What Is a Supply Chain?

A supply chain is a network between a company and its suppliers to produce and distribute a
specific product to the final buyer. This network includes different activities, people, entities,
information, and resources. The supply chain also represents the steps it takes to get the
product or service from its original state to the customer.

Companies develop supply chains so they can reduce their costs and remain competitive in the
business landscape.

Supply chain management is a crucial process because an optimized supply chain results in
lower costs and a faster production cycle.

Understanding Supply Chains

A supply chain involves a series of steps involved to get a product or service to the customer.
The steps include moving and transforming raw materials into finished products, transporting
those products, and distributing them to the end-user. The entities involved in the supply chain
include producers, vendors, warehouses, transportation companies, distribution centers, and
retailers.

The elements of a supply chain include all the functions that start with receiving an order to
meeting the customer's request. These functions include product development, marketing,
operations, distribution networks, finance, and customer service.

Supply chain management is a very important part of the business process. There are many
different links in this chain that require skill and expertise. When supply chain management is
effective, it can lower a company's overall costs and boost profitability. If one link breaks down,
it can affect the rest of the chain and can be costly.

What Are the Steps in a Supply Chain?

The key steps in a supply chain include:

1. Planning the inventory and manufacturing processes to ensure supply and demand are
adequately balanced

2. Manufacturing or sourcing materials needed to create the final product

3. Assembling parts and testing the product

4. Packaging the product for shipment (or holding in inventory until a later date)

5. Transporting and delivering the finished product to the distributor, retailer, or consumer

6. Providing customer service support for returned items

What Is Supply Chain Management?

Supply chain management (SCM) refers to the oversight and control of all the activities required
for a company to convert raw materials into finished products that are then sold to end-users.
SCM provides centralized control for the planning, design, manufacturing, inventory, and
distribution phases required to produce and sell a company's products.

A goal of supply chain management is to improve efficiency by coordinating the efforts of the
various entities in the supply chain. This can result in a company achieving a competitive
advantage over its rivals and enhancing the quality of the products it produces, both of which
can lead to increased sales and revenue.

What Are the Types of Supply Chains?

There are many different types of supply chain models available to companies interested in
implementing a strategy to improve efficiency and workflow. The type of supply chain model a
company selects will often depend on how the company is structured and what its specific
needs are. Here are a few examples:

 Continuous Flow Model: This traditional supply chain model works well for companies
that produce the same products with little variation. The products should be in high
demand and require little to no redesign. This lack of fluctuation means managers can
streamline production times and keep tight control over inventory. In a continuous flow
model, managers will need to continuously replenish raw materials in order to prevent
production bottlenecks.

 Fast Chain Model: This model works best for companies that sell products based on
trends that may have a limited time appeal. Businesses that use this model need to get
their products to market quickly to take advantage of the prevailing trend. They need to
rapidly move from idea to prototype to production to consumer. Fast fashion is an
example of an industry that uses this supply chain model.

 Flexible Model: Companies that manufacture seasonal or holiday merchandise often

use the flexible model. These companies experience surges of high demand for their
products followed by long periods of little to no demand. The flexible model ensures they
are able to gear up quickly to begin production and shut down efficiently as soon as
demand tapers off. In order to be profitable, they must be accurate in forecasting their
raw materials, inventory, and labor costs.
  Supply chains are made from combinations of four entities, and the interactions between
those entities are what drive supply chain operations. The four entities are:

 1. Products — things in demand at various facilities

2. Facilities — places where products are made, stored, sold or consumed
3. Vehicles — mechanisms to move products between facilities to meet demand
4. Routes — paths taken by vehicles to move products between facilities

The term value chain refers to the process in which businesses receive raw materials, add value
to them through production, manufacturing, and other processes to create a finished product,
and then sell the finished product to consumers. A supply chain represents the steps it takes to
get the product or service to the customer, often dealing with OEM and aftermarket parts.

