Centralize or decentralize? That is the organizational design question!

It seems that whenever there is a management change in an organization, there are movements to change the existing organizational structure.

In some cases, your function or company is decentralized and new management wants to centralize everything. Conversely, they want to centralize everything. And certainly there are organizational structures that are a hybrid of both paradigms.

But in the supply chain world, what is the best way to organize the function?

Forces affecting your organizational structure

organizational design

First off, it’s important to articulate that there are many, many different functions within the supply chain. Planning, scheduling, procurement, estimating and pricing, commodity/category management, purchasing, logistics management, inventory management, quality management, and many other functions are all part of the supply chain. Depending on the area of ​​responsibility, a centralized or decentralized structure can have more advantages or disadvantages.

This is further complicated by the various environmental factors at play, as well as your goals and the results you need to achieve.

If you work in a smaller, less complex company, chances are there are many different roles filled by individuals. And everyday situations demand that people do whatever is necessary to take care of what is going on. By definition and necessity, tasks are likely to be more centralized.

For example, in a larger organization where there are multiple facilities (e.g., manufacturing sites, distribution centers), geographically dispersed suppliers, and international customers, it must be determined whether a centralized or decentralized structure is critical.

Geographical diversity very often requires you to have employees in countries around the world. For example, if you have suppliers in different countries, you need some level of support and a business process structure that facilitates supplier selection, negotiations, audits, performance reviews, and direction setting.

In this example, face-to-face communication and interaction in these regions at certain intervals is essential for healthy and productive relationships. Automated management of remote suppliers is often a recipe for disaster.

Depending on your business model, it may also require members of your supply chain team to be close to your customers. Planning is a phenomenally important responsibility. It may require working directly with your customers to decode forecasts and turn them into actionable numbers that can be loaded into your ERP systems.

For the same reason, it is often important that the supply chain is tightly coupled to finance and distribution, as day-to-day decisions can have a profound and immediate impact on inventory levels and cash.

In addition, there may be further pressure from various stakeholders in your organization. There may be cultural norms or expectations. There can be competitive pressures. And there will certainly be personal preferences that individuals have as to whether they are right or wrong based on their own personality and experiences. Some people like to control and micromanage. Others like to empower people and create opportunities. This will surely affect the organizational design.

A final distinction that I believe is crucial in the discussion of organizational structure is the nature of the responsibility. Simply put, there are many tasks that can be characterized as planning functions, and there are other tasks that are more like execution functions. For me, this is one of the most important factors to consider!

Think global act local

A phrase I remember saying many years ago was “think globally, act locally”. It was a phrase defined to capture the essence of organizational design philosophy.

In particular, the term “think global, act local” has been applied to the planning and procurement organizations. The company was large and global, with a central headquarters and operations scattered around the world.

With a huge level of spending, every year it was necessary to negotiate intensively, regularly and aggressively with suppliers. Leveraging the economies of scale that comes from pooling spend across categories and commodities has been essential to ensure we get the best terms and competitive prices from our suppliers. In addition, it was crucial that we developed and leveraged our supplier relationships. And it was important to strategically evolve the supply chain platform, which required a tremendous amount of planning and work with our partners.

Therefore, responsibilities for planning and raw material management were managed centrally: “Think Global” individuals and teams in these areas would take global responsibility for negotiations and supplier management.

On the other hand, we had dozens of manufacturing plants. Each of them made different products for different customers. While there would certainly be some overlap in customers or products from one facility to the next, no two locations were exactly alike. Their schedules, daily activities and promotions all needed to be best managed locally. Therefore all order placement, fulfillment and logistic management was managed by the people and teams at these specific locations.

Each location worked under the umbrella of terms negotiated by the central team. But they were able to work in real-time and manage all the minute-by-minute pressures and challenges of the life of a manufacturing or distribution operation. Essentially, they would “act locally”.

All of this applied to both the purchase of goods for production and the procurement of non-product or indirect goods and services.

Conclusion

There isn’t really the best answer as to whether you should centralize or decentralize certain parts of your organization. Different functions within the supply chain can work better or worse in both structures.

Defining your goals and the outcomes you expect from an organizational design is an important first step.

When it comes to contract negotiations on a global level, there are many arguments in favor of negotiating centrally. But supply chain people are very proud people and I know of many instances where people who are not part of the central HQ group are able to do much better than their global peers.

And there’s always the consideration of outsourcing. There are some functions that are better off outsourced, depending on the skill level and strategic importance of that function to your organization. Outsourcing itself is a form of centralization, but outsourcers often have different activities themselves.

There are organizations that operate successfully in centralized, decentralized and hybrid organizational design models. There are pros and cons to each of these. It is crucial to understand the culture and the individuals and teams in your organization and what is best for them.

So what’s your experience? What organizational design models have you seen as working or not working? And which model would you recommend to someone who takes on this challenge?

Originally published October 25, 2017.

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