To Centralize or Not to Centralize

"It is said that the empire, long divided, must unite; long united must divide. Thus it has ever been." Luo Guanzhong, Romance of the Three Kingdoms

The decision of centralization and decentralization is often a major source of contention in politics as well as within businesses. This is not surprising as the allocation of resources and power are involved in the decision. If you are a member of Supply Chain Canada, I'm sure you understand this problem from the recent conflict between provincial institutions regarding the organization of the association. A thorough consideration of each side will help us make the best decision depending on the environment we are in. No arrangement will fit all scenarios and even if a good fit has been made, there is no guarantee the situation will stay the same.



Centralization


The primary advantage of centralization is economies of scale. The pooling of resources will allow a group to obtain assets that the same group cannot if separated. This is what happened in the industrial age where mechanized factories replaced craftsmen with tools and production became increasingly efficient. In current times, these assets may include digital assets such as software and data. In addition to the acquisition of capital assets that aid production, economies of scale also allow for more specialization of tasks. This results in workers being increasingly skilled at their tasks and the group as a whole end up benefiting from higher skilled workers all contributing to the same end product or service. For example, a supply chain professional couldn't have existed without economies of scale because a manager would have had to wear all hats (accounting, finance, marketing, human resources, etc.)


Centralization generally provides for higher consistency. Consistency is very important in operation and logistics processes. Variation in the process reduces efficiency and increases the probability of deficiencies. In the worst-case scenario, different parts of the business are directly working against one another. For example, by centralizing strategic sourcing, you might push for different locations to use the same vendor so that you know the quality and specifications of the products are similar and of a certain standard. At the same time, you might use the aggregated spend to negotiate volume discounts.


Decentralization


One advantage of decentralization is greater customization. If an organization is divided into smaller units, each unit will have closer ties to its operating location and there will be a superior fit between supply and demand. Localized units will have a better understanding of the customer requirements as well as the unique advantages and challenges of the operating environment. Central control adds a layer of communication that takes time and adds the possibility of misinterpretation of information.


Like large physical objects, large organizations have momentum and cannot redirect as quickly as small organizations. Large organizations have people with different interests and bureaucracies that prevent them from changing and this is a big disadvantage in today's fast-changing world. Small organizations are more agile and responsive to their environment.


Decentralization gives control to a greater number of individuals. Decentralization has a more direct link between resource availability and allocation. This has an impact on morale and by extension productivity because most people want to have ownership of their work. When resources are pooled, the various contributing units will have their preference as to how it is used resulting in organizational conflict.



Hybrid


The centralization and decentralization decision is not an all-or-nothing proposition. Hybrid models where tasks and resources are analyzed and deliberately centralized or decentralized can simultaneously take advantage of each model. The granularity of decentralization is also a consideration. Should an organization divide units by individuals, neighborhood, city, province/state, region, country, or continent? Should it be managed by a multi-tiered system? Decision makers have to analyze internal and external factors that best suit their organization.

New technologies are adding capabilities that reduce or even eliminate previous trade-offs. For example, small batch automation (mass customization) and collaborative software leverage both scale and customization. Well-designed processes and strong communication can also achieve the benefits of each model. As professionals, we should be ambitious and aim for the best of both worlds.

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