Executive Briefings

Improve Supply Chain Efficiency Through Decentralization

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 multinational 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 improves 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.

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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 multinational 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 improves 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.

Read Full Article