The debate between centralized, decentralized and hybrid supply chains will never be fully settled, primarily because each approach has unique advantages. In this article, we’ll cover some of the benefits a centralized, localized supply chain can bring to the table and a few best practices you should adopt when transitioning to this model.
The Advantages of a Centralized Supply Chain
Most of the rewards of a centralized supply chain can be summarized with one word: efficiency. This is introduced via lower costs, faster processes and more standardized products and services. In today’s economy, belt-tightening is a concept most businesses are becoming increasingly familiar with, and centralization can certainly boost those efforts. Data management is improved while redundancy in staffing is reduced.
As markets rapidly evolve, logistics must quickly adapt to continue to provide profitable service to current and new customer bases. Among all of the supply chain models, centralization is king here, providing the ability to pivot swiftly with little duplication of effort.
The Benefits of a Localized Supply Chain
Localization can complement centralization in numerous ways. When logistics are focused in a single area, investing in that area by using neighboring suppliers amplifies the efficiencies you can gain. Business relationships tend to be tighter and more consistent as physical distance decreases, which gives you more flexibility to work with partners as the economic landscape shifts. Ramping up or down can be accomplished with relative ease, and making adjustments to product lines or delivery schedules presents far fewer problems. This reduces overall supply chain costs and drives higher profits.
A healthier community and local environment
Some of the less tangible benefits include a healthier community and local environment. Although these are more difficult to quantify, their financial advantages shouldn’t be understated. The food and beverage industries, in particular, have recognized that consumer preference for green business practices has become a substantial revenue driver.
Being able to visit a supplier’s site
Being able to visit a supplier’s site gives you greater control as fewer messages are lost in translation. Cultural differences diminish, and being in the same time zone makes everything easier while maximizing communication windows. All of this helps you launch products more quickly, letting you keep pace with or even gain an advantage over your competitors.
If you currently have more than one distribution center, centralizing operations will present some challenges. Gaining personnel efficiencies also means downsizing, difficult decisions and often introduces strained relationships, even among the employees you keep. Depending on how siloed or varied your company’s culture has become while operating in different locations, you might see strain and confusion as some employees have to adapt to a new way of doing business.
Short-term expenses may see a hike
Although the long-term savings are undeniable, short-term expenses will see a hike. Walking away from real estate rarely coincides perfectly with the end of a lease, so you might be subject to financial penalties. If you’re bringing employees in from other areas, you’ll probably have to subsidize relocation costs, which can add up quickly. Infrastructure upgrades to your centralized warehouses and distribution centers to handle the increased traffic could be costly.
How to Centralize and Localize a Supply Chain
The most significant theme to emphasize while either centralizing or localizing a supply chain is planning. All of these processes involve innumerable moving parts, and changes to any of them drive adjustments in associated business units and related procedures. Effective planning can eliminate numerous headaches that would pop up otherwise.
Fully involve HR and Legal in the planning process and have a defined structure with specific stages as you consolidate personnel. If you downsize during this, you’ll need to have a fair, objective and defensible process for decisions involving workers. Keep in mind that not everyone will agree to stay, so you might have to revisit employees you’d initially decided to let go. How you handle internal PR can be the difference between a dream transition and a nightmare.
Accounting needs to be an integral part of this process, with forecasted financial obligations and detailed budgets covering the entire transition and all associated costs. This will be one of those exercises where it feels like you uncover a new expense every time you turn a corner. Doing that upfront will allow you to plan and pivot effectively in a proactive, not reactive, way.
Be sure that you’ve got all of the priority contracts inked before making any irrevocable decisions. Assumptions can kill a centralization and localization process, so knowing that the suppliers and logistics partners you need to make this work are as committed as you are is crucial.
Centralizing and localizing your supply chain can introduce a tremendous number of advantages to your business. As long as you’ve made an intentional decision and effectively planned it, you should do well.