While a supply chain involves all parties in fulfilling a customer request and leading to customer
satisfaction, a value chain is a set of interrelated activities a company uses to create
a competitive advantage.
Value Chain

The idea of a value chain was pioneered by American academic Michael Porter in his 1985
book Competitive Advantage: Creating and Sustaining Superior Performance. He used the idea
to show how companies add value to their raw materials to produce products that are eventually
sold to the public.1

The concept of the value chain comes from a business management perspective. Value chain
managers look for opportunities to add value to the business. They may look for ways to cut
back on shortages, prepare product plans, and work with others in the chain to add value to the
customer.

There are five steps in the value chain process. They give a company the ability to create value
exceeding the cost of providing its goods or services to customers. Maximizing the activities in
any one of the five steps allows a company to have a competitive advantage over competitors in
its industry. The five steps or activities are:

1. Inbound Logistics: Receiving, warehousing, and inventory control.

2. Operations: Value-creating activities that transform inputs into products, such as

assembly and manufacturing.

3. Outbound Logistics: Activities required to get a finished product to a customer. These

include warehousing, inventory management, order fulfillment, and shipping.

4. Marketing and Sales: Activities associated with getting a buyer to purchase a product.

5. Service: Activities that maintain and enhance a product's value, such as customer
support and warranty service.

In order to help streamline the five primary steps, Porter says the value chain also requires a
series of support activities. These include procurement, technology development, human
resource management, and infrastructure. 2

A profitable value chain requires connections between what consumers demand and what a
company produces. Simply put, the connection or sequence in the value chain originates from
the customer's request, moves through the value chain process, and finally ends at the finished
product. Value chains place a great amount of focus on things such as product testing,
innovation, research and development, and marketing.

Supply Chain

The supply chain comprises the flow of all information, products, materials, and funds between
different stages of creating and selling a product to the end user. The concept of the supply
chain comes from an operational management perspective. Every step in the process—
including creating a good or service, manufacturing it, transporting it to a place of
sale, and selling it—is part of a company's supply chain.

The supply chain includes all functions involved in receiving and filling a customer request.
These functions include:

 Product development

 Marketing

 Operations

 Distribution

 Finance

 Customer service

Supply chain management is an important process for most companies and involves many links
at large corporations. For this reason, supply chain management requires a lot of skill and
expertise to maintain.

While many people believe logistics—or the transportation of goods—to be synonymous with
the supply chain, it is only one part of the equation. The supply chain involves the coordination
of how and when products are manufactured along with how they are transported.

The primary concerns of supply chain management are the cost of materials and effective
product delivery. Proper supply chain management can reduce consumer costs and increase
profits for the manufacturer.

SCM on Financial Statements

Most businesses measure success through a high-level set of financial metrics that are reported
on a quarterly or annual basis, such as operating or net income, return on investment, and
earnings per share. Financial performance metrics are valuable because they capture the
economic consequences of business decisions. They are the “language of business,” used by
internal and external stakeholders to evaluate the results of business operations.

Supply chain managers make decisions and use organizational resources that eventually
impact the financial outcomes of the firm. To do so effectively, they need to link the results of
supply chain decisions to the financial goals and related metrics of the company.

By creating a set of linkages between the work that is being performed and the financial
outcomes of the firm, the organization’s supply chain function can gain organizational visibility
and demonstrate the impact of supply chain decisions and resource utilization on the firm’s
financial performance.

Financial Statements

The financial statements of an organization consist of the following primary statements:

 Income Statement – a report of the firm’s earnings over a specific period of time,
calculated as sales activities (revenues) minus product costs (cost of goods sold) and
selling, general, and administrative costs

 Balance Sheet – a report of what the firm owns (assets) and owes to either debtors
(liabilities) or owners (shareholders’ equity)

 Statement of Cash Flows – a report detailing the sources and uses of cash from three
perspectives: operational, investment, and financial

 Statement of Stockholders’ Equity – a report that traces the generation and distribution
of stockholders’ equity through capital stock transactions, retained earnings, and other
related transactions.

