The Impact and Dynamics of Centralization in Supply

The Impact and Dynamics of Centralization in Supply
Chain Decision-making
by
Guruprakash Rangavittal
Master of Business Administration, 1999

Indian Institute of Management, Lucknow, India
B.Eng., Electronics and Communication, 1995
Anna University, Chennai, India
and
Tae-Hee Sohn
B.S., Material Science and Engineering, 2007

Seoul National University, Seoul, Korea
Submitted to the Engineering Systems Division in Partial Fulfillment of the

Requirements for the Degree of
Master of Engineering in Logistics

at the
Massachusetts Institute of Technology

June 2008
C 2008 Guruprakash and Tae-Hee Sohn. All rights reserved.
The author hereby grants to MIT permission to reproduce and to distribute

publicly paper and electronic copies of this thesis document in whole or in part
in any medium now known or hereafter created.
Signatures of Auti
Engineering Systems Division,
May 9, 2008
Certified by: ...........(

/t ( Chris Caplice
cutive Director, Masters of Engine ng in Logistics Program
Executive Director of Cente'r T/nsportation and Logistics
Thesis Supervisor
Accepted by: ................

Yossi Sheffi
MASSACHUSETTS INSTITUTE Profes /oofCivil{end Environmental Engineering
OF TECHNOLOGY Professor of Engineering Systems Division
Director of Engineering Systems Division
AUG 0 6 2008 1 CHOVNE
LIBRARIES
The Impact and Dynamics of Centralization in Supply
Chain Decision-making
By
Guruprakash Rangavittal
and
Tae-Hee Sohn
Submitted to the Engineering Systems Division on May 9,2008 in Partial

Fulfillment of the Requirements for the Degree of Master Engineering in Logistics
Abstract
Companies with a corporate supply chain department and multiple business units use one
of two methods for their supply chain decision-making: centralized decision-making
where supply chain decisions are made at the corporate level by the central supply chain
department or decentralized decision-making where supply chain decisions are made at a
business unit level. We investigate the hypothesis that a centralized organizational
structure helps companies lower costs and a decentralized organization structure enables
companies to quickly respond to customer needs on a real time basis and improve
customer service. To evaluate our hypothesis we surveyed industry current practice.
Based on our analysis from the survey, we identified three factors that influence
companies to adopt either a centralized or decentralized organization structure: customer
service, supply chain management cost, and organizational control. We identified that a
"hybrid" structure, where strategic functions are centralized and operational functions are
decentralized, had the lowest supply chain management cost percentage to sales.
Thesis Supervisor: Chris Caplice

Title: Executive Director of Master of Engineering Program and Executive Director of
Center for Transportation and Logistics
Acknowledgements
By Guruprakash
My heartfelt thanks...
To
My wife, parents,family andfriends

ProfChris Caplice and ProfBill Haas
Mr. Jim Kellso and Mr. PaulLang
Tae
MLOG '08
The respondents to our survey
MIT
Google
Academics
Researchers
By Tae-Hee Sohn
First, I want to thank Dr. Chris Caplice, our thesis supervisor. He always helped and
guided us with his insightful comments and strong support. Also, I thank him for letting
me in the MLOG program and allowing me the opportunity to have all these wonderful
experiences.
Secondly, I want to thank Mr. Jim Kellso, Mr. Paul Lang, and Mr. Michael Waithe for
giving me an opportunity to conduct this project. They were always supportive, and their
assistance added value to our project.
I am also grateful to my thesis partner, Guruprakash. His creative ideas and experiences
were very valuable assets of our project, and I learned a lot from working with him.
I also want to thank the various professors and researchers, who were open to help us to
develop our project. Especially, I appreciate Dr. Paulo Goncalves's help to develop our
System Dynamics model. Also, I am very grateful to those who participated in our survey
and interviews with their insightful responses.
All of MLOG 08 friends are just great and very kind. I cannot imagine how I could
"sustain" in this MLOG life without them. Since I believe that it would be unfair to
mention only few, I do not want to name them. However, those who always supported
me, gave me a kind hand, and, most importantly, spent uncountable hours at the lab
together should have my many thanks. I will never forget all these pleasant memories.
Jin. Although we are separated for a year, I can always feel the connection between us.
Your cheers and prayers for me made me progress.
Finally and most importantly, I want to thank my parents and sister with my whole heart,
even if it is not enough. Everything that I achieved was possible due to them.
To my parents...
Table of Contents
ABSTRACT ............................................................................................................. 2
ACKNOWLEDGEMENTS ........................................ 3
LIST OF TABLES ................................................................................................. 7
LIST OF FIGURES ... ............................................................................. 8
CHAPTER 1. INTRODUCTION ...................................... .................................... 9
1.1. Research Questions and Hypotheses ....................................... ........... 10
1.2. Roadmap of this Research Work................................... 12
CHAPTER 2. LITERATURE REVIEW............................................................................... 15

2.1. Definition of Centralized and Decentralized Decision-Making...................... 15
2.2. Cost Elements in Supply Chains ..................................... .... ............. 17
2.3. Supply Chain Management Functions................................. ............. 19
2.4. Organizational Structure and Cost in Supply Chains ..................................... 20
2.5. Motivation from Literature Review.......................................................... 21
CHAPTER 3. RESEARCH METHODOLOGY ...................... ............................ 23

3.1. Measurement Method ...................................... 23
3.2. Sampling Approach ............................................................ 29
3.3. Analysis Methods ............................................................................................... 31
3.3.1. Centralization and Strategic Importance.............................. ......... 31
4.3.2. Factors Influencing Centralization ...................................... .........32
4.3.3. Dynamics of Centralization and Decentralization................................ 33
4.3.4. Cost Structure and Centralization Analysis ........................................ 33

CHAPTER 4. RESULTS AND DISCUSSION.............................. ............ 35
4.1. Characteristics of Supply Chain Management Organization......................... 36
4.2. Centralization and Strategic Importance.. ...................................................... 38
4.3. Factors influencing Centralization ......................................... ........... 41
4.4. Cost Structure and Centralization............................................................ 45
4.4.1. Transportation Costs and Shipment Handling Centralization..................... 46
4.4.2. Transportation Costs and Transportation Planning Centralization.............. 48
4.4.3. Inventory Carrying Costs and Inventory Planning Centralization .............. 50
4.4.4. Cluster Analysis on Centralization and Cost structure ............................... 52
4.5. Dynamics of Centralization .................................................... 58
4.5.1. Cost Driver Dynamics................................................. 59
4.5.2. Customer Service Driver Dynamics ...................................... ........61
4.5.3. Control Driver Dynamics .......................................... ............... 63
4.5.4. An Integrated Framework ..................................... ..... .............. 65
4.6. Case Studies .............................................. ................................................... 67
4.6.1. Case Study 1: Sourcing at the Leading Consumer Products Company.......... 67
4.6.2. Case Study 2: Shipment Handling at the Pharmaceutical Company .............. 72
CHAPTER 5. CONCLUSIONS.................................................................................. 76
5.1. K ey Findings ................................................................. ............................... 76
5.2. Contributions and Limitations................................................................. 76
5.3. Further Research................................................................................................. 77
APPENDIX.................................................................................................................. 79
BIBLIOGRAPHY .................................................. 88
List of Tables
Table 1: Supply Chain Costs Break-up Practices ....................................... ...... 19
Table 2: Framework for Strategic Importance Grouping ....................................... 26
Table 3: Key factors of centralization........................................ 27
Table 4: Respondent Statistics'....................................................... 31
Table 5: Student's t-test Result of the Consumer Products Manufacturing Industry........ 39
Table 6: Student's t-test Result of the Industrial Products Manufacturing Industry......... 39
Table 7: Student's t-test Result of the Logistics Service Industry ................................ 40
Table 8: Student's t-test Result of the Retail Industry.................................................. 40
Table 9: Centralization vs. Strategic Importance Segmentation Analysis .................... 40

Table 10: Influencing Factors of the Consumer Products Manufacturing Industry ......... 42
Table 11: Influencing Factors of the Industrial Products Manufacturing Industry .......... 42
Table 12: Influencing Factors of the Logistics Service Industry........................... .42

Table 13: Influencing Factors of the Retail Industry ..................................... ... 42
Table 14: Influencing Factors for Each Industry with respect to Strategic Importance ...44
Table 15: Summary of Other Attributes for the clusters ..................................... .54
Table 16: Chi-square Test Results .................................................... 79
Table 17: Final Centers and Distances of Clusters ...................................... ... .87
List of Figures
Figure 1: Cost Levels in supply chain Costing ...................................... ......... 17
Figure 2: Industry Categorization ..................................... ...... ................. 30
Figure 3: Senior Most Functionality of Supply Chain Department....................... 36
Figure 4: Reporting Relationship of supply chain Leadership (SCL)........................ 37
Figure 5: Various Functions Performed in supply chain Department .......................... 37
Figure 6: Centralization vs. Strategic Importance Segmentation Analysis................... 41

Figure 7: Cost Structure Comparison for All Industries ............................................. 45
Figure 8: Transportation costs Percentage of Sales With Respect To Shipment Handling
Centralization for A ll Industries.......................................................................... 46
Figure 9: Transportation Costs Percentage of Sales With Respect To ........... .49
Figure 10: Inventory Carrying Costs Percentage of Sales With Respect To Inventory
Planning Centralization for All Industries ...................................... ........ 51
Figure 11: Three Segmentations By K-means Clustering............................... ...... 53
Figure 12: Cost Analysis for Three Clusters ...................................... .......... 55
Figure 13: Cost Analysis for Three Clusters Excluding Inventory Carrying Costs ........ 57
Figure 14: Cost Driver M odel............................................................................ 60

Figure 15: Customer Service Driver Model ....................................... ........... 61
Figure 16: Integrated Decision-making and Incentive Conflict Model ........................ 63
Figure 17: An Integrated Framework that determines centralization of a function.......... 65
Figure 18: Causal Loop Diagram of Sourcing Function................................. ............. 71

Figure 19: Case 1 - Decentralized Sourcing.............................................................. 72
Figure 20: Case 1 - Centralized Sourcing................................ ................................. 72
Figure 21: Causal Loop Diagram of Shipment Handling Function............................ 74
Figure 22: Actual Survey Used for This Research ........................................................ 81
Chapter 1. Introduction
Centralization is the policy of concentrating all decision making in the hands of a few
people who are common across the different business units in an organization.
According to Stroh and Northcraft (2002), in a highly centralized organization all
decisions are made by one individual and are implemented through formal channels of
authority. Decentralization on the other hand refers to the policy of delegating authority
to the individual business units in an organization. Stroh defines decentralization as an
attempt to "push decision making authority and responsibility" lower in the organization.
There is a constant debate in the supply chain field as to how supply chain departments in
manufacturing, retail and logistics companies should be organized. Should the supply
chain organizations be centralized or should they be decentralized? To illustrate this
point, let us look at two examples that present contrasting outcomes where companies
have adopted different organizational structures for their supply chain organizations.
While HP decided to decentralize a previously centralized structure (Moad, 2006),
Office Depot decided to centralize a previously decentralized organizational structure
(Abright, 2004). In June 2006, HP decided to decentralize its supply chain function. It
disbanded its global supply chain function and decided to give responsibilities back to the
core operating divisions. More precisely, HP adopted a hybrid approach where some
responsibilities were clearly delineated between the two business units and some
responsibilities were still executed by one of the two business units as a service to the
other unit.
On the other hand, Office Depot, a leading office supplies retailer decided to
consolidate its North American supply chain operations under a single supply chain
organization. As narrated to Albright (2004), the Vice President of supply chain at Office
Depot, Mark Holifield commented that the consolidated structure would help drive
market share gains. He also commented that:
"Ifyou'realready in an industry-leadingposition, continuingto widen the gap
becomes more challenging," he said. "We achieved thatposition as separate
organizations.Now, consolidatedas a single supply chain, where we can leverage
all of the talents of all the people in those groups, I think we can unlock tremendous
capabilities."
As we see from these cases, companies are motivated by different reasons for either
centralizing or decentralizing their supply chain organization. Hence it is important to
understand the impact and dynamics that influence where critical supply chain decisions
have to be made - locally at each business units or centrally at the corporate level. This
research paper explores this question in greater detail.
1.1. Research Questions and Hypotheses

In this thesis we compare and contrast the cost structure of companies that are opting for
centralization or decentralization over the other structure in the supply chain organization
as well as understand the various factors influencing centralization-decentralization

decision in the supply chain organization. The research questions can be summarized as
follows:
a) How do companies centralize or decentralize their supply chain decision-making?
b) What is the cost structure of companies that centralize or decentralize their supply
chain decision-making?
c) What are the factors influencing the centralization or decentralization of the
supply chain department in manufacturing companies?
d) What are the underlying dynamics that shape the centralization or decentralization
of supply chain decision-making?
Answers to the research questions listed above will help us validate our hypotheses
on this topic, which are:
a) Companies centralize their strategic functions and decentralize their operational
functions.
b) Companies that decentralize their decision-making do so to meet unique customer
requirements in their businesses or to take advantage of supplier situations or to
meet legal regulations or to take advantage of any other business conditions in
their operating geographies and business units.
c) Companies centralize their supply chain decision-making for cost considerations.
d) Companies within the same industry that adopt centralized decision-making have
lower supply chain costs as a percentage of sales compared to companies that
decentralize in that industry.

