The Difference Between Centralized vs Decentralized Organization

Centralized vs. decentralized manufacturing, Fishbowl BlogIt doesn’t matter whether a business is big or small, the adopted organizational structure determines how work is handled and what guidelines are followed or avoided altogether. At the start of a business, sometimes even later, the organizational structure is developed to facilitate regular operation and growth. In most cases, the chosen structure reflects the owner or prominent decision makers, employing their personalities, management styles, character traits and personal goals. In manufacturing specifically, there are two major types of organizational structures or business methods — centralized and decentralized.

What Are Centralized and Decentralized Structures?

Centralized manufacturing can essentially liken to a foundational or core process. It involves a single factory or location that can alleviate per unit production costs by employing versatile and adaptive equipment. In short, it means you can produce different products or quantities of items at will based on demand and scale. APQC has revealed centralized organizations have 3 percent lower manufacturing costs than decentralized companies. This can mean a difference of $150 million, for organizations with $5 billion in annual revenue. This is one reason why smaller businesses tend to stick with centralized structures, alongside a variety of other benefits offered. Meanwhile, the decentralized approach involves an organization with multiple facilities or locations with the ultimate goal to provide service or coverage for large areas. As opposed to a central location, the factories or distribution centers are spaced out across a wider area. These locations are generally positioned close to customers.

Centralized Organizational Structure vs. Decentralized Organizational Structure

Aside from the overall setup, there are separate benefits and cons to choosing one organizational structure over another. Many project the idea that a decentralized structure is better and offers more benefits. This is only slightly true and makes sense because of how the modern landscape is currently structured. Decentralized manufacturing offers more flexibility and faster, timelier delivery of goods because it’s closer to the customer. It also offers a cost reduction, thanks to low labor costs in varying areas, and easier to manage processes. In reality, however, both organizational structures are on a level playing field. Because the startup costs and resources necessary to maintain several properties is much higher, you need more investment capital to start with a decentralized organization. Per unit costs tend to be higher, because you’re not mass producing a single good from one plant. Consistency in products and processes may also suffer because you’re talking about several different locations, filled with their own hardware and personnel, so things will differ. A centralized approach, on the other hand, provides better product forecasting, more local jobs for an area, consistent production schedules, and better or more efficient use of a limited resource supply. In addition, the cost of materials or operations may be significantly lower, because the location is positioned close to a source or supply as opposed to consumers. Adversely, centralized manufacturing is incredibly inflexible due to the nature of its structure. The cost of customization can be great, especially if change comes later in the development cycle. If and when a product must change, the entire system including equipment and hardware must be retooled to meet the new demands. This can be both costly and time-consuming, especially for large properties with lots of equipment. The costs can balloon even higher in areas where wages and resource costs are growing. Discover our advanced inventory management tools. Learn more!

Which One Is Better for My Organization? Centralized vs. Decentralized Organization?

This is an important decision to make. Often, a company will decentralize to meet increased demand or to enter alternate markets and coverage areas. Common practice is to begin with a single, centralized location or plant at company launch. Later, when demand grows and business is performing well, that coverage can expand by opening new locations, transforming a once centralized structure into a decentralized one. It should be worth noting that not all organizations follow this business strategy. Some may start with a decentralized structure, or may never adapt from centralized over the course of their lifecycle. Overall, decentralized manufacturing is best suited for companies that have generic or easy to develop goods with demand spread evenly across larger areas. If your company is smaller with a local customer base, or has incredibly unique or highly-specialized products, then centralized operations are better. In addition, centralized organization can offer more stable contract pricing, lower per-unit costs, improved or efficient material management and optimized production schedules. According to Simtec Silicone Parts, perhaps the greatest benefit of centralized manufacturing is the superior quality management and better decision-making options. Those benefits alone can make it a more viable option depending on what you need and want for your business structure. All said and done, the best way to decide between the two is to review the organizational structure better suited to your business operations and goals. Smaller companies and businesses tend to thrive with centralized manufacturing structures because they have limited resources and capital. But also because the owners and decision makers remain at the forefront of business operations and can better manage the entire production line. McKinsey recommends asking these three questions when deciding between the two structures:
  1. Is a centralized structure mandated?
  1. Will a centralized structure add significant value to your organization?
  1. Are the risks of adopting the structure low in regards to bureaucracy, business rigidity and motivation?
If you answer yes to any one of the three questions above, then a centralized approach is probably the better option for your organization or business. Larger organizations tend to require decentralized structures simply because they have several divisions, departments, and customer demographics spread more evenly. High growth and expansion can also call for decentralized processes, which is why a lot of larger and more successful businesses follow this structure. As you grow and expand, it’s more natural to open additional locations and influential properties. Learn more about Fishbowl’s inventory management software to help with your manufacturing organization today.