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Decentralize to Improve Supply Chain Efficiency

In today's globalized economy, supply chain professionals work together to deliver products to the end customer while working with different organizations and different business units within the same organization. During this process, supply chain managers face a challenge in controlling inventories and costs while maximizing customer service performance.

A supply chain — a network of production and exchange relationships — spans multiple levels of production or task decomposition to let a producer buy inputs and sell outputs. Traditionally, supply chains have been formed and maintained over an extended period with extensive human interactions. Companies around the world base their business models on offering a range of products to satisfy the ever-changing consumer demand.

The majority of multi-national corporations (MNCs) have a centralized supply chain. This brings the entire decision-making process to a centralized location (the MNC headquarters) and enables the MNC to centralize production and profits.

As Lee and Billington wrote in 1993, “Centralized control means that decisions on how much and when to produce are made centrally, based on material and demand status of the entire system.” This approach turns out to be extremely inefficient for large corporations, leading to poor customer service. Another drawback is that a centralized supply chain leads to increased centralization of the entire economy, leading to high population densities in cities (more jobs at the centralized locations of MNCs) and rural economies going into doldrums because of chronic unemployment.

Decentralizing improve supply chain performance. In a decentralized supply chain, individual units make decisions based on local information. Such a system makes it easy to incentivize players to act in co-operation, making the entire supply chain efficient.

In today's globalized economy, MNCs are trying to capture marketshare through centralized supply chains. In these cases, all the profits from operations are transferred to a centralized location (corporate headquarters). This results in centralized planning and increases the concentration of wealth in hands of a few.

A decentralized supply chain has a lower wealth concentration, and the rational distribution of wealth that results supports better macro-economic growth through higher consumer purchasing power and lower taxes. Additionally, since each individual player has a smaller influence on the entire supply chain, individual decision makers have less to gain by behaving in an opportunistic way.

Each individual decision maker has fewer profits to forgo by acting in an opportunistic way and has a broader customer base to gain by acting in the best interest of the supply chain. Hence, the decentralized supply chain leads to smaller organizations and lower probability for mergers and acquisitions. A decentralized supply chain leads to higher co-operation over competition among entities in a supply chain. By placing a higher value on building a relationship with the end customer, decentralization leads not only to overall customer satisfaction, but also results to healthier long-term relationships with end customers.

The decentralization of the supply chain also results in increased flexibility and decentralized decision making. It engenders better customer satisfaction by guaranteeing product delivery through an alternate route in cases where the regular supply chain would be disrupted by unforeseen events like natural disasters and social and political instability. Decentralization has also demonstrated good performance in emerging market co-operatives, urban logistics, micro-retailing, etc.

In today's world, the model of the decentralized supply chain has much to offer in terms of efficiency and outcome. Let's discuss in the comment section below.

11 comments on “Decentralize to Improve Supply Chain Efficiency

  1. apek
    October 11, 2013

    Decentralizing Supply Chain would eventually lead to Decentralization of entire economy which would lead to Macro-economc reforms towards prosperity of both regional and National economy. This would solve all the problems in current US economy and make it feasible to have an ALL AMERICAN DREAM economy through increased consumer purchasing capacity. It would pave way for an Economic Democracy which would let Wages of hard working Americans grow in proportion to their productivity eliminating consumer debt and eventually National debt. This would lead to a smaller size of government and less intereference by government leading to AUTO-BALANCING THE SUPPLY OF GOODS WITH THEIR DEMAND. There is not a single economic Ill which cannot be cured with Economic Democracy with Decentralization. It would let Free market Capitalism work for every American leading to “MASS CAPITALISM”.

  2. FLYINGSCOT
    October 12, 2013

    There are many parallels in government and this is the eternal debate of centralized vs decentralized control.  As soon as anyone finds the optimum pllease tell me as I have been searching for years to no avail.

  3. apek
    October 12, 2013

    There should be a Centralized government because governing authority of country should be centralized. I am talking about having a Decentralized economy. We have a Centralized economy in US which is controlled by Wall Street and their lobbyist in Washington ( who in fact also control the government). Instead, We should have a Decentralized economy where the local government works for local people and businesses also give preference to hiring local residents creating less unemployment. Until US develops its local economy…we will never solve our Consumer Debt and National Debt problems. Decentralized Supply chain would be beneficial to all businesses because Consumer purchaing power would be high and hence would the economic demand be high.

  4. Daniel
    October 15, 2013

    Apek, centralized supply chain or decentralized supply chain, which one is preferable? I think this debated is happening for more than a decade. But what I prefer is a combination of both of this, so that supply will be more convenient.

  5. Daniel
    October 15, 2013

    “Decentralized Supply chain would be beneficial to all businesses because Consumer purchaing power would be high and hence would the economic demand be high.”

    Apek, decentralized supply chain is good in certain aspects, where the companies can source the material and components from the local market, as and when required. This will help to reduce the logistic issues and more economic too.

  6. apek
    October 15, 2013

    Jacob,

    While you believe that a combination of both is good, I have given preference to Decentralized Supply chain because it increases co-operation between individual units in supply chain over competition. In case of Competition there is also a tendency to Monopolize the Supply Chain through killing competition with Mergers and Acquisitions. Once you have a monopoly…then the Supply chain becomes distorted and there is no longer any healthy competition. 

    Let me know your thoughts regarding this.

  7. Daniel
    October 16, 2013

    “I have given preference to Decentralized Supply chain because it increases co-operation between individual units in supply chain over competition. In case of Competition there is also a tendency to Monopolize the Supply Chain through killing competition with Mergers and Acquisitions.”

    Apek, good point. But now a day's companies are preferring to get all services from a single vendor rather than pick and choose from different vendors.

  8. apek
    October 17, 2013

    True. This is because today because of Globalization the SUPPLY chain has become distorted due to MNCs manufacturing goods from LLCs. Please read my article on Distorted Supply Chain http://truth-out.org/news/item/18140-distorted-supply-chain-caused-by-mncs-manufacturing-abroad-and-how-to-restore-its-legitimacy#!

  9. Daniel
    October 17, 2013

    Apek, thanks for the link. One more reason is convinence, nobody have the time to surf and found, where these materials are availabile at cheaper cost

  10. apek
    October 18, 2013

    The problem is profit at cost of National Security…this is where the Legitimacy of Supply Chain becomes a problem. Supply chain plays a key role in balanced trade of any country and decentralization helps minimize the opportunistic behavor of corporations.

  11. Daniel
    October 18, 2013

    “Supply chain plays a key role in balanced trade of any country and decentralization helps minimize the opportunistic behavor of corporations.”

    Apek, there is no doubt that local sourcing the material can minimize the procurement and logistic costs.

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