the impact and dynamics of centralization in supply chain
TRANSCRIPT
The Impact and Dynamics of Centralization in Supply Chain
Decision-makingGuruprakash and Tae-Hee Sohn
May 22, 2008
Advisor: Dr. Chris Caplice
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Agenda
• Part 1: Introduction– Definition of Centralization
– Research Questions & Methodology
– Survey Summary
• Part 2: Analysis & Results– Centralization of Functions Analysis
– Influencing Factor Analysis
– Case Study: Sourcing Function in Company A
– Centralization and Cost Analysis
• Part 3: Conclusions– Summary
– Further Research
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Definition of CentralizationWhen decisions are made by top-level executives it is referred to as
centralization. When decisions are delegated to the local operating units it is referred
to as decentralization1.
1. Source: Fredrickson, W, J. (1986), The strategic decision process and organizational structure. The academy of management review, 11(2), 280-297
Top
Mid Manager
Operational Manager
Centralization
Top
Mid Manager
Operational Manager
Decentralization
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Office Depot consolidates supply chain operations, March 20042
…"We achieved that position as separate organizations. Now, consolidated as a single supply chain, where we can leverage all of the talents of all the people in those groups, I think we can unlock tremendous capabilities.”…
Why Centralization?
Hewlett-Packard Bucks Industry Trend By Decentralizing Supply Chain Operation, July 20061
…”The success of Hewlett-Packard's recent move to break apart its 5,000-person Global Operations group will depend largely on whether the electronics giant can put into place reporting and governance structures”…
1. Source: Moad, J. (2006, July). Hewlett-Packard bucks industry trend by decentralizing supply chain operation. Managing Automation.2. Source: Albright, B. (2004, March). Office Depot consolidates supply chain operations. Frontline Solutions.
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Research Questions
• How do companies centralize their supply chain functions?
• What are the factors and dynamics that influence centralization?
• What is the impact of centralization in the supply chain organization on cost structure?
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Research Methodology
DATACOLLECTION ANALYSIS INSIGHT
DEVELOPMENT TESTING
• Survey
• Interview
• Statistical Analysis
• System Dynamics Modeling
• Cluster Analysis
• Overall & Industry Specific Trends
• Integrated Model
• Cost Comparison
• Case Studies
• Interview
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Survey Summary
• Surveyed 2,800+ SCM professionals in
March, 2008
• Received 144 responses (97 cleaned data)
from large global companies
• Conducted in-depth interviews with some
selected respondents
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0
1
2
3
4
Strategic Tactical OperationalStrategic Importance of Sub-functions
CPM IPM LSP RET TOTAL
Centralization of Functions Analysis
Strategic functions are centralized, while operational functions are decentralized
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Influencing Factor Analysis
• Trade-off between cost and customer service• Strategic functions have cost considerations• Operational functions have customer requirements
Strategic Tactical Operational
Industrial Products Manufacturers Cost Cost Customer
Consumer Products Manufacturers Cost Customer/Cost Customer
Logistics Service Providers Customer Customer Customer
Retailers Cost Customer/Cost Customer
All Industry Cost Customer/Cost Customer
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An Integrated Model
ControlControl
CustomerCustomerCost Cost
FunctionFunction
• Model demonstrates the influences of the three factors
• Model illustrates that centralization in a function is dependent on the most dominant factor
• Model illustrates the possibility of transitions
ControlControl
CustomerCustomerCost Cost
FunctionFunction
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Sourcing Function in Company A
• Global producer of mobile computing
cases and accessories
• Covers US, EU, Asia, but sources
from China
• Sells to retailers, electronic goods
manufacturers and direct consumers
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Centralized, But Decentralized Again
Why? business Unit of Company A
Supplier
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Underlying Dynamics of Company A
Centralization of Sourcing
Economy of Scale
Unit Cost
Customized Sourcing
Customer Service Level
Global Optimization
Conflict with Local Incentive System
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.00
1.00
2.00
3.00
4.00
Centralized Hybrid Decentralized
Deg
ree
of C
entr
aliz
atio
ns
Long-term capacity planning Sourcing Transportation planningInventory planning Short-term demand planning Manufacturing planningInternal improvement Order fulfillment Order managementShipment handling Average
Clustering w.r.t. Centralization
Using k-means clustering, we categorized samples into three segmentation
Centralized
DecentralizedHybrid
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0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
Centralized Hybrid Decentralized
Cos
t % to
Sal
es
16.00%
16.50%
17.00%
17.50%
18.00%
18.50%
19.00%
19.50%
20.00%
20.50%
21.00%
Tota
l Cos
t % to
Sal
es
Inventory Costs Transportation Costs Information Costs Operational Costs Total Costs
Cost Analysis of Clusters
The hybrid group has the lowest supply chain cost percentage to sales among three clusters
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Summary
Key Insights:• Strategic functions are centralized, while
operational functions are decentralized• Cost is the key factor influencing centralization
and customer service is the key factor influencing decentralization.
• Hybrid structure provides the lowest supply chain cost as a percentage of sales
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Suggested Further Research
• Analysis of the impact of centralization based on other business performance indices
• Process alignment in centralization of supply chain functions
• The relationship between centralization and outsourcing and off-shoring.
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Q & A
Thank You!