December 26, 2014 Centralized vs Decentralized Manufacturing

Volume 17 | Issue 10

Companies with centralized manufacturing have a single facility to produce and distribute their products or a central factory with multiple

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A decentralized manufacturing company has multiple facilities that cover large areas, allowing products to be manufactured and distributed close to customers.

In the highly competitive global market of today, the need to provide highly customized products is causing companies to rethink their manufacturing strategies. With the emergence of new manufacturing technology, companies of all sizes can adapt in order to succeed and the decision for some to migrate from centralized manufacturing to decentralized plants is critical to that success.

Regardless of how companies grow and adapt their supply chain, cloud-based ERP systems are there to facilitate the transition.

Centralized Manufacturing
A single factory can dramatically reduce per unit production costs by using the same equipment to produce different products, allowing the company to achieve economies of scale. Research from the nonprofit organization APQC shows that centralized organizations have manufacturing costs that are about 3 percent lower than decentralized companies. For an organization with $5 billion in annual revenue, this is a difference of $150 million. APQC’s research also shows that raw material inventory turn rates and production schedule efficiency is higher in companies with centralized manufacturing.

Centralized manufacturing can also enable better forecasting, more local jobs, consistent production and more effective use of limited resources. The cost of materials may also be lower for centralized manufacturing sites that are located near the source of those materials.

In spite of these advantages, centralized manufacturing tends to be inflexible because of the cost of customization. For example if a product has to change, the entire system must be retooled and this is extremely costly and time consuming. The cost of labor can also be a disadvantage, especially if a company maintains its central plant in a region or country where wages are rising.

Decentralized Manufacturing
Companies with decentralized manufacturing enjoy many benefits that often elude companies with centralized plants. These advantages include flexibility, being closer to their customers, better and timelier information, more motivated managers and employees, and the ability to take advantage of low labor costs in different areas.

When a company is physically close to its customers, it can be more flexible in meeting increasingly diverse demands. Greater flexibility means greater customization. A company with decentralized manufacturing can manufacture only those products that are in demand in a specific region or country. Flexibility has other rewards as well. For example, communicating locally is more efficient than having to go through multiple channels at a single corporate office. Decisions can be made more quickly.

Decentralized manufacturing not only improves the efficiency of decision-making but also empowers employees, letting them improve problem areas immediately without approval from a centralized organization. According to a study by Harvard University, decentralized manufacturing actually increases motivation and creativity by giving lower tier managers more responsibilities. When a manager is given a sense of ownership over an operation, efficiency increases among employees in both production and support positions.

Often a company decentralizes in response to increased demand or expanding markets. For example, American Nutrition, a major pet food company, started with a single plant in Ogden, Utah, but as the pet food market expanded, the company also expanded to four manufacturing plants in Phoenix, Ariz.; Woodland, Wash.; and Hazleton Township, Penn.

Decentralized manufacturing has disadvantages as well. Multiple sites require a larger investment of capital to set up, the per-unit costs are higher than mass-produced products made in a central plant, and maintaining organization-wide consistency in products and processes is a challenge. For companies that manufacture highly specialized products and distribute them locally, decentralized manufacturing may not be the best solution.

Trends to Decentralize Manufacturing
While some companies with decentralized manufacturing are reshoring overseas plants back to more centralized U.S.-based locations in response to increased costs, for example in China, the arguments in favor of decentralized manufacturing outweigh the arguments against.

Current manufacturing trends show that more and more companies are choosing a decentralized manufacturing strategy. As global markets continue to expand, the demand for customized products has also expanded and new technologies are emerging that make it easier for companies to build customization into their manufacturing processes, decreasing the costs of flexibility but not dramatically increasing the per-unit cost.

One emerging technology is additive manufacturing, popularly known as 3D printing. 3D printing allows products and components to be made from a digital model and is rapidly being applied by a range of industries, including defense, aerospace, automotive, medical and metals manufacturing.

3D printing enables products to be made in batches as small as one. Setup time and switching costs are low and while per-unit manufacturing costs are not as low as a mass manufactured product, 3D printing brings great flexibility and customizability to the manufacturing process. For low-demand products, production costs are often lower than the total costs associated with traditional supply chains.

Large manufacturers are planning to make significant investments in 3D printing. General Electric is one of those companies. Siemens is also investing heavily in the technology, planning to use 3D printers to produce spare parts for gas turbine engines. Investment by such large firms will lead to more advanced 3D printers that can work with a broader range of materials.

