Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

3.1.1 Centralized Production Versus Decentralized Production

Intended learning outcomes: Differentiate between centralized production and decentralized production. Present features such as demand volatility, supply chain vulnerability, economies of scale, demand for consistent process quality, customer proximity, market specificity of products, value density.

In a first approach it is possible to distinguish two fundamental types of production networks.

In centralized production, a product is manufactured at only one location or through a chain of single stations, one station per operation at one location.
In decentralized production, a product or certain operations of a product are manufactured at several locations.

Figure shows a simple example.

Fig.        Centralized versus decentralized production: an example.

Taking a product with four operations (or four production levels) and sub­sequent distribution, Figure shows centralized production (obvious­ly for the global market) and decentralized production (more for the local or regional market). For the decision as to centralized / decentralized, there are fea­tu­res for designing production networks, including:

  • Demand volatility: Items have continuous demand if demand is approxi­mately the same in every observation period. Items have disconti­nuous, or highly volatile demand if many periods with no or very little demand are inter­rupted by few periods with large demand; for example, ten times higher, without recognizable regularity.
  • Supply chain vulnerability: Unplanned events can disrupt a supply chain. These disruptions can arise from either the supply chain community or the macro-economic environment.
  • Economies of scale, that is, an effect whereby larger pro­duc­tion volumes reduce unit cost by distributing fixed costs over a larger quantity; and economies of scope, that is, when different products can be produced in a changeable factory at lower costs than when each product is produced in its own factory.
  • Demand for consistent process quality: Can customer needs be satisfied despite differing process quality?

An interesting observation is that these four features are highly correlated: Centralized production is an advantage for high economies of scale or scope and for a high demand for consistent pro­cess quality. Decentralized production is an advantage in the case of high demand volatility and in the case of high supply chain vulnerability.

Further important features for designing production networks are:

  • Customer proximity: To sell a product it can be necessary to locate the value-adding processes close to the customers.
  • Market specificity of products: Adapting products to the market is needful for functi­onal requirements, such as voltage, electrical connections, packaging, and docu­mentation. But it also applies for the appearance of products in the broadest sense.
  • Customer tolerance time, as defined in Section 1.1.6.
  • Value density, that is, product value — or item costs — per cubic meter or kilogram: Transport costs are of greater conse­quence if value density is low than if value density is high.

The above four features are also highly correlated: If customer tolerance time is high enough, there will be a tendency to centralize production, as there is also when value density is high. If high customer proximity is necessary, there will be an advantage in decentra­lizing production, as is also the case if high market specificity is necessary.

However, the two groups of features unfortunately often stand in opposition to one another. There are examples of this:

  • Appliances (specialized machining equipment, but adaptation due to voltage, connections, packaging, documentation): high necessity of economies of scale (in favor of centralized production), however also high market specificity of product (in favor of decentralized production)
  • Bakery products with a brand promise regarding quality: high de­mand for consistent process quality (in favor of centralized pro­duction), low value density (in favor of decentralized production)
  • High value components with variants (e.g., electronic chips, engines, pumps, inject­ions): high value density (in favor of centralized production), but also high demand volatility and high supply chain vulnerability (in favor of decentralized production)
  • Important raw material (such as steel), perishable foodstuffs: low market specificity of product (in favor of centralized production), also, however, high demand volatility and high supply chain vulnerability (in favor of decentralized production)

Here, a company must make a strategic decision, which some­times differs for each product family.

Continuation in next subsection (3.1.1b).

Course section 3.1: Subsections and their intended learning outcomes

  • 3.1.2b Design Options for Global Distribution Networks

    Intended learning outcomes: Explain design options for global distribution networks. Describe some company cases.

  • 3.1.3 Network Structure for Decentralized Distribution

    Intended learning outcomes: Disclose the distribution network structure and describe decision variables in its design. Present features such as available time for shopping, and simultaneously, capacity of an available means of transport of the customer, as well as the required geographical catchment area.

  • 3.1.3b Design Options for Retail Networks

    Intended learning outcomes: For decentralized distribution, explain the portfolio for designing retail networks retail networks.

  • 3.1.4 Centralized Service Versus Decentralized Service

    Intended learning outcomes: Differentiate between centralized service and decentralized service. Present features such as the mobility cost ratio of the service, the degree of customer involvement in bringing and picking up the service object, as well as the need for repeated transfer of the service object.