In order to answer the research questions, we recognized that we would need
information on the extent of centralization in supply chain functions and various cost
figures from a cross section of companies across industries. We will also need
information on the factors that motivate companies to adopt their chosen organization
structures. The volume of data requirements for our research clearly pointed us to a
survey for our research. The methodology that we adopted to collect and analyze data is
described in detail in the paragraphs below.
1.2. Roadmap of this Research Work

The next chapter (Chapter 2) reviews literature on this topic to define the terms and
framework examining centralization in decision-making and cost issues in Supply
Chains. The literature review gives us a strong theoretical foundation and motivation for
our research.
Chapter 3 describes our research questions and key hypotheses. The research
questions and hypotheses can help the readers understand the direction of our research
and the issues that we are exploring more closely.
Chapter 4 presents the methodology that we adopted for our research. This chapter
describes the design of the survey that we used to collect data and the sampling approach
for our research. This chapter also discusses the analysis methods used to extract insights
from the survey. We also employ systems dynamics modeling approach to examine the
macro influences that shape centralization of supply chain functions in organizations. We
also explain the advanced techniques that we use to examine the impact of centralization
on cost structure of companies in this chapter.

Chapter 5 discusses and documents the results of our analysis. In this chapter, the
research hypotheses are evaluated on the basis of results obtained and insights from
practicing managers are juxtaposed to compare and contrast the research results. In this
chapter, we also dive deeper on the key questions that initiated the research namely, how
do companies centralize or decentralize their supply chain management functions, and
why and what is the impact of this centralization approach in terms of cost structure to
those companies.
The last chapter (Chapter 6) summarizes lessons and limitations of this research. In
this chapter we also propose further research possibilities in this area.

14
Chapter 2. Literature Review
We studied past research to investigate centralization in different supply chain functions
in organizations and to explore centralization across industries. The literature survey
helped us to refine our definitions of terms namely centralization (Stroh & Northcraft,
2002; Fredrickson, 1986) and cost structure (Seuring & Goldbach al, 2001), review the
advantages and disadvantages of centralization and decentralization of decision making,
and understand the current status of research on the correlations between cost structure,
centralization and organization structure (Dai, Narasimhan & Wu, 2005; Johnson, 2003).
2.1. Definition of Centralized and Decentralized Decision-Making

A centralized organization is one in which the right to make decisions and evaluate
activities is concentrated with a small coalition of top-level executives (Fredrickson,
1986). Decentralized control on the other hand refers to a business situation where each
individual unit in the supply chain makes decisions based on local information (Lee &
Billington, 1993). There are merits and demerits of centralized and decentralized
decision-making. Centralized decision-making enables specialization in that function and
mastery in making such decisions acquired through the experience of executing that
process for various business units. Centralization enables economies of scale of
procurement of products and services (Harrison, 2001). Centralized decision-making
brings about uniformity of decisions and hence enables common processes across all
business units. Centralized decision-making provides economies of scale - if individual
business units negotiate deals, they are likely to have lesser bargaining power compared
to a central organization with much larger budget to spend. Also, a centralized buyer can
reduce the number of suppliers and thereby increase the efficiencies of dealing with fewer
suppliers. Centralization enables easy change of processes. For example a change in the
inventory policy or a change in the transportation sourcing is easy to implement owing to
minimal disruption to business.
Although centralized decision-making is beneficial for a variety of reasons there are
certain drawbacks that are forcing businesses to take over the decision-making from the
corporate supply chain organization and retain it locally. Centralized decision-making is
not tailored to unique business conditions that exist locally. Centralized decision-making
increases the response time because in some situations the corporate supply chain
organization might be in a different time zone compared to the business unit. Centralized
decision-making reduces the control of the local businesses on key decisions such as
inventory or transportation where the supply chain person might be waiting for decisions
to be made centrally. Centralized decision makers do not have all the information
necessary to make good decisions (Stroh 2002). On the other hand, in a decentralized
organization, there is a high potential incentive misalignment between the "principal"
(the delegating authority) and "agents" (the delegates) (Lee & Whang, 1999).
Therefore, it is clear that centralization and decentralization can be effective in
different situations. For different functions, businesses have evaluated the advantages
and disadvantages of a centralized decision-making process in light of their unique
business conditions, competitive situation and cost margins to decide which decision-
making process is better suited.

2.2. Cost Elements in Supply Chains
It is also pertinent now to analyze the cost structure and the various costs as referenced by
this paper in greater detail. Seuring and Goldbach (2002) provide a conceptual
framework to understand supply chain costs into three cost levels:
a) Direct costs: the costs that are caused by the production of each single entity of a
product and they include costs such as material cost and labor costs.
b) Activity-based costs: the costs caused by activities that cannot be directly
attributed to products, but by administrative activities to manufacture and deliver
products to customers and they include operational costs, transportation costs and
inventory carrying costs.
c) Transaction costs: the costs caused by the supply chain organization's need for
information and communication with suppliers and customers. This includes
Information Technology costs, hardware costs such as computer costs.
The following diagram shows these cost items in a supply chain model.
1 r
\ A
\ Transaction costs
Supply Chain
Figure 1: Cost Levels in supply chain Costing'
Seuring and Goldbach (2002)

Since in this research we are interested in costs pertaining to supply chain decision-
making, we will consider the costs that pertain to activity-based costs and transaction
costs as part of the cost structure to be analyzed, and exclude the direct costs, which
heavily depend on external factors such as fuel, in our cost analysis. The selection of cost
buckets identified in this research was influenced to a large extent by the cost categories
identified by Davis (2001). Davis (2001) identified five different cost elements namely
transportation (4.3% of sales), warehousing (1.8%), order entry (0.55%), administrative
(0.36%) and inventory carrying (2.07%). Moreover, Stock and Lambert (1987) have
identified logistics costs as falling mainly in five buckets: transportation, warehousing,
order processing and information, inventory carrying and lot quantity. Wendell (1965)
identified the logistics cost as a percentage of sales across all industries. He had
identified transportation costs to be 10.7% of sales, warehousing costs to be 3.7%,
inventory carrying costs to be 3.8%, order processing costs to be 1.2% and other
administrative costs to be 2.4% of sales. Transportation was relatively higher than other
cost items in his research, because transportation was regulated before 1980.
A similar cost breakup is also commonly seen in consulting research. The
consulting firm, Supply Chain Consultants (2005), has identified four key cost buckets
namely, transport, warehousing, inventory carrying, and customer service and
administration in their online paper. They have identified transport costs to be 2.7% of
sales, warehousing costs to be 1.5%, inventory charge of 2.5%, customer service and
administrative costs at 0.9%.

Supply Chain
Wendell (1965) Davis (2001) Consultants (2005)
Consultants (2005)
Transportation costs 10.7% 4.3% 2.7%
Warehousing costs 3.7% 1.8% 1.5%
Ordering costs 1.2% 0.6% N/A
Administrative costs 2.4% 0.4% 0.9%
Inventory carrying costs 3.8% 2.1% 2.5%
Table 1: Supply Chain Costs Break-up
We also noticed that Supply Chain Digest (2006), a popular online magazine on
supply chain management, had employed a similar breakup of cost components namely
warehousing costs, transportation costs, inventory carrying costs, customer service and
reverse logistics costs for its annual logistics survey of 2006. The supply chain cost
structure and ranges of cost as a percent of sales identified in academic and professional
journals have shaped the cost structures and cost ranges identified in our research as well.
2.3. Supply Chain Management Functions

As we start analyzing the cost in a supply chain, it is pertinent to also enumerate the
functions that are to be considered as part of the research. Miller (2002) has provided an
excellent reference for identifying the different decisions involved in supply chain
management in an organization. He breaks down the different decisions into three key
buckets namely:
a) Strategic decisions: the decisions that have high risk, high costs and high impact
(impact that lasts more than 2 years of the company's activities)
b) Tactical decisions: the decisions that have medium risk, medium costs and
medium impact (impact that lasts between 1 to 2 years of a company's operations)

c) Operational decisions: the decisions that have low risk, low costs and low impact
(impact that lasts less than a year).
This framework has been used for categorizing the main supply chain functions for
result analysis in the analysis section of this paper.
2.4. Organizational Structure and Cost in Supply Chains

In order to understand the factors that motivate companies to centralize or decentralize
and to examine the impact of structure on cost, we reviewed past research exploring the
relationships between organizational structure, centralization and cost in the supply chain
organization of companies.
Johnson (2003) analyzed purchasing organization structure of companies and
identified important relationships between organizational structure and competitive
pressures such as cost, technology and market uncertainty. Likewise, in an attempt to
model buyer behavior in centralized and decentralized organizations, Dai, Narasimhan
and Wu (2005) have analyzed the structure of procurement organizations using queuing
theories and have provided an economic model that captures the fundamental trade-off in
a firm's e-sourcing business process as characterized by communication complexity,
frequency of use and cost of delay. While the research papers provide an excellent
theoretical basis to model centralization and decentralization, it is applied to only the
purchasing function and does not differentiate the type of function namely strategic,
tactical or operational. However it does provide a basis to envisage the service level and
cost tradeoffs possible in centralized and decentralized organization structures.

Das and Tyagi (1996) identified centralization of inventory as providing the
tradeoff between cost and customer assignments. Their research has focused on physical
inventory management. However the cost advantages identified by them due to
centralization of inventory allocation can be extended to other functions of supply chain
management that are analyzed in this paper. Anupindi and Yehuda (1999) have identified
a threshold level of "market search" at which both retailers and manufacturers benefit by
the centralization of stocks. They identify a certain level of centralization for both
manufacturers and retailers to be profitable. Nozick and Turnquist (2001) have also
provided a comprehensive analysis of the location of distribution centers in influencing
inventory, transportation costs and customer service. While there are a number of
academic papers and articles on the centralization of physical inventory as a tactical
approach to manage cost and customer service, not much focus has been given to
centralization of decision making in the different functions of supply chain management.
Also, for companies that want to implement a change in their decision making
process from either a centralized or decentralized organization to the other the transition
is wrought with challenges. This has been illustrated by Johnson and Leenders (2004) as
they point out the merits and demerits of centralization and decentralization and the
pitfalls and issues one can face while migrating from one form of organization to the
other.
2.5. Motivation from Literature Review

Although there is rich literature on the topic of physical inventory centralization, not
much analysis has been done on the relationship between centralization of decision-
making, organizational structure and cost structure. Such an analysis would provide a
valuable tool to business managers who would like to understand the implications of a
particular organizational design on the cost structure of the companies. Also none of the
papers that we examined went in detail analyzing the factors influencing companies in
either centralizing or decentralizing their supply chain organizations. Such an analysis
would be valuable to establish the context where one type of organizational structure can
be more effective over the other. This paper attempts to bridge this knowledge gap
through research. The extensive literature available provides us with a strong foundation
to analyze the factors influencing centralization and understand the underlying dynamics
shaping a particular organization structure.