 Each of these statements report financial information that is important to management,

analysts, and investors. How do decisions made by supply chain managers impact the
results shown on each of these statements?

Income Statement

Most managers readily understand the basic income statement components of revenues,
product costs, and administrative overhead costs. The net income figure is arguably the most
focused-upon performance metric in the business community. Firms may also focus on
components of net income, such as gross margin (revenues minus product costs), earnings
before interest and taxes (gross margin minus administrative overhead costs), or EBITDA
(earnings before interest and taxes minus depreciations and amortization expense). Supply
chain decisions and performance have direct impacts on income through each of the three
primary components of the income statement, as shown below:
Income Statement Supply Chain Issues that Affect Financial
Component Performance

Revenues  Lead time

 Time to market for new products

 Response time to customer requests

 On-time delivery

 Product quality

 Product returns

 Stock outs

 Fill rates

Product Costs  Transportation costs

 Network distance

 Procurement costs

 Inventory costs – raw materials, work in

progress, finished goods

 Storage costs

 Packaging costs

 Waste

 Stock outs

 Forecast accuracy

 Number of suppliers

 Product remediation costs

Sales, General, and

 Warranty costs
Administrative Costs
  Selling costs

 Transaction accuracy (invoices, shipping

documents, export documentation)

 Exchange rate control

Balance Sheet

Within the balance sheet, a key component of organizational success (or failure) is the control of
working capital. Working capital is defined as current assets less current liabilities; think of
working capital as the "lifeblood" of an organization, as it is essential to keeping the organization
healthy and viable.

The primary components of current assets are cash (and cash-like investments), accounts
receivables, and inventories; the primary component of current liabilities for most firms is
accounts payables.

Not only do supply chain decisions have a direct impact on working capital, but working capital
flows and balances have a direct impact on the financial viability and performance of a firm. A
firm that lacks adequate working capital will have not have the funds available to pay its
employees, suppliers, or government taxes – any of which have the potential to quickly shut the
firm down. The firm will then have to borrow funds to meet working capital needs. A firm with
excess working capital will have the ability to fund expansion without increasing borrowings.

One useful supply chain performance measure to evaluate working capital performance is the
cash conversion cycle, calculated as Inventory Days plus Accounts Receivable Days minus
Accounts Payable Days.

 Inventory Days = 365 / (cost of goods sold / average inventory balance)

 Accounts Receivable Days = 365 / (sales / average accounts receivables balance)

 Accounts Payable Days = 365 / (cost of goods sold / average accounts payables
balance)

One goal of cash conversion is to balance the investments a company makes in inventory and
extending credit to customers with payments that a company makes for purchases.

The supply chain function influences working capital, as shown below:

 Supply Chain Issues that Affect Financial
Working Capital Component
Performance

Inventory Days  Holding costs – financing, warehousing,

tracking, moving, insurance

 Obsolescence

 Theft

 Forecasting accuracy

 Sourcing time

 Delivery time

Accounts Receivable Days  Bad debt

 Follow-up calls to receive payments

 Unable to ship due to non-payment

 Exchange rate changes

 Correct invoicing terms

 Proof of receipt

Accounts Payable Days  Discounts not taken

 Late payments; subsequent orders delayed

 Correct invoicing terms

 Payment penalties

In addition to working capital, the balance sheet helps firms measure utilization of the firm’s
physical assets. Plant, Property and Equipment (PP&E) productivity is measured by dividing
sales revenues by the amount recorded for net PP&E. This measure gives an indicator of how
productive the physical assets of the organization are.
Statement of Cash Flows and Statement of Shareholders’ Equity

The Statement of Cash Flows contains information generated through the Income Statement
and Balance Sheet, but formatted so that managers and investors can see the sources and
uses of cash in three primary areas of the firm: operations, investing, and financing. The
information on this statement is key to analyzing the health of an organization, because a
company requires positive operational cash flows to endure over time. The supply chain
organization impacts this statement through actions that influence the income statement or
balance sheet of the firm.