In short, the flexibility and customization that 3D printing brings to manufacturing will make it easy for companies to maintain smaller, decentralized factories in different parts of the world.

Other advances in automation also are helping to lower supply chain costs. For example, Kiva Systems makes automated warehouse solutions that let mobile robots move products. These autonomous but coordinated robots help in distribution and because it is easy to start small and add more units later, they are ideal for small to medium sized warehouses. Amazon recently acquired Kiva as part of its planned rollout of more regional centers for same day delivery.

As technology continues to advance, customization gets cheaper and the arguments against decentralizing manufacturing get weaker. But even those companies for whom centralized manufacturing makes the most sense face the demand for customization technological lower supply chain costs. Whatever changes a company makes to their manufacturing and distribution processes, whether it’s to centralize or decentralize, enterprise resource planning (ERP) software can help.

Cloud ERP Solutions
Cloud ERP systems integrate multiple department functions into a single software platform and help companies by providing visibility into every function of their operation. The modular nature of cloud ERP lets firms implement only those modules that meet their requirements, allowing for seamless integration of company processes and workflows, improved tracking and security and lower costs. For those Cloud ERP systems that have multi plant and multi site capabilities, they are more able to support such an environment.

As companies weigh the advantages and disadvantages of centralized versus decentralized, moving ERP for manufacturing to the cloud becomes a critical factor. The cloud provides central data storage, the sharing of data-processing tasks and internet-based access to services and resources.

Large companies who have been maintaining on-premise ERP systems are discovering that these systems can no longer support the need to become more flexible. Moving their manufacturing ERP systems to the cloud is the perfect solution for them. Small- and medium-sized companies can especially benefit from cloud ERP solutions. For companies with centralized manufacturing but far-flung distribution networks, cloud ERP for distribution is a perfect fit.

Cloud ERP provides significant benefits for both centralized and decentralized manufacturing strategies. Upfront costs are lower and the total cost of operation, especially for small- and medium-sized companies, is lower. Unlike expensive and inflexible on-premise ERP software, cloud ERP is accessible from any device with a web browser and Internet connection, giving such systems great mobility. This is a great advantage to decentralized processes. Furthermore, cloud ERP and MRP (Manufacturing Resource Planning) systems offer faster updates and bug fixes.

Cloud ERP represents and integrates every function in the manufacturing process, including materials requirements planning (MRP), sales order management, cost accounting, engineering, purchase order and inventory software, shop floor software and supply chain management software. Companies that manufacture specialized products can move to cloud ERP for everything from material requirements planning, inventory control and purchasing to accounting, quality and production control.

Cloud ERP lets companies focus on delivering the customized products and services now in demand and not worry about the limitations of in-house IT and lets companies scale their businesses quickly.

Rootstock Software helps manufacturers transition their manufacturing and distribution processes to more nimble, customization-focused operations by providing configurable, scalable and adaptable cloud ERP solutions. Rootstock systems give companies the flexibility they need to accommodate any workflow, implement social collaboration, and especially add new capabilities and quickly address changing requirements. The company provides state-of-the-art manufacturing, distribution and supply chain apps that integrate “out of the box” with native crm and accounting apps. Rootstock has drag and drop scheduling and capacity planning as well as centralized and decentralized capabilities for sales, procurement, and bills of material and engineering change control.

By providing manufacturers and distributors with the control and flexibility they need, Rootstock empowers companies to meet the challenges of rapidly changing markets while raising the total performance of their entire supply chain. So whether a company is looking to adapt their centralized manufacturing to greater customization or is considering decentralizing their manufacturing to meet that need, Rootstock Software has the right solution for both.

ABOUT THE AUTHOR:
Pat Garrehy is the Founder, President, and CEO for Rootstock Software®, a Cloud ERP company, and has an extensive background as a software architect and engineer. With over 30 years of management, sales and technical experience, Garrehy brings a unique blend of analytical focus and business savvy to the table.

Garrehy is also the founder and former CEO of Relevant Business Systems, a client-server ERP software provider with an exclusive focus on discrete manufacturing companies. Relevant, which was sold in 2006, remains the most profitable division of the acquirer to date. As a University of California at Berkeley graduate, he holds a BS degree in business and mathematics as well as an MBA in finance from the University of Southern California.

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