Chapter 3. Research Methodology
We used a web based survey method to collect data from companies representing retailers,
manufacturing (consumer products and industrial products) and logistics service
companies.
3.1. Measurement Method

The survey method is adequate and appropriate for our research because majority of the
data points that were collected are not available generally in publicly available
information. Furthermore, this information is best collected from senior supply chain
professionals within the organization who will have a better picture of the way the
company is organized. In addition, in order to eliminate the possibility of subjectivity or
bias by external observers it is best to collect information through an anonymous survey
where senior supply chain professionals who are best placed to provide that information
anonymously can provide the facts. At the same time, a survey method still has
limitations in accuracy because of internal bias and subjectivity in data collection.
However, for the considerations of our research this error is minimized through our
selection process for respondents as described later in the chapter.
Our survey questionnaire consisted of five parts. Each part measured an attribute of
the supply chain of our respondent companies related to centralization, business factors or
cost structure. Besides, we also collected information pertaining to the company
characteristics. The data collected was used to answer the research questions and derive
important conclusions.
Supply Chain Management Organization Characteristics
The first part of the survey was designed to collect information about the supply
chain department pertaining to its importance, reporting relationships, and key functions
performed by the SCM department. We used the title of the top supply chain functionary
to gauge the importance of the supply chain department in the organization and we also
gave multiple options to respondents to collect information on relationships and functions
to reflect business realities. Although these questions were not attached to any
hypotheses, information collected gave us an indication of the interfaces that existed
between the supply chain department and other departments within the company and the
importance of supply chain organization within the company. A sample questionnaire of
our survey is attached in the Appendix.
Degree of Centralizationin Supply Chain Management Functions
The second section of our survey collected information about the level of
centralization across the different sub-functions of the supply chain organization where
respondents were asked to choose the level of centralization in the different functions.
Although supply chain literature has a number of definitions for supply chain
management, for our research, the key functions of supply chain professionals have not
been clearly enumerated. Miller (2002) has identified a number of decisions taken by
supply chain professionals but it has been left to the readers to assume the key functions
of supply chain management. Hence for the purposes of our research we list below the
key functions of supply chain management in organizations:

a) Long-term capacity planning - the function that creates long range capacity
investment plans for the business
b) Sourcing - function that is responsible for procurement of products and services
for the company's operations
c) Transportation planning - function that plans for Transportation assets and
partners with carriers
d) Inventory planning - function that executes inventory planning
e) Short-term demand planning - function that develops short-term demand forecasts
f) Manufacturing planning - function that plans production and integrates the other
teams with the manufacturing
g) Internal improvement - function that supports internal projects supporting supply
chain strategy/quality
h) Order fulfillment - function that is involved in fulfilling demands using dedicated
or/and private warehouses
i) Shipment handling - function that manages the day to day logistics and shipment
handling/tracking
j) Order management and problem resolution - function that supports customers and
expedites/consolidates delivery to customers
The above ten functions can be grouped into strategic, tactical and operational
based on Miller (2002)'s framework as described earlier in the literature review section.
Hence, the different supply chain functions can then be classified as below:
Functions Strategic Tactical Operational
Timeline to Long - Yearly Medium - Quarterly, Monthly Short - Daily, Weekly
PlanlExecute
Impact on High Medium Low
Business
Risk High Medium Low
Examples - Long-term Capacity Planning - Transportation Planning - Order Fulfillment
- Sourcing - Inventory Planning - Order Management
- Short-term Demand Planning - Shipment Handling
- Manufacturing Planning
- Internal Improvement
Table 2: Framework for Supply Chain Functions Grouping
With the functions of supply chain management well laid out the respondents can
now specify the degree of centralization of each of these functions in their organization
based on their experience. The degree of centralization in each function is classified into
four categories:
a) Most decisions (75% - 100%) made locally
b) Majority decisions (50% - 75%) made locally
c) Majority decisions (50% - 75%) made centrally
d) Most decisions (75% - 100%) made centrally
For the respondents, whose company did not have some functions, or who did not
know how some functions operated, we allowed a "Not applicable" option as well.
Key factors influencing centralization
The next section in the survey focused on understanding the factors influencing
centralization or decentralization of supply chain functions. The respondents were asked
to select the most influencing factor for centralization in each function among six factors,
shown below:
Name Description
Supply conditions A dominant supplier could force a downstream manufacturer or
distributor to centralize its sourcing in one location whereas a generic
raw material can be sourced from any location. This question is
intended to identify respondents with such constraints.
Customer requirements Many times customer requirements force companies to either
centralize or decentralize their supply chain functions to understand
customers better or to provide better service to customers.
Government regulations Occasionally government rules force companies to operate out of a
particular geography to avoid penalties or to take advantage of tax
benefits.
Competitive situation When market share is critical to companies, centralization or
decentralization of critical supply chain function is adopted to pre-
empt competitors.
Cost considerations As cost considerations set in,companies tend to centralize to achieve
economies of scale.
Capacity constraints Occasionally internal capacity considerations force companies to stick
to their current organizational structure despite high costs and poor
service to customers in their current organizational structure.
Table 3: Key factors of centralization
Although there could be several factors influencing centralization or
decentralization of supply chain decision making in companies, the list identified above
captures the key external stakeholders that could influence any company and important
internal factors that force companies to adopt a particular organization structure.
Respondents could choose only one factor for each function hence their answers can be
regarded as the most important factor to determine centralization of the function.
Cost structure information
The next section of our survey collected cost information. We established five cost
buckets based on prior research on this topic as identified in the literature review section:
inventory carrying costs, transportation costs, information costs, operational costs, and
other supply chain costs. The different cost elements that fall under these five cost
buckets were:
Inventory Carrying costs as a % of Sales: This is the cost of maintaining inventory
which includes inventory financing charges, inventory insurance and taxes, inventory
shrinkage, inventory control and cycle counting expenses.
Transportation costs as a % of Sales: This is the cost of engaging third party
transportation charges or private fleet costs including fuel, driver and depreciation
charges.
Information costs as a % of Sales: This includes costs related to the setup of IT
systems for supply chain activities including service charges, hardware and software
charges.
Operational costs as a % of Sales: This includes the cost of labor, warehouse rent,
utilities, cost of warranty, lease payments or depreciation on material handling equipment
and other operational charges.
Other supply chain costs as a % of Sales: This includes all other supply chain
charges not included in the above buckets.
Cost figures in those five cost buckets were obtained as a percentage of sales.
Respondents were asked to choose from among different options with each option
representing a range of percentages. The different options given to respondents were 0-
1.4%, 1.5 - 2.9%, 3.1 to 4.4%, 4.5 to 5.9%, 6 to 7.4%, 7.5 to 8.9%, 9 to 10.5% and more
than 10.5%. The choice of the cost structure ranges were influenced by the representative
cost structure identified in the literature survey.

Basic information of the company
Lastly, we asked basic information about the company to learn organizational
characteristics of the whole company. In this part, we asked respondents to provide
information about the employee count of their company and the supply chain
organization along with annual revenue size and the range of countries their company
operated. This section helped us capture the extent of globalization of respondent
companies and their size.
3.2. Sampling Approach

We conducted a pre-test survey with supply chain professionals from industry and
academia, and modified the survey after incorporating feedback. For the actual survey,
we employed a web-based questionnaire to collect responses and administered the
questionnaire over a period of 21 days to senior supply chain professionals including C-
level, president, senior vice president, and other vice president level executives
numbering more than 2800 in the industry. We received a fairly encouraging response
from more than 145 supply chain professionals across 15 different industries. The survey
respondents were part of a professional club and were carefully selected after making
sure that they are operational professionals at a level of manager and above. The survey
responses were carefully cleaned with due consistency checks and the clean responses
numbering 97 in total were used for further analysis for a usable yield of 3.46%.
Industry Categorization
We classified our respondent companies into the following four categories based on
their position in consumer and industrial supply chains:
Industrial Products
Manufacturer
Logistic Service
Provider
Consumer Products Retailer
Manufacturer
Figure 2: Industry Categorization
a) Consumer products manufacturers (CPM): All consumer product companies
operating in food and beverage products, clothing goods, pharmaceuticals,
consumer electronics, and other consumer products will fall under this category.
b) Industrial products manufacturers (IPM): Companies operating in the paper,
chemical goods, industrial machinery, automobile component products, industrial
materials, industrial electronics products and other industrial products
manufacturers will fall in this category.
c) Logistics service providers (LSP): This industry group covers third part logistics
companies and wholesale distributors, whose main business focuses on
distribution and warehouse management services.
d) Retailers (RET): All retailers fall under this category.
Table 2 summarizes the sample characteristics according to the industry categories,
annual revenue, company size in terms of total employees, and number of countries, in
which they operate.

Manufacturing Industry Logistics Service Retail Industry Total
CPM IPM Provider
No. of Respondents 25 (26.0%) 37 (38.1%) 22 (22.7%) 13 (13.4%) 97
Annual Revenue
<= $49M 0.0% 2.7% 4.5% 0.0% 2.1%
$50M - $499M 16.0% 10.8% 9.1% 7.7% 11.3%
$500M - $999M 4.0% 5.4% 9.1% 7.7% 6.2%
$1.00B - $9.99B 32.0% 37.8% 45.5% 7.7% 34.0%
>= $10B 40.0% 32.4% 9.1% 15.4% 2,61 |
No Response 8.0% 10.8% 22.7% 61.5% 19.6%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
Total Employeese Small 0.0% 2.7% 4.5% 7.7% 3.1%

Medium 0.0% 2.7% 4.5% 7.7% 3.1%
Large 92.0% 83.8% 81.8% 53.8% 81.4%
No Response 8.0% 10.8% 9.1% 30.8% 12.4%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
No. of Coutries 1 0.0% 8.1% 13.6% 7.7% 7.2%

2-4 24.0% 8.1% 18.2% 0.0% 13.4%
5-10 16.0% 13.5% 18.2% 0.0% 13.4%
11 -29 12.0% 21.6% 9.1% 53.8%
>= 30 40.0% 37.8% 31.8% 38.5% 3.1%
No Response 8.0% 10.8% 9.1% 0.0% 8.2%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
Table 4: RespondentStatistics2'3
As you can see, most of our respondents (81.4%) are large companies and more
than 80% of respondent companies operate in more than 5 countries and more than 60%
of respondents have revenue with more than $1 billion.
3.3. Analysis Methods

3.3.1. Centralization and Strategic Importance
The objective of this analysis is to prove the hypothesis that strategic level functions are
centralized, while operational level functions are decentralized. We conducted a
student's t-test on the data obtained through the survey to determine which functions
were centralized and which functions were not. Our analysis focused on accepting or
rejecting the null hypothesis shown below:
a) Ho (null hypothesis) - The survey result is not different from a random choice
result.
2Total employees size - small: 1 - 99, medium: 100 - 499, large: > 500
Annual revenue is the data of FY 2007, total employees and number
of countries in which their supply
chain operates are collected in March, 2008
b) H1 (Alternate hypothesis) - The survey result is different from a random choice
result.
The results of our analysis are shown in the next chapter. We analyzed the results
for a statistical significance of 95% confidence level for a one sided hypothesis test.
4.3.2. Factors Influencing Centralization
The objective of this analysis is to find the factor that influences a particular supply chain
function most. Respondents were asked to select the most influencing factor among six
factors for each function. The various factors given for selection were: supply conditions,
customer requirements, government regulations, competitive situation, cost
considerations and capacity constraints as explained in Table 2.
We validated the data using chi-square test for 95% confidence level. The
hypotheses were:
a) Ho (null hypothesis) - The factor selection for each function is not different from
a random choice
b) H 1 (Alternate hypothesis) - The factor selection for each function is different
from a random choice.
Based on the data collected we were able to identify the critical factors for each
industry at the individual function level as well as at a macro function level aggregated by
strategic importance (strategic functions, tactical functions and operational functions).

4.3.3. Dynamics of Centralization and Decentralization
We also employed system dynamics principles to analyze the organizational influences to
centralize or decentralize and built a framework to capture the patterns that we learnt
through interviews with supply chain professionals in industries.
System Dynamics is a method to understand the behavior of complex systems over
time, using the causal loop diagrams a fundamental tool to capture the modeler's
hypotheses about the causes and critical feedbacks (Sterman, 2000).
4.3.4. Cost Structure and Centralization Analysis
Cost Structure and Centralization Analysis
We analyzed the cost structure across different industries and did a correlation test
between centralization in a particular function and cost consideration in that function.
This helped us answer our research question: does cost consideration propel companies to
centralize their supply chain functions? We will discuss our results in detail in the next
chapter.
We also analyzed the relationship between certain key cost elements and the level
of centralization in corresponding supply chain function, namely, we compared
transportation cost and its relationship with transportation planning, transportation cost
and its relationship with shipment scheduling and inventory costs and its relationship
with inventory planning. The results were insightful and interesting as revealed in the
next chapter.
Cluster Analysis on Centralization and Supply Chain Cost Structure
We also evaluated the relationship between the total supply chain costs and
organizational structure over all industries through cluster analysis. This analysis will
help us validate our final hypothesis: companies with centralized supply chain functions
have lower total supply chain costs.
We adopted k-means clustering method to evaluate this hypothesis. With
centralization index as independent variable and through iterative clustering for different
values of k, we found that a three group clustering (k=3) had the most differentiated
grouping: a highly centralized group, a highly decentralized group, and a hybrid group.
By analyzing the attributes of those groups, with respect to centralization, cost
structure, company size, revenue, and the number of countries where the company
operates we were able to understand the correlation between the total supply chain cost
for the three distinct groups and the level of centralization namely high level of
centralization, high level of decentralization and a balanced level of centralization called
the "hybrid".
Chapter 4. Results and Discussion
The data collected from the survey was analyzed for inaccuracies and adequate steps
were taken to eliminate incorrect entries. The cleaned data was then validated using
simple rules matching the consistency of the data provided for the cost structure and
supply chain management costs. The cleaned and validated data was then analyzed to
arrive at aggregated metrics as well as segmented metrics in each industry. Our analysis
helped us to arrive at the following results as an outcome of our research. We were able
to:
a) Analyze the correlation between centralization and strategic importance of supply
chain functions
b) Identify factors and constraints that drove the centralization decision in
companies.
c) Assess the influence of centralization and decentralization of supply chain
functions on the cost structure.
Further, in-depth analysis of the results gave us insights on the business strategy of
companies that adopt centralized decision-making over decentralized decision-making.
We were also able to understand the tradeoffs that companies face while deciding the
decision-making approach in the supply chain organization of companies.