The Statement of Shareholders’ Equity summarizes the ownership portion of the firm – capital
stock sales and purchases, income generation and payment of dividends, and other related
items. The supply chain management function most directly impacts the net income generated
for the firm.

Conclusion
To build an effective model between supply chain decisions and organizational performance,
the supply chain organization in a firm must understand how its actions and decisions link to the
financial components of the firm. Then, it should analyze the influence that its various actions
and components have on outcomes that influence financial performance. This linkage model will
help to ensure that the supply chain organization is making and implementing decisions that are
valued by the top management of the firm.

5 main drivers of supply chain costs

In my career at ICRON (which has spanned nearly two decades), I have had the opportunity to
work with numerous customers around the world and across various industries. Although each
company’s supply chain is different (with its own unique dynamics, constraints, and complexity),
I have observed that there are certain common challenges that all these businesses face. One
of these is controlling costs.

Indeed, cost minimization is a main KPI of nearly every supply chain manager. The reason for
this is clear: Supply chain costs constitute a huge (and often hidden) danger to the financial
health and future of any company.
If your company’s supply chain costs are not effectively monitored, managed, and minimized,
they can eat away at your bottom line and – over the long haul – ultimately break your business.

Cutting costs sounds simple in theory, but in reality it is an incredibly difficult undertaking due to
the fact that:

-The KPI of cost minimization is often in conflict with other KPIs such as revenue maximization,
on-time in-full (OTIF) delivery performance, customer satisfaction, and inventory optimization.
There’s always a tradeoff – as an improvement in one KPI may lead to a drop off in another.

-Supply chains today are highly complex and intricately interconnected, so a cost reduction in
one area of operations can result in a cost spike in another. It is imperative to understand the
interrelationship between various processes in your supply chain and the impact of slashing
costs in one area on the entire supply chain.

-Senior supply chain executives are often hyper-focused on propelling revenue growth and fail
to assess and address the effect of supply chain costs – which, if not curbed, can do great
damage to profit margins over the long term. Many executives are not aware of the supply chain
costs their companies are racking up, or the potential, positive impact of even a small reduction
in costs would have on their overall financial performance and competitive edge.

Due to these and other factors, cost minimization is a tricky task for today’s supply chain
companies, requiring difficult decisions by key stakeholders.

Before embarking on cost cutting initiatives, it is imperative to first understand the main drivers
of costs in your supply chain.

In this blog, we will take a (brief and broad) look at the five most significant sources of supply
chain costs.

1) Investment Costs

In today’s globalized economy, most supply chains are sprawling multi-site networks of
suppliers, manufacturers, distributors, and retailers that stretch around the world.

In this business environment, it is essential to make smart strategic decisions – over a time
horizon of up to ten years – about where and when to invest in new facilities (such as
warehouses and factories) and resources (such as equipment and employees).

Many supply chain companies pump too much money into the wrong locations at the wrong
times or fail to invest in the right locations at the right times – and this can have a negative
impact on their financial fortunes.

Managing investment costs and making sound strategic investment decisions is absolutely
critical. To do this, your company must have:
  An end-to-end view of their supply chains (encompassing their entire network of
customers, suppliers, manufacturers, distributors, and retailers).

 Accurate, data-driven demand forecasts for the coming five to ten years.

 A clear market strategy and expansion plans.

 The capability to correctly calculate current and potential investment costs across your
supply chain and explore various “what-if” scenarios.

Getting a handle on strategic investment costs and making the best possible strategic
investment decisions is crucial for your company to survive and thrive in today’s global
economic landscape.

2) Transportation Costs

The second key driver of supply chain costs is transportation costs. Typically, the root cause of
higher transportation costs – for finished goods as well as raw materials and components – is
inefficient supply chain network planning, routing, and deployment of resources.

To minimize transportation costs and times, your company must be able to make the best
possible decisions about:

 The design of your supply chain network to ensure the location of suppliers,
manufacturers, distributors, and customers is optimal.

 The utilization of your capacity by, for example, adjusting load size or engaging third-
party logistics (3PL) firms when extra capacity is needed.

