The pendulum of centralization

PendulumCentralized or decentralized? Local or global? Generic or specific? Issues that have always been around and probably will be there forever. And a phenomenon that is often visualized by the image of the pendulum, swinging from local to central, from central back to local… Reading the article “Multinationals change their logistics to a single European strategy ” (El Vigía, October 21, 2013 ) I wonder if in this case this is also simply a movement of the pendulum or if it’s maybe different this time, that is, whether it will be a longer lasting change.

European Supply Chain centralization in itself is very good news. Because from the corporate point of view, authorizing changes of this magnitude, it implies that the Supply Chain is finally getting where it should have been from the beginning: on the agenda of the Board of the company. But aside from this observation, is centralization of Supply Chains really such a positive thing? And, does the solution fit all situations?

The great promise, as it is expressed by managers, is to optimize inventories and transport movements between countries as well as the proper management of them through the unification of systems, business processes and even logistics contracts. All of them reasonable goals, provided that certain conditions are met. Not all companies can aspire to centralize their logistics processes like ZARA or McDonald’s do. Or like Ikea, of which I saw a few weeks ago the construction-site of a new mega-store to be opened next May in Amman (Jordan). From the outside the building follows the standard pattern of Ikea stores, the well-known “blue blocks”. And true to their philosophy it is quite likely that a similar thing awaits us inside, as will probably be the case of the products and even the suppliers. But as said, not all companies can do such a thing.

To get the situation a bit clearer, perhaps we should identify potential barriers that may cause centralization to become difficult or even undesirable. Let’s start with the most important part that always has to be the starting point of any operations or logistics solution: the value proposition of the company and the products we sell. First, there is the range of products, the more products we have in common between countries, the more potential for optimization in terms of transport flows and inventories. In this regard, some products can facilitate centralization where others might actually complicated it. For instance, think of those products that carry text (languages), those that have plugs (different by country), those which are subject to restrictive legal aspects (such as chemical or pharmaceutical products), or those which are perishable (e.g. food). Also, let’s not forget the local characteristics of the markets. On the one hand, local preferences for “what’s from here versus what’s from there” and to which we can add in the future trends related to environmental sustainability, such as carbon footprint in general or “kilometer zero” in particular. It is clear that there can be many differences between local market preferences, which obviously impacts the improvement potential of centralization.

On top of all this, we must also take the mix of services we offer around our physical products into account. For example, with respect to delivery lead time, the more centralized our operations are, the longer it will take us to reach our local markets, simply because the average distances we have to cover are longer. And if we compete in speed of delivery, then centralization could actually harm our competitive position, rather tan improve it. Other examples are related to additional services we offer: repaletization of products, using delivery pallets of special off-standard sizes, reaching final destinations in extended time-ranges, bringing products to the third floor instead of to the front door, offering the service to unwrap the goods before delivering, allowing returns when a new delivery arrives, offering installation services, and much much more.

It is very common to find portfolios of additional services to be completely different between countries, even regardless of whether they are paid services or not. I have seen examples in practice where, from the parent company, there was a clear desire to simplify and harmonize the product and service offering a lot at the international level, but eventually it turned out that the basis of competition in some countries was just different: “in our country this extra service is something we just have to offer and we cannot even charge for it, because in the industry over here it’s just a basic requirement, if we don’t offer this, we wouldn’t even be invited to biddings anymore, so we would end up with no customers left”. Clearly, in such cases centralization needs to be evaluated really carefully.

As in other areas of the supply chain, it could be interesting to observe what Amazon is doing. This huge multinational has a far-reaching centralization in terms of processes and systems, but at the same time also a strong local foothold in many countries. Of course, with the agility and flexibility to achieve the best commercial and operational combination of central and local. It looks like they have set it up very well, but as far as it can be perceived from the outside, it has been a long road accompanied by heavy investments. We will see if in the long-term the market proves them right.

We see the pendulum in action, while it moves between the behaviors of local markets (trends towards convergence or not) and the difficulties of successfully implementing a centralization (operationally and financially). Here it will be determined whether centralization is a lasting trend or if we return again to the local later on. Let’s continue watching the pendulum, just be careful not to get dizzy…

To finish, a final thought based on another article in these same pages about the tendency of logistics contracts being of shorter and shorter duration (El Vigía, October 28, 2013). Based on my experience in the logistics world over the past 15 years, working both from the point of view of logistics operators and from the manufacturers/distributors, I tend to share the view of the operators stating that shorter contracts are not a good basis for starting a lasting collaboration.

Already on another occasion I have expressed in these same opinion-pages my belief that every manufacturer/distributor, in the end, will get the logistics operator they deserve. And thinking, for example, about centralization, when we talk about highly complex logistics services that require significant investments from the point of view of facilities, systems and human resources, shorter contracts will really not be of help at all. Logistics operators simply can not afford to run the associated financial risks. Whatever the final formula, in these cases the mutual commitment between shipper and service provider must be expressed in some way. It’s like in the best marriages: if you want to talk about “gain-sharing“, you will also have to talk about “pain-sharing“.

(originally published in Spanish in “La Tribuna”, the opinion-section of logistics newspaper El Vigía, January 14, 2014)