4.1. Characteristics of Supply Chain Management Organization
The companies that responded to our survey had supply chain departments that played
fairly important roles in their companies. Senior functionaries of supply chain
departments in our respondent companies held positions of importance. 77% of
companies were lead by vice presidents and above, as seen in Figure 3.
Also the supply chain leadership (84%) in our respondent companies reported
directly to the top management4 , including C-level, vice president and above. The result
is included in Figure 4.
2% vo.,
" Manager
MSenior Manager
Director
29% SVice President
SSenor Vice President
C-level or General Manager
Figure 3: Senior Most Functionary in Supply Chain Department
Also the Supply Chain leadership (84%) in our respondent companies reported
directly to the top management 5, including C-level, vice president and above. The result
is included in Figure 4.
4 This was a multiple choice question with multiple response options - the sum of all choices
is greater than
100% because Supply Chain departments are in reality related to many other departments
5 This was a multiple choice question with multiple response options - the sum of all choices
is greater than
100% because Supply Chain departments are in reality related to many other departments
36
100%-- ------
84%
75%
50%
25%
8% 10% 7%
% 0%
SCL reports into SCL reports into SCL reports into SCL reports directly to the Other departments report
Finance/Shared Service Manufacturing/Operations Marketing/Sales top management into SCL
Figure 4: Reporting Relationship of Supply Chain Leadership
Another important data point that we collected pertained to the scope of functions
performed in the supply chain department. It varied across industries as seen in Figure 5.
Traditional logistics management functions such as transportation planning and shipment
handling, are being performed in most of the companies in all industries.
100%
II
75%
~
c .ýo '(*
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50%
25%
"'
0% -
r^, I-r-l-1 +-----~-a--

uolyg-term I rrnpouaion Invwury no-wrnm MIan
uractaunng
urow lumilment srnpmentl Urar
capacity improvement planning planning ourcing
demand planning handing management
planning planning
l CPM I IPM a1PM

LSP RET W TOTAL
Figure 5: Various Functions Performed in supply chain Department

In manufacturing industries, inventory planning and short-term demand planning
functions were also the responsibility of the SCM department showing that the supply
chain department generally deals with supply and demand balancing - a fundamental role
of supply chain management.
As expected, manufacturing planning is not part of logistics service providers and
retailers. Sourcing functions are rarely implemented within the supply chain department.
The reason for this phenomenon was revealed during an interview with a food retailer;
the sourcing function is so critical for the retailer that they usually have a separate
sourcing department.
As we see above the survey results indicate a fairly well distributed group of
respondents occupying senior positions in supply chain organizations of companies and
playing a critical role in shaping their company's strategy.
4.2. Centralization and Strategic Importance

In order to evaluate our first hypothesis that centralization of a function depended on its
strategic importance, we asked respondents to evaluate the centralization of key supply
chain functions in their companies.
While letting respondents choose the centralization of that function in their
organization, we made an important assumption on the strategic importance of supply
chain functions as identified in Table 1. On the basis of the horizon of the decision and
the impact of the decision we were able to group functions into three categories namely
strategic, tactical and operational. Table 3 illustrates the statistical significance of the
results that we obtained from the survey for different supply chain functions across
industries. While we were able to see consistency in responses (p < 0.05) in strategic
(long term capacity planning and sourcing) and operational functions (shipment handling)
for the question on centralization, the consistency was markedly less prominent in the
tactical functions. Although the p-values were more than 5% for all the other functions,
this inconsistency in observations is in line with our hypothesis that some tactical
functions are centralized and some are decentralized.
Deg of Statistical Significant Test

Cent p-value t-statistic k SE
Long-term capacity planning 3.40 0.00% 5.20 24 0.17
Sourcing 3.35 0.03% 3.96 22 0.21
Transportation planning 2.79 12.58% 1.18 23 0.25
Inventory planning 2.75 14.93% 1.06 23 0.24
Short-term demand planning 2.42 36.59% 0.35 23 0.24
Manufacturing planning 2.58 36.59% 0.35 23 0.24
Internal improvement 2.67 22.23% 0.78 23 0.21
Order fulfillment 2.36 29.58% 0.54 24 0.26
Order management 2.50 50.00% 0.00 23 0.22
Shipment handling 1.96 0.88% 2.55 24 0.21
Table 5: Student's t-test Result for Consumer ProductsIndustry

Sourcing 3.06 0.08% 3.45 32 0.16
Table 6: Student's t-test Resultfor IndustrialProductsIndustry

Sourcing 3.26 .003% 4.13 18 0.18
Table 7: Student's t-test Resultfor Logistics Service Industry

Sourcing 3.08 4.45% 1.86 11 0.31
Table 8: Student's t-test Resultfor Retail Industry
Also, the results bear out our hypothesis that in almost all industries except retail
industry, long-term capacity planning, and sourcing functions are centralized, while,
shipment handling function is decentralized. In tactical decisions, companies have
adopted different strategies for centralization depending on their specific business
context. The average centralization scores of the functions across different industries are
shown below for reference:
Industry Strategic Tactical Operational Avg.

CPM 3.38 2.53 2.27 2.67
IPM 3.17 2.53 2.09 2.52
LSP 3.13 2.45 2.07 2.47
RET 3.42 2.86 2.13 2.74
TOTAL 3.25 2.60 2.14 2.59
Table 9: Centralizationvs. Strategic ImportanceSegmentation Analysis
Additionally, Figure 6 depicts the average centralization scores in different
functions across industries in a graphical form. It is clear from the graph that strategic
functions are centralized and operational functions are decentralized, while tactical
functions tend to be centralized or decentralized depending on the business context. We
also observed on the basis of the average centralization scores across industries that retail
organizations tend to be more centralized whereas logistic service provider companies
tend to be least centralized in their overall operations.
- - .......
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................
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ftwaafth-
0
0 Strategic Tactical Operational
Strategic Importance of Sub-functions
iCPM IPM I-I' LSP \RET *- TOTAL
Figure 6: Centralization vs. Strategic Importance Segmentation Analysis
4.3. Factors influencing Centralization

We also examined the factors that are influencing companies to centralize or decentralize
their supply chain functions. By elucidating the influencing factors on each function we
were able to identify the most common factor that influences centralization of a particular
function. The results of our survey are shown in the table below:
Deg. of Supply Customer Government Competitive Cost Capacity
Functions Cent. Condition Requirement Regulation Situation Consideration Constraint
Long-term capacity planning 3.40 8.00% 20.00% 0.00% 12.00% 16.00% 44.00%
Sourcing 3.35 27.27% 9.09% 0.00% 13.64% 50.00% 0.00%
Transportation planning 2.79 4.17% 33.33% 0.00% 12.50% 50Q00% 0.00%
Inventory planning 2.75 32.00% 36.00% 0.00% 4.00% 16.00% 12.00%
Short-term demand planning 2.42 8.33% 62.50% 0.00% 0.00% 4.17% 25.00%
Manufacturing planning 2.58 8.70% 30.43% 0.00% 0.00% 26.09% 34.78%
Internal improvement 2.67 0.00% 23.81% 0.00% 9.52% 66.67% 0.00%
Order fulfillment 2.36 4.00% 76.00% 0.00% 12.00% 8.00% 0.00%
Order management 2.50 0.00% 87.50% 0.00% 8.33% 4.17% 0.00%
Shipment handling 1.96 8.70% 69.7% 0.00% 8.70% 13.04% 0.00%
Table 10: Influencing Factors for Consumer Products Industry
Functions Deg. of Supply Customer Government Competitive Cost Capacity

Cent. Condition Requirement Regulation Situation Consideration Constraint
Sourcing 3.06 26.67% 6.67% 0.00% 13.33% 50.00% 3.33%
Transportation planning 3.00 14.29% 17.14% 2.86% 11.43% 54.29% 0.00%
Short-term demand planning 2.18 12.50% 50,00% 0.00% 3.13% 9.38% 25.00%
Manufacturing planning 2.27 6.67% 13.33% 0.00% 3.33% 16.67% 6000%
Shipment handling 1.97 6.25% 46.88% 0.00% 3.13% 43,75% 0.00%
Table 11: Influencing Factorsfor IndustrialProductsIndustry

Sourcing 3.26 5.56% 33.33% 5.56% 11.11% 38.89% 5.56%
Order fulfillment 2.31 0.00% 80,00% 0.00% 5.00% 5.00% 10.00%
Order management 1.81 0.00% 76Z.9% 0.00% 9.52% 9.52% 4.76%
Table 12: Influencing Factorsfor Logistics Service Industry

Long-term capacity planning 3.75 8.33% 8.33% 0.00% 25.00% 16.67% 41.671
Sourcing 3.08 18.18% 9.09% 0.00% 27.27% 45,45% 0.00%
Table 13: Influencing Factorsfor Retail Industry
This factor analysis revealed interesting insights:
Firstly, the two most important factors for centralizing or decentralizing in any
function across industries were customer requirements and cost considerations. Although
other factors, such as, capacity constraints did play an important role in motivating
companies to centralize or decentralize.
Secondly, customer requirements were the critical driving factor for logistics
service providers. This is rightly so considering that third-party companies compete
largely on the basis of their relationship with customers and their ability to match
customer needs. Thus "customer requirements" emerges as the most important factor for
logistics service providers among all six factors.
Third, industrial product manufacturers and consumer product manufacturers have
similar trends for their factors. However, industrial product manufacturers have cost as a
dominant factor, while customer requirements are dominant for consumer product
companies. The reason for this behavior can be found from the demand variability of
industrial products and consumer products. Industrial products in general have low
demand variability while consumer products have high variability. The low demand
variability of industrial products translates to a focus on cost reduction by the consumers
of industrial products. This explains why cost is a key driver for industrial product
companies. The high demand variability of consumer product companies translates into
high customer service requirements. This explains why customer service is a key driver
for consumer product companies.

All the survey results, except long-term capacity planning, sourcing, and
manufacturing planning in the retailing industry were validated to be statistically
significant (p<0.05) (Appendix 1) in the chi-square tests conducted.

Consumer Product Manufacturers
Functions Deg. of Supply Customer Govemment Competitive Cost Capacity
Strategic Functions 3.38 17.02% 14.89% 0.00% 12.77% 31.91% 23.40%
Tactical Functions 2.53 11.11% 37.61/ 0.00% 5.13% 31.62% 14.53%
Operational Functions 2.27 4.17% 77.78% 0.00% 9.72% 8.33% 0.00%
Industrial Product Manufacturers

Cent Condition Requirement Regulation Situation Consideration Constraint
Tactical Functions 2.53 10.37% 23.17% 0.61% 10.98% 36.59% 18.29%
Logistics Service Providers

Functions Deg. of Supply Customer Govemment Competitive Cost Capacity
Retailers
Cent. Condition Reauirement Reaulation Situation Consideration Cnnstraint
Operational Functions 2.13 16.67% 50Q.00 0.00% 2.78% 30.56% 0.00%
Table 14: Influencing Factorsfor Each Industry with respectto Strategic Importance
The results from this factor analysis also confirmed that strategic functions were
centralized for cost considerations and operational functions were influenced by customer
requirements. This insight is easy to recognize considering the fact that for strategic
functions, the focus is primarily to achieve global optimization. Hence cost becomes an
important driver for strategic functions. Individual customer demands are relegated to the
local managers to handle and manage. Hence in operational functions, customer service
becomes a key driver.
The dynamics of these factors in shaping the centralization or decentralization of
decisions are explored in greater detail in the later chapters.