 The routes and modes of transport (truck, airplane, ship, etc.) that you use for particular
orders – taking into account your capacity and constraints (and those of your 3PL
services providers) as well as product-specific requirements.

 The selection of the suppliers, manufacturers, and distributors that you work with.

Many supply chain companies see their transportation costs skyrocket because they don’t have
the capability to take all the above considerations into account, conduct scenario analysis to
evaluate different options in terms of transportation route, mode, and partner companies, and
make optimized decisions on the best way to get their goods to their customers.

3) Procurement Costs

The third main contributor to soaring supply chain costs is procurement costs.

Choosing the right suppliers – who are consistently able to deliver the right products and
materials at the right times and at the lowest prices – is vital.
Choosing the wrong suppliers – who are unreliable or expensive – can cause your OTIF
performance and customer satisfaction to plummet and your procurement costs to shoot up.

To minimize procurement costs, your company must be able to:

 Use historical and real-time data to evaluate and compare the performance and pricing
of various suppliers.

 Choose the most reliable suppliers with the most competitive prices, who are able to
deliver the goods you need (in the right quantity, of the right quality, at the right times,
and in the right locations).

By optimizing your procurement process, your company can ensure that you make the best
possible decisions when it comes to supplier selection, dramatically reduce procurement costs,
and improve delivery performance.

4) Production Costs

Another primary source of supply chain costs – which applies to manufacturing companies in
particular – is production costs.

Surges in production costs can be caused by various factors including:

 Inefficient utilization of assets such as production machines and other equipment. Many
manufacturers are not able to assess their unit production costs (to identify which
equipment and processes are inefficient) and weigh various production process
alternatives and potential investment in new manufacturing technologies.

 Protracted machine set-up times – which, in turn, increase asset downtime and
production lead times and decrease capacity.

 Ineffective workforce management, which often results in a spike in overtime hours (and
overtime wages that manufacturers must pay to employees).

 Rework, which is especially an issue for project-based or engineer-to-order (ETO)

manufacturers. If each step of the manufacturing process is not performed correctly,
extensive rework may be required – and this can involve repurchasing expensive raw
materials and even restarting the whole manufacturing process from scratch.

 Various manufacturing overhead costs for items such as electricity, water, and
equipment maintenance and repair.

To minimize production costs (while maximizing production efficiency and OTIF performance),
manufacturing companies must be able to make optimized strategic, tactical, and operational
plans and decisions.
5) Inventory Costs

The last major driver of supply chain costs is inventory costs.

Companies across the supply chain spectrum – from retailers to manufacturers to suppliers –
rely on inventory as a buffer against supply and demand uncertainty and volatility.

Although inventory is undoubtedly a source of comfort for supply chain executives (as they can
rest assured that they will always be able to satisfy demand), it is also a source of costs.

Indeed, stockpiling and storing inventory can cause your costs – including warehousing and
transportation costs – to shoot up and can tie up vital capital that could otherwise be used to
propel your company’s growth.

It’s important to note that minimizing inventory costs does not mean eliminating inventory
altogether – after all, some inventory is always necessary to fulfill customer demand. The goal
here is to reduce excess inventory and to maintain just the right amount of stock of the right
products in the right places at the right times across your multi-echelon distribution network.

SCM on Profitability

In today’s highly competitive marketplace, supply chain has become a major differentiating
factor between companies that are profitable and those not profitable and in industries where
new product introduction is common place this differentiation is even more pronounced. In
industries where products and services have become commoditized, supply chain is the major
frontier in which industry players compete, hence the impact of supply chain decisions on the
bottom line of these companies is something top management cannot afford to overlook
anymore. In light of its impact on corporate profitability, supply chain management now requires
that so many complex decisions be made simultaneously, particularly in relation to the flow of
information, goods and cash flow. Usually these decisions can either be long term (strategic,
involving several years), short term (quarterly or annually) or operational (daily and weekly
production planning decisions).

