The Impact and Dynamics of Centralization in Supply Chain Decision-making

Transcription

1 The Impact and Dynamics of Centralization in Supply Chain Decision-making Guruprakash and Tae-Hee Sohn May 22, 2008 Advisor: Dr. Chris Caplice

2 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 Rangavittal and Sohn May 22,

3 Definition of Centralization When 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 decentralization 1. Top Mid Manager Top Mid Manager Operational Manager Operational Manager Centralization Decentralization 1. Source: Fredrickson, W, J. (1986), The strategic decision process and organizational structure. The academy of management review, 11(2), Rangavittal and Sohn May 22,

4 Why Centralization? Hewlett-Packard Bucks Industry Trend By Decentralizing Supply Chain Operation, July 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 Office Depot consolidates supply chain operations, March "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. 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. Rangavittal and Sohn May 22,

5 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? Rangavittal and Sohn May 22,

6 Research Methodology DATA COLLECTION ANALYSIS INSIGHT DEVELOPMENT TESTING Survey Statistical Analysis Overall & Industry Case Studies Interview System Dynamics Specific Trends Interview Modeling Integrated Model Cluster Analysis Cost Comparison Rangavittal and Sohn May 22,

7 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 Rangavittal and Sohn May 22,

8 Centralization of Functions Analysis Strategic functions are centralized, while operational functions are decentralized Strategic Tactical Operational Strategic Importance of Sub-functions CPM IPM LSP RET TOTAL Rangavittal and Sohn May 22,

9 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 Rangavittal and Sohn May 22,

10 An Integrated Model Cost Control Function Customer Model demonstrates the influences of the three Control factors Model illustrates that centralization in Function a function is dependent on the most dominant Cost factor Customer Model illustrates the possibility of transitions Rangavittal and Sohn May 22,

11 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 Rangavittal and Sohn May 22,

12 Centralized, But Decentralized Again Why? business Unit of Company A Supplier Rangavittal and Sohn May 22,

13 Underlying Dynamics of Company A Conflict with Local Incentive System Global Optimization Unit Cost Economy of Scale Centralization of Sourcing Customized Sourcing Customer Service Level Rangavittal and Sohn May 22,

14 Clustering w.r.t. Centralization Using k-means clustering, we categorized samples into three segmentation 4.00 Degree of Centralizations Centralized Hybrid Decentralized.00 Centralized Hybrid Decentralized Long-term capacity planning Sourcing Transportation planning Inventory planning Short-term demand planning Manufacturing planning Internal improvement Order fulfillment Order management Shipment handling Average Rangavittal and Sohn May 22,

15 Cost Analysis of Clusters The hybrid group has the lowest supply chain cost percentage to sales among three clusters 7.00% 21.00% Cost % to Sales 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Centralized Hybrid Decentralized 20.50% 20.00% 19.50% 19.00% 18.50% 18.00% 17.50% 17.00% 16.50% 16.00% Total Cost % to Sales Inventory Costs Transportation Costs Information Costs Operational Costs Total Costs Rangavittal and Sohn May 22,

16 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 Rangavittal and Sohn May 22,

17 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. Rangavittal and Sohn May 22,

18 Q & A Thank You! Rangavittal and Sohn May 22,