4.4. Cost Structure and Centralization
In this section we analyze the correlation of different cost elements with centralization.
We evaluated the relationship between basic cost elements and individual supply chain
functions besides analyzing the relationship between total supply chain cost and the
organizational structure.
Our survey gave us insights on the supply chain cost structure of companies in
manufacturing (CPM, IPM), retail and logistics service industries. The cost structure of
companies varied across different industries as illustrated in the graph shown below.
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6.00%
4.00%
2.00%
0.00% -
Inventory Carrying Cost Transportation Cost Information Cost Operational Cost

ICPM IIPM iLSP URET
Figure 7.: Cost Structure Comparison for All Industries
We were able to draw a few insightful conclusions from the data collected:
a) Retail industry showed one of the lowest supply chain cost structure possible
followed by industrial product manufacturers, then CPM and finally logistic
service providers. Logistics service providers had the highest supply chain cost
structure owing to their business model.

b) Operational cost was the largest cost bucket for all companies followed by
transportation, then inventory carrying costs and other supply chain costs.
c) Third, total supply chain costs varied from 10.6% for retail, 16.1% for consumer
products manufacturers, and 15.7% for industrial manufacturers. Supply chain
costs for logistics providers ranged from 23% to as much as 81% depending upon
the business model and service offered by the service provider.
4.4.1. Transportation Costs and Shipment Handling Centralization
An interesting observation in our survey was the relationship between transportation cost
and shipment handling. We noticed that the transportation cost as a percentage of sales
grew as the centralization of shipment handling increased. Transportation cost ranged
from 1% to 6% of sales. The maximum transportation cost as a percent of sales was
observed in companies that had partially centralized their shipment handling function.
7 - ........... .L
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5.00% 3.00%
2.50% .
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2.00% -
1.50% &
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1.00%
1.00%
0.50%
0.00%
0.00%- Localized Partially Localized Partially Centralized
0 .vv
00%L
Centralized
Shipment Handling Centralization
SI Max Cost % IM Min Cost % -0I-- Average Transportation Costs %
Figure 8: Transportation costs Percentage of Sales With Respect To Shipment

Handling Centralization for All Industries
.
A careful analysis can reveal the dynamics of this relationship. One has to keep in
mind that our survey is a post facto analysis of cost structures and centralization of supply
chain functions. It captures a snapshot of the transportation cost as a percent of sales and
centralization of the shipment handling function. The results indicate that in companies
that have a high transportation cost as a percentage of sales, the shipment handling was
centralized, while companies that had low transportation cost as a percentage of sales, the
shipment handling function was decentralized.
Shipment handling is an operational function in the supply chain department that is
typically carried out by individual business units in remote geographies. Such an
organizational structure enables companies to provide the minimum level of service to
customers. However this comes with a cost. Maintaining teams in different geographies
requires companies to incur cost that cannot be supported by all companies. Only
companies that have a low transportation cost as a percent of sales can afford to
decentralize their shipment handling function. Companies that have a high transportation
cost as a percent of sales tend to centralize their shipment handling function to obtain
economy of scale.
An example of a company with decentralized shipment handling and low
transportation cost percentage could be a traditional fast moving consumer goods
organization that has logistics teams in different geographies and has low transportation
cost as a percent of sales. Common examples include beverages, food products, beauty
and cosmetics etc. An example of a company with centralized shipment handling and
high transportation cost percentage could be medical products. For example, a
manufacturer of dialysis machines meets the demand for its products from a central
location in the US. The vast distribution of its customer base is pushing the transportation
costs of this medical products company. In order to reduce costs this company has
centralized its shipment handling function in order to obtain economies of costs in
shipment handling.
The results of our survey are pointing to an important result that reinforces our
hypothesis that companies use centralization to reduce their transportation costs. As
transportation costs increase as a percent of sales, companies are increasingly resorting to
centralization of their core supply chain functions such as shipment handling that are
driving cost elements to reduce their cost.
4.4.2. Transportation Costs and Transportation Planning Centralization
Another key relationship we noticed was the interplay between transportation cost and
transportation planning. Transportation cost as a percent of sales grew as the
centralization of transportation planning increased. Although the growth was not linear
and transportation cost as a percentage of sales dipped for companies that were partially
centralized, we observed an upward trend in transportation cost as a percentage of sales
as centralization of transportation planning increased. Transportation cost ranged from
0.5% to 6% of sales for different levels of transportation planning centralization. The
maximum transportation cost as a percent of sales was observed in companies that had
fully centralized their transportation planning function.

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Localized Partially Localized Partially Centralized Centralized
Transportation Planning Centralization
i Max Cost % AwIIMin Cost % - Average Transportation Costs %
Figure 9: Transportation Costs Percentage of Sales With Respect To

Transportation Planning Centralization for All Industries
Transportation planning is a tactical function and is concerned with activities such
as transportation asset utilization, resource scheduling, carrier selection and payment, and
performance assessment. As a tactical activity, this function is occasionally centralized
and occasionally decentralized - as identified in an earlier discussion of centralization of
functions in Figure 6. This tactical nature of this function can explain the non-linear
nature of the curve. As shown in the graph, a partially centralized or decentralized
execution of this function is associated with low transportation cost as a percent of sales.
Although there is an upward tendency in the curve with an increase in transportation cost
as a percentage of sales with increase in the centralization of transportation planning
function, the differences between the transportation costs as a percentage of sales for a
decentralized transportation planning function to a centralized transportation planning
function is not markedly significant as compared to the relationship seen between
transportation cost percentage of sales and centralization of shipment handling function.

Centralized transportation planning can be observed in many mature manufacturing
and retail companies. A central transportation-planning department enables these
companies to reduce their transportation cost as a percentage of sales by allowing them to
optimize globally. Also, companies whose transportation cost as a percentage of sales is
high tend to explore options to reduce their transportation costs and a centralized
transportation planning function enables them to identify consolidation opportunities that
can reduce their transportation costs. Decentralized transportation planning is observed in
companies that do not have opportunities for consolidation. Examples are companies that
tend to operate in last mile logistics. A retailer selling fresh food might have a
decentralized transportation planning in select geographies. Transportation cost as a
percent of sales for such companies are typically lower, owing to the high product costs,
than that for companies with a centralized transportation planning function and
comparatively higher transportation cost as a percent of sales.
It is clear from the above results and analysis that companies tend to adopt
centralized transportation planning as a response to the high costs observed in their
transportation. Centralized transportation planning enables these companies to evaluate
consolidation opportunities and optimization possibilities to reduce their total
transportation cost.
4.4.3. Inventory Carrying Costs and Inventory Planning Centralization

Inventory planning is also a tactical function, which is executed centrally in some
companies or executed locally in other companies. Inventory carrying costs range from a
low of 0.5% to 6%. Inventory carrying costs was observed to be fairly uniform across
different levels of centralization in organizations. The highest level of inventory carrying
cost is about 6% observed in organizations where inventory planning is partially
centralized. As a tactical decision, Inventory planning centralization was expected to have
minimal influence on the inventory carrying costs and the results obtained are on
expected lines. We will explain the results observed in the subsequent paragraphs below.
""
7.0UU0%
-
AA%0
6.00% 2.50%
ICCIC·~4~4_
5.00% - rr~L- '"s4\

2.00%
0 4.00%
1.50%
S3.00%-
1.00% P
' 2.00% -
0.50%
1.00%
n nn0 .
.
10.00%
Localized Partially Localized Partially Centralized Centralized
Inventory Planning Centralization
Max Cost % 0 Min Cost % -1 Average Inventory Carry Costs %
Figure 10: Inventory Carrying Costs Percentage of Sales With Respect To Inventory
Planning Centralization for All Industries
Inventory planning is done either for raw material or for end items. A decentralized
raw material inventory planning would imply that the inventory planning is being carried
out at each and every factory of the company. Likewise, a decentralized finished goods
inventory planning would imply planning for end items at every demand region. While
centralized inventory planning would be able to achieve economies of scale through
consolidation of supply and demand, a decentralized inventory planning can take into
account regional constraints and requirements and respond on a real time basis. The
advantages offered by a centralized inventory planning system are as valuable to
companies as the advantages of a decentralized inventory planning system. Hence

companies adopt a middle path of a partially centralized inventory planning system or a
partially decentralized inventory planning system with a marked preference for a partial
centralized inventory planning system.
Centralized inventory planning is observed in large retailers and manufacturing
companies that have a high inventory carrying cost for their finished goods inventory.
Decentralized inventory planning is seen in manufacturing firms with distributed
facilities for production with low inventory carrying costs on their raw material side. Also
a large portion of inventory carrying costs is a function of the inventory level and less
dependent on the economies of centralization of the inventory planning function.
Inventory carrying costs are largely independent of inventory planning
centralization. Centralization and decentralization of Inventory planning is done as a
response to the inventory level requirements of companies at the raw material side (near
factories) or at the finished goods side (near customer regions) or centrally (common to
both raw material and finished goods).
4.4.4. Cluster Analysis on Centralization and Cost structure
We grouped the respondent companies on the basis of the centralization of their supply
chain functions through 'cluster analysis' (k-means clustering at k=3) techniques and
arrived at three distinct groups that we call highly centralized, hybrid and highly
decentralized.
The three groups of companies can be diagrammatically shown as below and are
defined as follows below:

-Iu
4.WU -
----
I ___________~
c 3.00 ~55C* I
= 2.00
00
00 Hybrid Decentralized
Centralized
Long-term capacity planning i Sourcing Transportation planning
Inventory planning Short-term demand planning INM= Manufacturing planning
internal improvement Order fulfillment I Order management
Shipment handling - Average
Figure 11: Three Segmentations By K-means Clustering
a) Centralized organizations: these are companies where most of the functions are
centralized
b) Decentralized organization: companies that are decentralized for almost all supply
chain functions
c) Hybrid organizations: companies that have some functions (strategic functions)
that are centralized and some functions (operational functions) that are
decentralized.
Characteristics of hybrid, centralized and decentralized clusters
In the grouping that we did for the cluster analysis, the characteristics of the three
groups are described as below:
"Centralized" cluster companies were typically consumer or industrial product
manufacturers with a large portion of companies operating in fairly smaller geographic

spread (though spread over more than 10 countries on an average) and with fairly high
revenue.
"Hybrid" cluster companies were typically large retailers or industrial or consumer
product manufacturers with a large portion of companies operating in more than 30
countries and with high revenue.
"Decentralized" cluster companies were typically companies spanning retail and
manufacturing industries and with operations spanning a large number of countries and
with fairly moderate revenues.
Centralized Hybrid Decentralized

Total Number 14 22 10
Industry
CPM 57% 41% 0%
IPM 36% 32% 70%
LSP 7% 9% 20%
RET 0% 18% 10%
Total 100% 100% 100%
Size
Small 0% 0% 0%
Medium 0% 0% 0%
Large 100% 100% 100%
Total 100% 100% 100%
Revenue
< $49M 0% 0% 0%
$50M - $499M 25% 0% 30%
$500M - $999M 0% 0% 0%
$1B - $9.99B 42% 40% 60%
> 10B 33% 60% 10%
Total 100% 100% 100%
Countries
1 Country 0% 5% 0%
2 - 4 Countries 33% 5% 0%
5 - 10 Countries 17% 14% 30%
10 - 29 Countries 33% 29% 10%
> 30 Countries 17% 48% 60%
Total 100% 100% 100%
Table 15: Summary of Other Attributes for the clusters
Clusters and their relationship to costs
On examining the relationship between the extent of centralization in companies

structure (total
that have been grouped as centralized, hybrid or decentralized and the cost
the lowest
supply chain costs) we noticed a very interesting relationship. We noticed that
cost is achieved by companies that have a hybrid structure.

7.00% - 21.00%
11_ 1__ ~1--~ - 1-1_---_-1-111__ 1t 20.50%
a0O
%
20.00%
5.00% 19.50%
19.00%
I4.00
18.50%
23.00%
4.00% 18.00%
0
17.50%
2.00%
17.00%
1.00% 16.50%
0.00% ----r-- Decentralized

16.00%
Centralized Hybrid
IlllInventory Costs Transportation Costs ill Information Costs W Operational Costs -.*- Total Costs
Figure 12: Cost Analysis for Three Clusters
The results are an excellent insight that centralization of all functions does not result
in low costs. From the results, we can see that companies that are highly centralized have
a higher percentage of supply chain cost as a percentage of sales compared to companies
that have adopted a hybrid strategy. Likewise, companies that are highly decentralized
have a higher percentage of supply chain cost as a percentage of sales. Let us now review
the reasons why a hybrid cluster is able to achieve lower costs as a percentage of sales by
analyzing the various cost elements.
We can see that the transportation costs decreases from a centralized cluster to a
decentralized cluster. This was expected because transportation costs typically increase
55
with centralization of transportation planning and shipment handling as explained in the
previous section. Hence, a hybrid cluster, which has decentralized transportation planning
and shipment handling, has lower transportation costs compared to centralized clusters.
Extending this line of discussion, a decentralized cluster has the lowest transportation
cost but other costs go up faster than the reduction in transportation costs for
decentralized clusters as described in the following paragraphs.
We can see that operational costs increase from a centralized cluster to a
decentralized cluster. This is also along expected lines because a decentralized cluster has
redundant overheads in managing the decentralized business units, which results in
higher operational costs. For the same reason, operational cost percentages are lower for
centralized organizations.
We also noticed that information costs were more or less identical for all the three
clusters though they were marginally higher for centralized and decentralized clusters.
The observation was on expected lines because information costs as a percentage of sales
should not significantly differ from one organizational structure to the other.
In our observations we noticed that Inventory carrying costs as a percent of sales
did not follow a pattern from a centralized cluster to a decentralized cluster. In fact
inventory carrying costs were lower for decentralized clusters and higher for centralized
clusters. This observation was different from our expectation. We expected that for a
centralized cluster for a given product, risk pooling arising as a result of centralization
can lower the levels of safety stock and hence lower inventory carrying costs. The
observation obviously points to a different direction. The reason the observation did not
match our expectation could be because of the product cost differential. Since inventory
carrying costs
carrying costs are a function of product costs, we believe that inventory
to reexamine
could have added an unexpected distortion to our results. Hence we decided
the total supply chain costs for the three clusters after eliminating the inventory carrying
costs.
7.00% ----- 13.00%