Long term supply chain decisions are usually strategic because they will determine the value
chain’s structure in terms of resource allocation, design of process staging, whether to
outsource or make in-house, supplier relationships and even the production capacity. Because
the implications of these decisions will reverberate over the course of several years for the
business, hence for any company that chooses to base its competitive position on cost
leadership and differentiation this becomes a make or break decision that must be strategically
thought through with little room for forecasting errors even in the face of high implied demand
uncertainty because it will be very difficult to change on short notice. Therefore, two critical
requirements for any company a making long term supply chain decision is to factor in flexibility
and cost in the decision making process. This will help the company absorb shocks in demand
and supply uncertainty that can greatly impact the bottom line.
In the short term, companies still need to meet customer orders, keep operation running, pay
suppliers and employees, but how customer order and supplier needs are met and how
operation is continued on a quarterly and annual basis, though within the constraints of the long
term supply chain decision, is determined by tactical short term supply chain decisions on how
to maximize its supply network. Though short term, these decisions often have a huge impact
on the company’s bottom line as well. To succeed a company must factor in market
uncertainties like currency fluctuation, supplier responsiveness and competition (i.e what is the
competition’s inventory turnover and distribution strategy?) into its supply chain decision. While
operational decisions usually have the shortest planning horizon, it is by no means unimportant
to the profitability of the company. While making operational supply chain decisions, critical
factors to consider are sources of material waste and time waste, quality and lead time.

As can be observed from the success of companies like Nigerian Breweries and Dangote that
have made bold supply chain decisions grounded on sound parameters such as inventory
turnover, production location, distribution channels, supplier relationships and sales operations,
it is evident that supply chain decisions (long term, short term and operational) have the
greatest impact on the profitability and success of companies in today’s competitive market
place.

Customer Profitability Analysis

CPA is a managerial accounting method that allows businesses to determine the overall profit a
customer generates. A profitable customer is someone who generates a revenue stream
greater than the cost of their acquisition, selling, and serving. Companies calculate the CPA on
a customer level or for the entire customer group.

When companies are more focused on products, departments, and locations of their offices,
they often tend to lose focus on the customers. As a result, the companies have to sometimes
bear the cost of maintaining unprofitable customers which is detrimental to their business.

CPA allows companies to evaluate their customers and know how beneficial it is for them to
keep the customers. Based on this value they can decide upon the cost of serving them or even
to decide whether to continue or let them go.

It has been found in a study that the size of the customer is not directly proportional to their
profitability. Sometimes even the large-sized customers can turn out to be unprofitable ones for
a business.

Customer Profitability Formula

To calculate CPA, you need the annual profit per customer, and the total duration a customer
stays with your business.
Annual profit = (Total revenue generated by the customer in a year) – (Total expenses
incurred to serve the customer in a year)

The total revenue can be generated by the following sources that you need to include:

 Recurring revenue

 Upgrades to the higher plans

 Cross-buying relevant products

And, expenses can be incurred from the following sources which also you need to consider:

 Cost of customer service

 Maintaining a customer success team

 Loyalty perks

 Operational cost

Finally, when you have the annual profit, the customer profitability analysis calculation goes like
this:

CPA = (Annual profit) x (no. of years customer stays with company)

Benefits of Customer Profitability Analysis

CPA allows you to understand the business from a profitability viewpoint. Methods like activity-
based costing help you assign a cost to each activity associated with a product or service.
Businesses can leverage customer account profitability analysis in the following areas to benefit
from this method.

Trim out the cost factors

One of the most common exercises to analyze customers is customer segmentation. After
segmentation, businesses can segregate the group of customers that are costing more than
others. It is still viable to do business with a low-profit generating group. But on a deeper
analysis, if you find a group of customers that are costing more than the revenue they are
generating, then it is advisable to shut your services to them. By letting them go, you are making
your customer base more efficient in your growth engine.

