How to Optimize Your Global Supply Chain for Better Procurement

Over the last few years, there has been a debate about the optimal structure of supply chains and manufacturing in sectors that deploy advanced technology, such as automotive, aerospace, and high-tech manufacturing companies. 

Some arguments point to a localized supply base and shorter supply chains, while others champion a decentralized approach that offers unique benefits and challenges. Join us as we explore these two mindsets and discover how today’s organizations can transform their procurement processes through optimized supply chain structures.

Centralized vs Decentralized Manufacturing

There are two primary models for global manufacturing: centralized and decentralized manufacturing. The centralized model consolidates product manufacturing in one location that serves demand of customers around the world. The in-country services provided by centralized companies include logistics and shipping services provided locally.   

The alternative business model is decentralized manufacturing, where OEMs, component makers and their supply-chain partners produce parts in multiple countries and ship them to local finished goods manufacturers that assemble and sell them worldwide. The primary advantage of this model is efficient production and high productivity of the equipment used to manufacture the parts. The disadvantage is higher shipping and inventory costs for customers on the other side of the world. 

The decentralized model has been gaining adherence that challenges the global supply chain model. The value of this model is that local assembly reduces the cost of shipping the finished goods and shortens the supply chain. One major manufacturing company recently announced that half of its supply chain spending is moving to a national or regional level, perhaps signaling a larger trend across a variety of industries.

The Benefits of a Decentralized Approach

The decentralized model establishes production hubs in multiple locations worldwide that provides opportunities for local suppliers, contract manufacturers, and third-party logistics providers. It can be more flexible when customer needs and market trends change. The decentralized model can be adjusted at each location. However, while it can be more flexible and adaptable to meet local needs, decentralization typically has a higher cost per unit than the centralized model, which benefits from global economies of scale, lower unit costs, but is less flexible in customizing products. 

Other benefits of the decentralized approach include: 

• Greater flexibility and responsiveness
• Lower transportation costs and lead times because products are produced and distributed locally
• Decentralized manufacturing provides the local manufacturing facility the ability to customize each location to serve the local market more effectively.
• Decentralized manufacturing typically requires less inventory than centralized manufacturing as production can be matched to local demand.

Of course, there is a cost for the decentralized structure. It requires more workers, equipment, and facilities that increase costs, and capital investment to provide equipment and build infrastructure. Other challenges include:

• Managing production processes across multiple locations requires greater coordination and team communication 
• Higher manufacturing costs per unit since production requires transportation to many different locations

The Argument For Centralized Manufacturing 

The alternative to decentralization of manufacturing is centralization, which has the advantage of delivering more efficient and larger manufacturing operations. With all manufacturing processes located in a single center, production can run faster and more efficiently, which results in lower costs per unit.

The benefits of centralizing manufacturing include: 

• Standardization — All department teams are under one roof, work processes follow robust standards and quality control processes, and it is easier to maintain consistent product quality.
• Efficient resource utilization — Equipment, labor, and materials can be gathered and dispersed efficiently between departments.
• Simplified supply chain management— Supply chain management is simplified because all the production processes are under one roof, which reduces the complexity of logistics and inventory across multiple locations.
• Specialization — Centralized production facilities specialize in products and processes that require highly skilled management and staff.
• Lower administrative costs — Centralizing manufacturing system means streamlined administration and just one location to manage.

Of course, there are a few disadvantages to centralized manufacturing, such as a disruption in the facility that impacts the production process, leading to delays and production downtime. Here are some additional potential disruptors:

• Higher transportation costs — With just one manufacturing center, the transfer of products to their final destination around the world are likely to produce longer lead times and higher shipping costs.
• Poor responsiveness — A centralized factory may not be able to respond to updated customer needs or market trends quickly enough, which could lead to missing delivery dates and losing a customer.
• Limited customization — Because it has limited flexibility to adapt to each customer’s needs, centralized manufacturing may not be able to customize each product and service.
• Higher inventory costs — Centralized production may require holding extra inventory to ensure a steady supply of products. In turn, this could result in overstocking or dead stock, and higher stock-carrying costs.

Suppose companies want to improve their supply chains. If so, they need to develop both a local and national market presence, be responsive, and shrink their supply chains for better control over their procurement processes. Another benefit is that if you have local partners you trust and know well, you can drive innovation and new opportunities to harness data and analytics. 

This is the basis for a case to localize your supply chain, but to harness the benefits of this approach, organizations should look to harness new forms of intelligence that will allow their newly structured supply chains to remain agile and proactive in the face of ever-evolving risk.  

Localize Your Supply Base to Mitigate Risk 

Supplyframe’s industry-leading Design-to-Source Intelligence (DSI) solutions allow organizations to take control of their supply chains and better understand how to circumvent risk in their procurement processes. 

Consider these key capabilities: 

• Plan Your Commodity Strategy – Understand which commodities to leverage, which to negotiate, which to build part inventory, and which to watch for risk.
• Select Preferred Parts and Highlight Risk – Drive decisions to an AVL for greater leverage. Identify obsolete parts and incorrect part numbers to choose alternates quickly.
• Collaborate With Engineering – View part selections from sourcing and procurement teams without emailing a spreadsheet.
• Compile and Send Quotes – Send RFQs directly within the solution. Negotiate with component manufacturers and EMS providers to reach agreeable pricing.
• Predict future risk – Utilize always-on risk signals to take action before issues like shortages become an issue. Optimize sourcing for current and future products.

Whether seeking to localize your supply base or strike a balance in your supply chain, Supplyframe’s intelligence and leading solutions can help your organization accelerate transformation across your procurement processes. 

Visit Supplyframe.com today to learn more!