It seems that every time there is a Management change in an organization there is movement to change the existing organization structure.
In some cases your Function or company is decentralized and new management wants to centralize everything. In the opposite case they want to centralize everything. And certainly there are organization structures which are a hybrid of both paradigms.
But in the Supply Chain world what is the best way to organize the function?
Forces Influencing Your Organization Structure
First of al it is important to articulate that there are many, many different functions within the Supply Chain. Planning, Scheduling, Sourcing, Costing and Pricing, Commodity/Category Management, Buying, Logistics Management, Inventory Management, Quality Management and many other functions are all a part of the Supply Chain. Depending on the specific job function there may be more advantages or disadvantages for a centralized or a decentralized structure.
This is further complicated by the various environmental factors at play as well as your objectives and the results you need to achieve.
If you are in a smaller, less complex company there is a strong likelihood that individuals perform many different tasks. And day-to-day situations demand that people do anything and everything necessary to take care of whatever is going on. By definition and necessity tasks are likely more centralized.
In a larger company, one in which, for instance, there are multiple facilities (eg. manufacturing locations, distribution centres), geographically dispersed suppliers, and international customers the need to determine whether a centralized or decentralized structure is critical.
Geographic diversity very often requires that you have employees in countries all around the world. If you have Suppliers in different countries for instance you need some level of support and business process structure which will facilitate supplier selection, negotiations, auditing, performance reviews, and direction setting.
Face to face communications and interaction in those geographies, at some interval, is essential for healthy and productive relationships in this example. Hands-off management of remote suppliers is often a recipe for disaster.
Depending on your business model it may also be necessary for members of your Supply Chain team to be close to your customers. Planning is a phenomenally important responsibility. Working directly with your customers to decipher forecasts and turn these into actionable numbers that can be loaded into your ERP systems may be required.
By the same token it is often essential for Supply Chain to be tightly coupled with Finance and Sales as day-to-day decisions can have profound and immediate impacts on Inventory and Cash levels.
On top of that there may be other pressures from various Stakeholders in your organization. There may be cultural norms or expectations. There may be competitive pressures. And there will certainly be personal preferences that individuals have based whether it be right or wrong on their own personalities and experiences. Some people like to control and micromanage. Others like to empower people and create opportunities. This will certainly influence organization design.
A final distinction which I believe is pivotal in the organization structure discussion 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 Execution functions. This to me is amongst the most important factors to be considered!
Think Global, Act Local
One phrase I recall from many years ago was “Think Global, Act Local”. It was a phrase defined to capture the essence of the organization design philosophy.
Specifically the notion of “Think Global, Act Local” was applied to the Planning and Procurement organizations. The company was large and global in nature with a central headquarters and operations scattered across the globe.
With an enormous spend level every year it was necessary to negotiate intently, regularly, and aggressively with suppliers. Leveraging the economies of scale that came from aggregating spend across categories and commodities was essential to ensure that we were able to get the best terms and conditions and competitive rates from our suppliers. Further it was critical that we developed and leveraged our supplier relationships. And it was important to advance the Supply Chain platform strategically which required a tremendous amount of planning and work with our partners.
As such the Planning and Commodity Management responsibilities were managed centrally: “Think Global” Individuals and teams in those areas would take global responsibility for negotiations and Supplier management.
On the other hand we had dozens of manufacturing operations. Each of them manufactured different products for different customers. While there would certainly be some overlap of customers or products from one facility to the next no two sites were exactly the same. Their schedules, day-to-day activities and actions all had to be best-managed locally. As such all of the purchase order placement, expediting, and logistics management was managed by the individuals and teams at those specific locations.
Each site worked under the umbrella of the terms and conditions negotiated by the central team. But they were able to operate in real-time addressing all of the minute to minute pressures and challenges in the life of a manufacturing or distribution operation. In essence they would “Act Local”.
All of this was applied to both the purchase of goods for production as well as the procurement of non-product, or indirect, goods and services.
There is not really one best answer as to whether to centralize or decentralize certain parts of your organization. Different functions within the Supply Chain may work better or worse in either structure.
Defining your objectives and the results you expect to achieve from an organization design is an important first step.
When it comes to contract negotiations on a global scale there is a case to be made for negotiating centrally. But Supply Chain people are very proud people and I know of many instances where individuals who are not part of the central headquarters group are able to do much better then their global counterparts.
And there is always the consideration of Outsourcing. There are some functions that may be better off being outsourced depending on the level of competency and strategic importance of that function to your organization. Outsourcing itself is a form of centralization yet outsources often have diverse operations themselves.
There are organizations that operate successfully in centralized, decentralized, and hybrid organization design models. There are advantages and disadvantages for any of these. Critically important is understanding the culture and the individuals and the teams in your company and what is best for them.
So what is your experience? What organization design models have you seen work or not work? And what model do you recommend for someone facing this challenge?
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