Marketing to the right segment

When the customer segmentation according to profit range has been identified, they can be
used for further operations. The attributes of the most profit-generating customer group must be
recorded and used for further acquisition. Marketing teams can design their campaigns based
on those attributes to attract more such customers. Furthermore, based on their profitability
range, marketers can decide what deals and discounts they can offer to the prospects.

It takes commonly from five or six months to more than a year to recover the customer
acquisition cost. CPA can give the estimated duration for the ROI on marketing by extrapolating
on the attributes of customer segmentations with different profit margins. This helps in setting up
the overall budget for marketing and advertisements that a company can afford.

Customized retention strategy

After finding the customer group with different profitability, companies can customize
their retention strategies for each group. For the customers with the highest profitability,
companies can afford to give a service of the highest quality. That means, they can spend more
on serving those elite customers.

What engagement model to choose from – high-touch or low-touch? How many CSMs must be
employed for a specific group of customers? Questions like these can be easily answered when
you know the cost behind each choice and the profit a customer group would generate. To
retain high-value customers, through CPA, you get a clear margin of how much you can spend
on building their loyalty. Initiatives like customer loyalty programs can be easily designed based
on the profit margin for a customer segment.

Enhancing operational efficiency

The main reason for a customer group to generate lower profits is not always the customer.
There might be few flaws in the internal operations of the company that is costing them more to
serve the customers.

According to a customer profitability analysis example, let’s say the lower profit customer group
is consuming a lot of resources to deal with the same issue in a product over and over again.
Instead of allocating resources to that recurring issue, it might be beneficial for the company to
build a feature in the product itself that resolves the issue. This would not only lower the
operational cost but would also make your product better for future customers.

Centralized Supply Chain

Centralized distribution is the traditional network that most businesses are familiar with. In the
centralized distribution model, operations are typically limited to a “central” location. If there is
more than one hub, the locations may be geographically spaced to handle East and West coast
time zones or area-specific product lines.
Centralization Positives

 Fewer locations make the standardization of systems and processes through the
business easier. Company culture is easier to foster and maintain in a single location.

 Management has the ability to have eyes on a product within moments if there is a
concern since everything is often located in the same building.

Centralization Negatives

 Limited to talent within a geographic radius, centralized businesses often find

themselves competing for employees with other distribution centers that have similar
concerns.

 Ownership of cost and staffing for all areas of business including systems, security,
recruiting and training can be very costly.

 Businesses can be locked into a multi-year contract for a specific building or geographic
area regardless of growth or opportunity in the market. These leases often have
penalties for early termination.

 Cross-country customers who have an urgent need may be charged steep shipping
fees. In a market dominated with free 2nd-day delivery, this could force them to look
elsewhere for fulfillment.

Decentralized Supply Chain

When a business moves into a decentralized distribution model, the product moves further away
from the key stakeholders at the “central” corporate office and closer to the end customer. While
this can be accomplished through self-owned warehouse and logistics, a managed
decentralized logistics network is far more agile than its counterpart.

Decentralized Positives

 Each node of the supply chain can be tuned to that specific area's demand to best serve
the customer base. Product levels can be distributed to locations across the country
based on the volume of orders in that area.

 Customers with critical need may have the option of will call or same-day delivery with
moderate cost. For example, a customer may be able to order an item and pick it up in
the same day.

 The ability to test systems, products, markets, and suppliers on a small scale before
rolling out to the entire organization can lead to better data-driven decisions.
  Local addresses on shipping labels increase trust in customers.

Decentralized Negatives

 Shipping to multiple distribution locations may affect bargaining power with suppliers
wanting to ship in bulk to a single location.

 Control of operations and culture can be diluted through the nodes of the supply chain,
which may not be relevant for outsourced decentralized supply chains.

Centralized and Decentralized Hybrid Supply Chain

By blending centralized and decentralized supply chain methodologies, a business can enjoy
some of the advantages of each while mitigating the negatives. While this is not as
advantageous as a decentralized supply chain, it can be an easier sell the idea of a hybrid
supply chain to a leadership team that may favor a centralized logistics solution.