...........
6.00%"/ 12.50%
5.00% ............... S
12.00% "n
• 4.00% 0t
3.00% 11.50% o
2.00%
11.00%
1.00%
10.50%
0.00%
Centralized Hybrid Decentralized
Transportation Costs I Information Costs I Operational Costs --4*-Total Costs
Figure 13: Cost Analysis for Three Clusters Excluding Inventory Carrying Costs
Upon re-examining the total supply chain costs (excluding inventory carrying costs)
as a percentage of sales, we see that the pattern has not changed. The hybrid clusters once
again have the lowest total supply chain costs as a percentage of sales over the other
clusters. The hybrid cluster strikes a fine balance of managing the different cost elements
and is able to achieve the lowest cost as a percentage of sales.
This is an important result because it runs counter to our hypothesis that
centralization can lower the costs. A hybrid cluster is a balance and combination of both
centralization and decentralization. The balance is achieved through centralization of
strategic functions, which inherently lowers costs and decentralization of operational
functions, which enhances the ability to provide better customer service. Both these key
factors enable the hybrid cluster to boost revenues (Table 8) as well as lower costs, which
translate into lower total supply chain costs as a percentage of sales.
4.5. Dynamics of Centralization
Having looked at the empirical data in detail, we now present below frameworks to
understand the factors that are influencing companies to adopt a particular organization
structure (centralized or decentralized) for their supply chain functions. The empirical.
data collected and the qualitative information obtained through interviews point us to
three key factors influencing organizational (centralization or decentralization) structure.
They are:
a) Cost
b) Customer Service
c) Control (risk and incentive)
We present below the influences of these factors individually. Each factor has a
specific tendency towards a particular organizational structure as will be revealed below.
However in an organizational context the dominance of a particular factor over the other
factors determines the eventual organizational structure for that function. Although, there
are still more factors that play a role in the centralization of supply chain functions, it is
still meaningful to capture the main drivers that determine centralization or
decentralization of supply chain decision-making.
In the first part of this section, we explain the simple causality of each of the factors
cost, customer service, and control in shaping the organizational structure, through
diagrams called as "causal loop diagrams", which are pictorial representations of the
underlying structure that is thought to explain the reference model behavior (Sterman,
2000). We illustrate the influence of these factors in shaping the structure for three key
supply chain functions namely, Sourcing, long-term capacity planning, and shipment
handling.
Each of the three factors can be explained using "goal seeking models" (Sterman,
2000). The goal seeking model is used to explain how systems tend towards an
equilibrium level, which means a goal, for their end-states whereas an "oscillation
model" is used to explain how systems switch from one state to the other. Since each of
these factors stabilize at a particular state, the goal seeking model is more appropriate for
the three driver dynamics.
In the later portion of this section, we present an integrated framework that
illustrates the interplay among the factors and an oscillation model that can be used to
explain the long run transitions to migrate from one organization structure to another
arising out of a result of dominating factors.
4.5.1. Cost Driver Dynamics
A primary factor influencing companies to adopt centralization is cost. As the
diagram below explains, companies striving to achieve a target cost based on competitor
prices are motivated to explore avenues for reducing redundancies. This translates into
centralization of supply chain functions that yield the economies of scale and enable
companies to lower their unit costs.

Motivation to Reduce Centralization of
Redundancies the Functions
Target Cost +
3B
Pressure to Consolidation of
+ Lower Cost , . Operations
Figure14: Cost DriverModel
The above diagram illustrates the economies of scale achieved through
centralization.
The cost dynamic can be explained as follows:
(a) If the company's unit costs increase relative to the target cost defined on the basis
of profitability targets, the company's supply chain managers are under pressure
to lower costs.
(b) This pressure motivates the company to identify ways to reduce costs -
centralization being one of them.
(c) Centralization enables the company to also consolidate its operations.
(d) Thus centralization lowers the unit costs for the company and keeps the company
to retain a centralized operation for that function.
The analysis presented here could be applied to any supply chain function though it
is applicable very well to a sourcing function. Some of the "economies" of centralization
from a sourcing context are:
a) Reinforced bargaining power

This is perhaps the most important reason companies tend to centralize the
sourcing function. Consolidation of sourcing strengthens the company's
bargaining power. Companies can, thus, negotiate better with their suppliers to
reduce their unit costs.
b) Knowledge sharing
Centralization enables companies to achieve improvement in their sourcing
processes because of availability of better information.
c) Standardized operations
Centralization enables companies to also standardize the sourcing process, which
helps in standardizing operations and reducing errors.
The extent of centralization that companies employ is also defined to some extent
by the competitive pressures on companies and the other influences as discussed in the
following paragraphs. As observed in earlier paragraphs in this thesis, economies of scale
are achieved in strategic functions such as long term capacity planning besides sourcing.
4.5.2. Customer Service Driver Dynamics
Motivation to Decide Centralization of

Closer to Customer the Functions
4
Threshold Customer
Service Expectation
\\4, +
+ Pressure to Improve Time to Respond to
Customer Service Customer Service Local Needs
Customer
Service Level -
Figure 15: Customer Service Driver Model
A second factor influencing companies in choosing between a centralized or a
decentralized architecture is the level of customer service that they can provide through a
particular organization structure. A decentralized architecture helps companies provide
better service to their customers. This is illustrated through the causal diagram shown.
a) The company sets a threshold customer service level to provide to its customers.
b) If the service level provided does not match the threshold, the company's
management is under pressure to improve customer service level. This pressure
forces the management to discourage centralization of supply chain functions
such as shipment handling or order management.
c) The company's management now decentralizes its supply chain functions and
achieves lower response time to customer needs.
d) As customer response time reduces and customer requirements are better
understood, the customer service level given to customers increase resulting in an
overall reaffirmation of the current policy of the management.
e) The management is thus encouraged to continue this policy of increased
decentralization to improve customer service.
The key benefits of a decentralized customer service stems out of two key reasons:
a) Reaction time: decentralized structures help companies to react faster to customer
demands.
b) Service customization: A decentralized operation can help companies achieve
better customer insight and thereby provide customized solutions to customers
and develop products meeting customer needs more precisely.

Customized service is an important driver in many functions such as order
management, shipment handling, and something like that. where proximity to the
customer becomes a competitive advantage.
4.5.3. Control Driver Dynamics
Needs to Aggregate-- Centralization of4 ----- Needs to Meet

Information & Align the Functions Various Local
Different Incentiies Demands
Impact of Decision +
Integrated and Specialized

Risk of Decision B Resources for Conlict with Local
Decision-making Optimization
e a
Integrated Incentie Conflict +
Decision-making Alignment of Local
n+ Incentive System with
Uncertainty of IGlobal Optimization
Decision Comprehensiveness Global Optimization
of Decision-making ....
S---
Figure 16: Integrated Decision-making and Incentive Conflict Model
The third factor besides cost and customer service that influences companies to
adopt either a centralized or decentralized structure is "control". "Control" is a soft factor
as against the other two factors cost and customer service because whereas the other
factors have a clear tendency to either a centralized organization or decentralized
organization, control factor does not have a specific tendency. The tendency for
centralization or decentralization for control reasons depends on the locus of control in
that organization. If the locus of control is tilted to the centre of the organization the
function is centralized, whereas if the locus of control is tilted to the regions the function
is decentralized. This can be explained through two key dimensions within the control
factor: namely risk and incentive.

The Risk effect means the functions that have a very high impact on the
organization tend to be centralized to mitigate the risk and achieve global optimization,
while functions where the risk impact was not high tend to be decentralized.
For example, to make long-term capacity planning decision, the organization needs
the expertise of diverse individuals to identify a globally optimal long-term capacity plan.
Developing a long-term capacity plan without full visibility to demands and supplies
might be sub optimal and undesirable. An attempt to take a decision at a central location
using all available data is centralization.
The risks in such a centralized long-term decision-making are:
a) The company requires information up to a good level of detail. Data that is
inaccurate can lead to incorrect results. Hence a central decision making is more
appropriate for this function
b) Misaligned incentives - a local organization that is governed by local
performance metrics is not the right team to make organization wide decisions.
c) A centralized function can help integrating resources, such as human talent,
finance, information, skills and knowledge for decision-making.
d) With these integrated resources, the company can make a more comprehensive
decision.
e) This diminished uncertainty reduces the risk, and as a result, the centralization of
the function becomes stabilized.
Another important factor is the Incentive. In some situations, Incentive misalignment can
be a resistance to centralization of functions and can in fact cause decentralization
resulting in sub optimal organizational structures in companies.

Control can thus result in a centralized organization or decentralized organization
depending upon whether risk or incentive dominates within this factor.
4.5.4. An Integrated Framework
Based on our analysis we present below an integrated framework in Figure 17, to
understand the interplay of the three dominating factors that shape centralization or
decentralization of functions in an organization.
Figure 17: An Integrated Framework that determines centralization of afunction
One important feature of this framework is the goal seeking behavior. Any of the
three factors cost concerns, customer service, or control concerns can dominate in an
organization and position the architecture to be either centralized or decentralized. A
company that is faced with significant competition on cost, might be forced to centralize
whereas a company that is facing pressures to achieve market share might decentralize its
operations to strengthen its customer relationship and a company that is concerned with
risks and control might adopt a centralized or a decentralized structure depending upon
the need to achieve better coordination.

Another important feature is the oscillatory behavior. The three key factors not only
explain the architecture achieved by companies in the steady state but also the states
reached during times of transition. The oscillations or transitions are caused because of a
change in priorities when the product matures or when the company matures.
When a company launches a new product the company would like the supply chain
functions to be centralized because of the coordination required for a new supply chain,
in other words, control is the dominant factor. As the product matures and the needs of
the individual markets start diverging the company is forced to decentralize its supply
chain functions because of unique needs in every geography, that is, customer service is
the dominant factor. However as the product sales starts declining, the company switches
gears to a cost focus and pushes them to centralize their supply chain functions to reduce
total landed costs, which means cost is the dominant factor. Thus we see that the three
key factors play an important role in shaping the organizational structure which in turn
shapes the organization's response to business needs.
We see this oscillatory behavior in organizational life cycle as well. As companies
are launched they start off with centralized supply chain functions purely for control
reasons. As the business starts maturing in different geographies, the company adopts a
more decentralized supply chain organization to service its customers better. Finally as
companies start losing market share to competitors with declining sales, they are forced
to centralize their supply chain functions to cut costs.
The integrated framework proposed here enables us to understand the short term
and long term dynamics that shape the centralization or decentralization of supply chain
functions in organizations.
4.6. Case Studies
In this section, we present cases that illustrate the influence of key drivers in shaping
organization structure and in turn cost structure. The case studies document the
tendencies for certain organizational structures in functions such as sourcing and
shipment handling. The case studies also illustrate the challenges that companies face
when migrating from one organizational structure to another.
In the first case, the sourcing function in the Consumer Products Company was
once centralized to reduce the cost, after few years, reverted to decentralize the function
because of high customer service requirements and conflicts with the local incentive
systems.
The second case shows that process of the shipment handling function in the
decentralized to meet the high customer service requirements using the case of the
Pharmaceutical Company.
4.6.1. Case Study 1: Sourcing at the Leading Consumer Products Company
A leading consumer products company wanted to centralize its sourcing activities to
a central location. The company, a maker of mobile computing cases and accessories and
based in Southern California sources majority of its products from manufacturers in
China. The company itself is a large supplier to retailers, electronic goods manufacturers
and direct consumers. The company's business units were spread across US, Europe and
Asia Pacific. The different business units bought goods directly from suppliers in China
and Taiwan. The company recognized the potential of integrating the sourcing functions
of the different business units in order to have benefits from economy of scale (refer to
Figure 19).
Integrating the procurement processes would have helped the company obtain
greater economies of scale. The company would have been able to obtain discounts for
the volume of purchase as well as achieve economies of shipping the goods to its
different business units as shown as the B 1 loop in Figure 18. The company also
recognized the value in integration and pursued the path of centralizing the procurement
(B2).
However it faced a number of challenges in implementing the process:
Firstly, a centralized sourcing process did not help the regional business units
maintain the high level of customer service that they traditionally provided to their retail
customers. The pressure to deliver goods on time now fell on the central procurement
team. However, it did not fare as well compared to an external supplier who had the
responsibility in the past to deliver the goods to the regional warehouses. The decision-
making time on the sourcing decisions took longer than before (B3), and the centralized
sourcing team faced difficulties in meeting the needs from the local customers (B4).
Secondly, their incentive system on the local divisions made the local managers to
resist the centralization because the incentive system was designed to maximize the local
optimization. For example, the local managers were evaluated in terms of their local
inventory level or spend on the sourcing. Thus, they are strongly interested in their local
efficiencies, not in a global cost reduction of whole supply chains. Hence, when the
centralized sourcing made them lose their control on their inventory level or spend on
sourcing, they apparently had strong incentives to resist the change of centralization.
(B6)
Lastly, the original terms of the contract negotiated by individual business units
included the cost of transporting the goods to their warehouses in the different countries.
The central procurement on the other hand involved purchase of all goods at a central
place which meant that the company had to transport the goods itself to its business units
in different countries. The volume of goods shipped by the central procurement team to
the regional business units was not of an economical size and the company realized very
high transportation cost as a result of centralization.
Additionally, uncertainty and impact of each individual sourcing decision is not
relatively significant to affect on the bottom line. Therefore, the company's risk driver of
centralization was small (B5).
This resulted in a situation where the company decided to discontinue the
centralized procurement process and revert to the previous approach of decentralized
procurement.
This case illustrates the challenges companies face while implementing a structural
change such as this as well as identifying the importance of organizational fit while
implementing such a change within the company. Although procurement is a commonly
cited example for centralization, it is not always applicable in all corporate situations. The
selection of centralization or decentralization in an organization will depend on the
business context. Also, implementing a change will require supporting processes to be
implemented. If the company under discussion had adopted suitable strategies and
processes that will enable centralized procurement at the same time ensure timely
delivery of the products to the different regional business units, the change would have
been successful. Also a change like this should involve accompanying changes in
compensation structure and incentives to all parties involved in order to make this change
successful.
Alignment of Local SUncertainty of
Global Optimization Impact of Decision
Incentive System with S Sourcing Decision
Global Optimization
/-
Conflict with Loical Comprehensiveness

