakery: How we saved $30k-$40k a year with the B2B Store

Sources

https://www.warehouseanywhere.com/resources/centralized-vs-decentralized-logistics/
https://www.evansdist.com/pros-cons-centralized-warehouse/
https://logistikknowhow.com/en/storage-techniques/advantages-and-disadvantages-centralized-and-decentralized-warehouse/
https://blog.shelving.com/warehouse/centralized-vs-decentralized-warehouses/
https://www.redwoodlogistics.com/the-pros-and-cons-of-inventory-decentralization/
https://www.intechopen.com/books/supply-chain-management/supply-chain-optimization-centralized-vs-decentralized-planning-and-scheduling

More about the author:

Melanie - Unleashed Software
Melanie

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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