Hybrid Positives

 Standardization of systems and processes are easier. Company culture can be fostered
and maintained in a single location.

 Leadership has the ability to locate products quickly if there are concerns about
inventory status or reliability.

 The additional locations can be stocked to that specific area's demand in order to better
serve customers. Products can be distributed to locations across the US based on the
volume of orders.

 Customers with critical needs may have the option of will call or same-day delivery with
moderate cost.

 The decentralized locations will grant the ability to test systems, products, markets, and
suppliers on a small scale before rolling out to the entire organization.

 Maintain bargaining power with suppliers by shipping in bulk to a single location.

Hybrid Negatives

 Maintaining large central distribution centers still carries the cost of staffing and
inventory.

 Businesses may still find themselves tied to a long lease or geolocation.

How Can Decentralization Make Your Supply Chain More Efficient?

Before the evolution of broadband internet and cloud computing, a single centralized location
made a lot of sense. The costs of servers and infrastructure could be shared across
departments and economies of scale translated to dramatic cost savings.

The virtual and cloud landscapes today are eliminating the need for the infrastructure we
needed just five years ago. The same economies of scale that worked before to house servers
internally, now make it safer to house data in the cloud with leading minds in security that would
be too costly to bring in-house.

Companies are realizing that the cost-saving measures that once worked so well are now
hindering them from being the agile supply chain that their customers are beginning to expect.
The biggest reason why decentralization is better than centralization is the flexibility and data to
adapt to market demands quickly.

Which Industries Increase Competition in Today's Landscape through Decentralized

Logistics?

Service & Repair

Competitive service level agreements (SLAs) put pressure on technicians to resolve problems
faster every year. By distributing the products closer to the clients, service and repair
businesses pay out fewer penalties. Decentralized storage solutions like Warehouse Anywhere
are even able to deliver hardware to the destination so the technician never loses time driving to
the warehouse.

RFID tracking speeds up the process further by automating the tracking of serial numbers. By
scanning the product as it enters and leaves the facility, it can move quickly through the process
without systems getting in the way.

E-Commerce

E-commerce giant Amazon continues to open more distribution centers around the world. To
better control the last mile, they are looking at opening up to 3,000 Amazon Go stores by
2021 where customers can purchase online and conveniently pick up their items on the way
home. To compete with that level of expectation, decentralized logistics can help small e-
commerce businesses stay competitive with companies like Amazon.

Pharmaceuticals

While consignment used to be a way to get the product in the hands of customers faster, losing
control of the customer relationship and the chain of custody are becoming risks that
businesses can no longer accept. Supply chains that facilitate stronger interactions with
customers will continue to lead their industries.
Having a robust chain of custody while still rapidly being able to satisfy customers needs is a
powerful tool for salespeople in the field. Decentralized distribution centers that can pair access
with any and all product movement mitigates the risk of carrying sensitive materials.

Medical Devices

Healthcare supply chain management hinges on traceability. Expiry of sensitive items, serial
tracking, lot numbers, and even temperature controls can be requirements of the business or
even regulatory compliance.

RFID is an excellent tool to automate the tracking of key information such as serial number, lot,
expiration, and even temperature throughout the life of an item. LIFO or FIFO picking methods
ensure the customer always receives the best product.

While these may be difficult to implement, engaging a logistics provider that already has the
capabilities to track these data points can save both time and money. A decentralized logistics
provider like Warehouse Anywhere can help direct businesses to the tools best suited for each
stage.

Just In Time Inventory

Just like the cost-effective solution used to be centralized distribution, businesses used to
overstock inventory in case of unforeseen spikes in demand. While this did solve the problem, it
tied up cash in inventory, increased the chance of damage, and consumed large amounts of
real estate.

The big buzzword in distribution over the past few years has been “Just In Time” inventory.
Being able to satisfy customers demands through better last mile management can give
businesses a competitive advantage in the marketplace. Increased technological capabilities
allow systems to communicate and bring the product where it is needed when it is needed, so
cash isn't parked in inventory.

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