1c Iti Q +Kl
Vu e+m
II.Iys.
I.o-
A of Decision-makino
.
A 7 of Decision
, Risk Mitigation
Incentive Conflict Risk Mitigation
+ Integrated and Specialized
'4 Resources for Sourcing Motivation to
Motivation to Meet Decisions: Skills and Information Aggregate Information
Different Incenties +
+
Centralization of-- Motivation to Decide Thresl hold Customer
S ,Motivation to Reduce + Sourcing Closer to Customers Servic e Expectation
Target Cost Redundancies + j\ +
. . Pressure to Impr ove

Pre ssure to Sourcing Pressuretomer
Se
Lovver Cost Consolidation + Customer Reaction Customer Seric e
+Bargaining
Power + / ime for Sourcing
Bargaining Power + Process Customer
Ur t Cost Discount Standardized Service Level
AStandard +4
-B Sourcing Process Customized
Standardized Operation Cusomized Service

Operations _ Efficiency
Figure 18: Causal Loop Diagram ofSourcing Function

1~
'p
N
Figure 19: Case 1 - Decentralized Sourcing
'p
-I
Figure 20: Case 1 - Centralized Sourcing
4.6.2. Case Study 2: Shipment Handling at the Pharmaceutical Company
This pharmaceutical company is a world leading animal health company that provides
medical products and vaccines for livestock, pets and wildlife. The company is
headquartered in Atlanta, Georgia with factories in Georgia, US, Puerto Rico and France.
It has a modest 3 DC distribution network which it uses to ship drugs as parcels to
veterinary clinics and distributors in the US, Europe and Japan.

The company has a very high market share with more than 60 to 70% in its top
selling products. It has superior quality products than competitors. Since competition in
the market is very fierce, high customer service level is a critical success factor for the
company. If the company's product is not available in the customer's refrigerator, the
company might lose not just the present sale but also all future sales. The cost of lost
sales for this company is very high compared to the cost of holding additional inventory.
It could take a long time for the company to recover if it loses the shelf space.
Therefore the company had to decentralize its shipment handling function to make
decisions closer to the customers (B3 & B4). This decentralization of shipment handling
caused additional inventory holding and redundant operations (B 1 & B2), but since the
cost of lost sales for the company was very high compared to the inventory costs, they
were willing to incur the additional costs.
Despite significant pressure to maintain high customer service, the company is able
to manage the challenge through decentralized shipment handling that enables the
regional distribution centres to respond to demands quickly and using the cheapest
alternative available to them. The company uses third parties distribution centres and the
third parties take the decision on how to deliver the shipments including the selection of
carriers. The company is thus able to lower transportation costs and improve levels of
product availability by delegating authority to regions and allowing the regions to make
the optimal decisions under the constraints.

I
+ . Uncertainty of
Alignment of Local Global Optimization
- Sourcing Decision Impact of Decision
Incentive System with "- NII
Global Optimization +
Possibility to Offset I+
Conflict with Local Operational /ariability Risk of Decision
Incentive System tB5
\ + Incentive Conflicts Risk Pcooling +/

Integrated and Specialized
Motivation to
Resources for Shipment Handling Needs to Aggregate
ereffiD
nt Incentiles
Decisions: Skills and Information Information
- +z - Thres hold
-+ Centralization of Motivation to be Customer Service
Target Cost Motivation to Reduce + Shipment Handling Closer to Customers
Redundancies
t3 Pressure to Improve
Pressure to Capital Utilization Customer Service
Lower Cost / + Customer Reaction
4+ Economy of Scale + /
Capital Cost and Time to Respond

Labor Cost Standardized Customer Requests
Unit Cost -. ---- Shipment Handling - - Customer
+B2 Process Customization of
2+ Service 4
Operational Cost Standardized Cusomized Serice
Operations Operation
- Efficiency
Figure 21: Causal Loop Diagram of Shipment Handling Function

75
Chapter 5. Conclusions
In this section we summarize the key findings of our research, identify contributions and
limitations of our study, and suggest further research in this area.
5.1. Key Findings

We investigated the strategic, tactical, and operational supply chain functions that were
centralized or decentralized by companies, the reasons companies chose to centralize or
decentralize and the impact of centralization and decentralization on supply chain costs.
Our research made clear that strategic functions were centralized, and operational
functions were decentralized. We identified that strategic functions were centralized for
cost considerations, while operational functions were decentralized to improve customer
service.
We identified three clusters of companies: a 14-company cluster where the majority
of decisions were made centrally, a 10-company cluster where majority of decisions were
made locally, and a 22-company cluster (named as "hybrid cluster"), where strategic
functions were centralized and operational functions were decentralized. The cluster
analysis demonstrated that the "hybrid cluster" companies had the lowest supply chain
costs as a percentage of sales.
5.2. Contributions and Limitations

This section highlights the contributions and limitations of this thesis, since these
attributes can be helpful to understand this thesis more precisely.
The research work has contributed in the following areas:

a) Identification of cost structure data that can be used as a bench mark for different
cost buckets and across industries.
b) Development of a framework that can be used to understand whether a function is
centralized or decentralized.
There are limitations to our research work that should be considered to meaningfully
interpret the results and for future research in this area.
The cost data used in this research work was collected in percentage range buckets,
not in a continuous value format. This was done for two reasons: first, in most
companies, specific supply chain cost figures are not clarified for practical reasons; also
supply chain managers have only ranges not specific figures for supply chain costs, as the
numbers change over the years.
Our sample mainly consists of large and global companies. Hence it is not
appropriate to generalize the results and the framework more widely.
Lastly, centralization of supply chain functions can be captured in many ways. We
collected research data based on the experiences of supply chain professionals and their
intuition. Hence, the research is limited by the accuracy of data provided by the
respondents.
5.3. Further Research

During the research, we found additional subjects that we identified as possible
candidates for future research in this area. They are:
We employed cost structure for performance index, however there are other
meaningful performance indices like market share, net profit, operational excellence
index, and other financial ratios to analyze the impact of centralization.

Change management and risk management within centralization are other important
areas that have not been explored by researchers. Centralization is an important subject
influencing corporate performance and sustainability. Hence any attempt to change
organizational structure should be accompanied with appropriate change management
and risk management strategies. Therefore, we believe that additional research on the risk
management and change management aspects of centralization can add significant value
in this area.
Appendix
Table 16: Chi-square Test Results
CPM
Supply Customer Government Competitive Cost Capacity
Condition Requirement Regulation Situation Consideration Constraint
2 5 o 3 4 11
Long-term capacity planning 0.45%
4.17 4.17 4.17 4.17 4.17 4.17
6 2 0 3 11 0
Sourcing 0.02%
3.67 3.67 3.67 3.67 3.67 3.67
1 8 0 3 12 0
Transportation planning 0.00%
4.00 4.00 4.00 4.00 4.00 4.00
8 9 0 1 4 3
Inventory planning 0.67% 4.17 4.17 4.17 4.17 4.17 4.17
2 15 0 0 1 6
Short-term demand planning 0.00%
4.00 4.00 4.00 4.00 4.00 4.00
2 7 0 0 6 8
Manufacturing planning 0.62% 4.00 4.00 4.00 4.00 4.00 4.00
0 5 0 2 14 0
Internal improvement 0.00%
3.50 3.50 3.50 3.50 3.50 3.50
1 19 0 3 2 0
Order fulfillment 0.00%
4.17 4.17 4.17 4.17 4.17 4.17
0 21 0 2 1 0
Order management 0.00%
4.00 4.00 4.00 4.00 4.00 4.00
2 16 0 2 3 0
Shipment handling 0.00%
3.83 3.83 3.83 3.83 3.83 3.83
Supply Customer Government Competitive Cost Capacity

Functions p-value Condition Requirement Regulation Situation Consideration Constraint
2 7 0 3 10 10
Long-term capacity planning 0.43% 5.33 5.33 5.33 5.33 5.33 5.33
8 2 0 4 15 1
Sourcing 0.00% 5.00 5.00 5.00 5.00 5.00 5.00
5 6 1 4 19 0
Transportation planning 0.00% 5.83 5.83 5.83 5.83 5.83 5.83
4 8 0 2 17 4
Inventory planning 0.00% 5.83
5.83 5.83 5.83 5.83 5.83
4 16 0 1 3 8
5.33 5.33 5.33 5.33 5.33 5.33
2 4 0 1 5 18
Manufacturing planning 0.00%
5.00 5.00 5.00 5.00 5.00 5.00
2 4 0 10 16 0
5.33 5.33 5.33 5.33 5.33 5.33
2 16 0 1 8 4
5.17 5.17 5.17 5.17 5.17 5.17
1 21 0 5 1 3
5.17 5.17 5.17 5.17 5.17 5.17
2 15 0 1 14 0
Shipment handling
LS 0.00%
5.33 5.33 5.33 5.33 5.33 5.33
LSP
Functions Supply Customer Government Competitive Cost Capacity
p-value Condition Requirement Regulation Situation Consideration Constraint
1 13 0 1 5 1
Long-term capacity planning 0.00%
3.50 3.50 3.50 3.50 3.50 3.50
1 6 1 2 7 1
Sourcing 2.67%
3.00 3.00 3.00 3.00 3.00 3.00
2 10 0 2 4 2
Transportation planning 0.25%
3.33 3.33 3.33 3.33 3.33 3.33
1 11 0 1 4 1
Inventory planning 0.00%
3.00 3.00 3.00 3.00 3.00 3.00
0 12 0 0 0 5
2.83 2.83 2.83 2.83 2.83 2.83
0 8 0 2 1 2
Manufacturing planning 0.09%
2.17 2.17 2.17 2.17 2.17 .
2.17
0 13 0 2 6 1
3.67 3.67 3.67 3.67 3.67 .
3.67
0 16 0 1 1 2
3.33 n r.
3.33 .~uu 3.33 3.33 3.33 ~ ~ JJ
3.33
0 16 0 2 2 1
3.50
0
3.50
18
.
3.50
0
3.50
.n 3.50 3.50
Shipment handling 0.00% 0 2 1
3.50 3.50 .
3.50 .
3.50 3.
3.50 .
3.50
RET
Supply
Condition Customer Government Competitive Cost Capacity
Functions p-value Condition Situation Consideration Constraint
Requirement Regulation
1 1 0 3 2 5
Long-term capacity planning 1562% 2.00
2.00 2.00 2.00 2.00 2.00
2 1 0 3 5 0
Sourcing 6.79%
A 83
1.83 1.83 1.83 1.83 1.83 1.83
0 2 0 1 8 1
Transportation planning 0.03% 2.00
2.00 2.00 2.00 2.00 2.00 2.00
2 7 0 3 0 1
Inventory planning 0.66% 2
2.17 2.17 2.17 2.17 2.17 2.17
Short-term demand planning 0.06% 33 8 0 1 0
2.17 2.17 2.17 2.17 2.17 2.17
1 0 0 2
Manufacturing planning 4 1.17 1.17 1.17 1.17 1.17 1.17
1 0 2 7 1
Internal improvement 0.68% 1
2.00 2.00 2.00 2.00 2.00 2.00
3 7 0 0 2 0
Order fulfillment 0.19% 3
2.00 2.00 2.00 2.00 2.00 2.00
2 6 0 1 2 0
Order management 1.88% 2
1.83 1.83 1.83
I 1 5 0
1.83
0
1.83
7
1.83
0
Shipment handling 0.06%
2.17 2.17 2.17 2.17 2.17 2.17
Figure 22: Actual Survey Used for This Research
ofa-.-yp
- Buins an uplCan searmn
1. Indicate the type of business that best reflects your company's operation (Please
choose only one answer):
[I] F oda 0B vrager cPt'wsC
SPaper ikcPrsducts
and A
Sl and
Cwrnmioal A11id PtoivCIS
S Petroievm Refriinr and Related Industries

SPirimary Metal ndiustnals
D tInC str a. and Commner:ia Machinery
S Psriraceltical Products
M1 ird Party .09istas

SRetail
Others (please specify)
2. What is the title of the senior most functionary in your supply chain department?
O Mana-r
O Drector
Q Seln)
o; VicePreSiler(4
Other fplease specify)
Page 2
ýEoic of Cetrliato Supl
in Chin Dcsio-mkn 1
3, In your company, what Is the usual reporting relationship between the supply
chain leadership and other departments? (multiple choices possible)
- Supp•y chain leadership reports into Finance
D SoqplYy hain leadership reports into: hanwr4aCriring
Supply chain leadersnlp reports into Maraetlng.$a4
O Supply chain ieadershrp reorts directly to the top ma nap•nent
D Other departments report to the supply chain leadership

Other (fplease
specify)
4. In your company what are the various functions performed by the Supply Chain
department? (multiple choices possible)
L tong;le in Capaytv Planning (Funhction that create; iong range capacity irvestnent plans for the business)
O Internal Improvement (function that supports interna prjects su•pportng Supply Chain Strategy/qualityl
[] Transportation P:anning (unctiorn tiat plans for Trarsor•taton assets arnd partners with carriers)
W Inhenowry PNanning (Functlon that exsectte Inventory Pltanning)
El sharterit PeinDam
d Planning (Functionthat develops sho't-erm genanvgd
torecasts)
D Manufacturi•g Planning JFunct •n t*at plans production and integrates the otherteams with tne manufacturrng)
D Order FuisrNlent (Function that ;sisnvolied mnf!liling Cenands using dedicate or/land prvate warehuses)
L Shipment Haindfing (Function thN.t anages t•h day to day logistics and shipment han•licing/trekirrg)
S.Order Nanagerrn t and Pro•r• Resolution (Funct o that sipports customers and eXpeilites/consolldates delivery to
cuinoPers)
Li Sitn
o g (Function that manages suppiters, writes contracts ae executes the purchasing
and procurement precesses)
Page 3
Ecnmc of Cetrliato in Supl Chai Decsionmain
Iý- -1- ..
5. How would you characterize the decision making authority (Centrally made or
Locally made) for various functions in the supply chain department of your company?
Most
Must Majority Mganrity 1 ons (75
decisions decisions (Sdecislors (0 ~dcisions
(75-•100%) - 75%) Made- 75%) made m1te N/A
made locally locally centrally
Long-term Capacity Planning (Function that creates long range
capacity investment plans for the business): 0 0 0
Internal Improvement (Fvncton that supports Eternal projetts
suppoitinq Supply Chain Strategy/Qual ty):
Transportation Planning (Function that plans ftr rarnsportaton
assets and partners with carriers):
Inventory Plartlng jFiancor that ezecites Invertory Planning):
Short-term Demand Planning (Function that develops short-term
demand
atrcuasts)
Manufackring Planning (Function that plans production and
integrates the other teams yoth the marufactur rng):
Order Fulfillment (Function that is Invohved in ilfiltlig demands
using dedcated or/and private warehouses)
Shipment Handling (F:nction that manages the day to dsay
legistics ard sli lpnment andplir/tracking):
Order Management and Problem Reioutloi (Function that
supports customers an eSxpedites/consoildatS deltivery to
customers):
Sourcilrng (Furtion that mnages stiDplikers, writes contracts ad
executes the purchassing and procurement processes) O O O O 0
Page 4
aconomics of Centralization in Supply Chain Decisio-i
4.Fatr inlecn deiso main locus
6. What is the key factor that is influencing centralized or localized decision making in
the various functions of your supply chain organization?
Supply Customer GovernmentCompetitive Cost Capacity Other
Congltonsrqg, rements regulati•ns situation conside ationrsonstraintsreasons
Log-terrm Capacity Pianning (Funcion tiat creates
long range capacity irvestrnent plarn farthe 0 00 0 00
business)
] nter•al Imprrovenment (Function that supports
insernal pro ects supprtling Suppy Chain 000 0 0 0 0
S'trtegy/Quablly;
transportatlor Planning (Function that piansfor
trarportatýin assets and paftners with carriers)
Irnentory Planring (Fr ntion ,hat exPrtes
Invento-y Parr nlni):
Snort-term D•ea.ad Plan*rni. (Function thlat
deseloDs short-tern damard rfrecasts)
aruanufatrlng Plarlning (Function that p;ls
rodtion ad e ntegrates
l t e other tleams with the
Fufii rllrnt (Furction that Is ino•vead in

Order
rdll rg dea•nAds using dedkcatedroand pri)ate 0 0 0 0 0 00
warehooses)
Shipmert Hantlim; (Fo rion that manages the day
to Cay logistics aiso shiopmient Eandlng/traclig}
O4dee Managernefit and Proernm Resolution
(FVunctOn that supports customers eaVnd
esvedites/csnsoiidates delivery to customers)
Sour• min(Function that rranages supri ers, writes
contracts eic executes the purchasing and 0 O 000 0 00
procure' aetprocesscs)
Others (please specify)
_ ___~_
1
Page 5
84
*rr-~r
S *t35 ~ ~ i - FT 5rrlilrr II l -~r S
JiR *-F I~~s
Ecnmc of Cetaiaini5 upyhi eiinmkn
7. Please provide an approximate breakdown of your total supply chain costs among
the following cost buckets in your organization? (Please specify cost % to Sales)
- 1.4 1.5- .0- 4.5 - 7.5 - Molre
5.0 - 9.0 - "are
% 2.9% 4.4
•; S.9% ?.4 % 8.9% 10.4%
Invetory Carrying csts as a % of Saies:(Cost of
Gnyertory whch niclusdes tvintory financhng charges, iwventary
nanttunlag O
) O
tnsurance and taxes, inventory shnntage, Inventory control and

cycle counting expenses)
racnspotation costs as a % of Sales:(CosTs w C "ch lci40ýethler
party trarsportatvn charges ard pr vote fceet costs ircluding fuel.
0 0 0 0 0 0 0 0
dr ver and deprecwatbon charges)
O0 0 00000
Informanon costs as aS of Sales:(Casts
related to the sets9 of IT
5Y& ems or I pp Yc:a n actvities nc u. nq sere ve t ares,

t f l h i i l t i h
harcware ard software charges)

Operational costs asa " of Sales 1lnC<
des cost of laor, 0 0 0 0 0
worehoasE rent, utlitiLes, cost of warranty, lease payrnerts ro 0 0 0
deprcIlatiao cr mIateri.al nancing eQUiperntj and othet operational
cnarges)
Other Supply Cla r Costs as a S of Sales
0 0
S. What percentage of total costs is your supply chain cost? (Supply chain cost refers
to the sum of the cost components listed above)
Swpply Chain Costs as a % of Cost of Goos 501Sold
O OO O7O7O
Supply Chain Costs as a %b
of Saecs
Page 6
Economc of Co I y C Su i D
9. How many total employees are working in your company?

O1 99
O 100 -499
O SO - 999
O 5000 9,99
O More than 10.000
10. How many employees are currently working in the supply chain department? If
your company does not have a separate supply chain department, please Indicate
the number of employees who execute supply chain related activities.
0119
S10 - 49
O 50 - 99
0200, 499
O More tharn S•
11. What Is the annual revenue of your company in FY 2007?

O Less ten *s4M
O $SCM - 5999M
$1O -$,999B
0 MO.e tha.$10,005
12. In how many countries does your company's supply chain operate?
0t
O More than 30
Page 7
Table 17: Final Centers and Distances of Clusters
Cluster Names Centralized Hybrid Decentralized

Number of Cases 14 22 10
Final Cluster Centers
Long-term Capacity 3.57 3.68 2.58
Internal Improvement 2.86 2.80 1.92
Transportation Planning 3.71 2.72 2.17
Inventory Planning 3.64 2.72 1.25
Short-term Demand 3.29 2.32 1.08
Manufacturing Planning 2.64 2.92 1.08
Order Fulfillment 3.71 1.88 1.08
Shipment Handling 3.14 1.48 1.50
Order Management 3.71 1.72 1.50
Sourcing 3.57 3.48 2.67
Distance Between Centers
Centralized 5.71 3.60
Hybrid 5.71 3.27
Decentralized 3.60 3.27
87
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The Impact and Dynamics of Centralization in Supply

Master of Business Administration, 1999

B.S., Material Science and Engineering, 2007

Submitted to the Engineering Systems Division in Partial Fulfillment of the

Master of Engineering in Logistics

Massachusetts Institute of Technology

C 2008 Guruprakash and Tae-Hee Sohn. All rights reserved.

The author hereby grants to MIT permission to reproduce and to distribute

Certified by: ...........(

Accepted by: ................

Submitted to the Engineering Systems Division on May 9,2008 in Partial

Thesis Supervisor: Chris Caplice

My wife, parents,family andfriends

1.2. Roadmap of this Research Work................................... 12

CHAPTER 2. LITERATURE REVIEW............................................................................... 15

2.2. Cost Elements in Supply Chains ..................................... .... ............. 17

2.3. Supply Chain Management Functions................................. ............. 19

2.4. Organizational Structure and Cost in Supply Chains ..................................... 20

2.5. Motivation from Literature Review.......................................................... 21

CHAPTER 3. RESEARCH METHODOLOGY ...................... ............................ 23

3.2. Sampling Approach ............................................................ 29

3.3. Analysis Methods ............................................................................................... 31

3.3.1. Centralization and Strategic Importance.............................. ......... 31

4.3.2. Factors Influencing Centralization ...................................... .........32

4.3.3. Dynamics of Centralization and Decentralization................................ 33

4.3.4. Cost Structure and Centralization Analysis ........................................ 33

4.4. Cost Structure and Centralization............................................................ 45

4.4.1. Transportation Costs and Shipment Handling Centralization..................... 46

4.4.2. Transportation Costs and Transportation Planning Centralization.............. 48

4.4.3. Inventory Carrying Costs and Inventory Planning Centralization .............. 50

4.4.4. Cluster Analysis on Centralization and Cost structure ............................... 52

4.5. Dynamics of Centralization .................................................... 58

4.5.1. Cost Driver Dynamics................................................. 59

4.5.2. Customer Service Driver Dynamics ...................................... ........61

4.5.3. Control Driver Dynamics .......................................... ............... 63

4.5.4. An Integrated Framework ..................................... ..... .............. 65

4.6. Case Studies .............................................. ................................................... 67

4.6.1. Case Study 1: Sourcing at the Leading Consumer Products Company.......... 67

4.6.2. Case Study 2: Shipment Handling at the Pharmaceutical Company .............. 72

5.2. Contributions and Limitations................................................................. 76

5.3. Further Research................................................................................................. 77

Table 1: Supply Chain Costs Break-up Practices ....................................... ...... 19

Table 2: Framework for Strategic Importance Grouping ....................................... 26

Table 3: Key factors of centralization........................................ 27

Table 4: Respondent Statistics'....................................................... 31

Table 5: Student's t-test Result of the Consumer Products Manufacturing Industry........ 39

Table 6: Student's t-test Result of the Industrial Products Manufacturing Industry......... 39

Table 7: Student's t-test Result of the Logistics Service Industry ................................ 40

Table 8: Student's t-test Result of the Retail Industry.................................................. 40

Table 9: Centralization vs. Strategic Importance Segmentation Analysis .................... 40

Table 12: Influencing Factors of the Logistics Service Industry........................... .42

Figure 1: Cost Levels in supply chain Costing ...................................... ......... 17

Figure 2: Industry Categorization ..................................... ...... ................. 30

Figure 3: Senior Most Functionality of Supply Chain Department....................... 36

Figure 4: Reporting Relationship of supply chain Leadership (SCL)........................ 37

Figure 5: Various Functions Performed in supply chain Department .......................... 37

Figure 6: Centralization vs. Strategic Importance Segmentation Analysis................... 41

Figure 14: Cost Driver M odel............................................................................ 60

Figure 17: An Integrated Framework that determines centralization of a function.......... 65

Figure 18: Causal Loop Diagram of Sourcing Function................................. ............. 71