Michael Yevgen Kotendzhi is a Partner and the COO with Vancouver BC based warehousing and transportation company 18 Wheels Logistics. With the global supply chain drawing so much attention in the news recently many are proposing alternative models to how products as processed, packaged, shipped, and stored. One such notion is the idea of the “decentralized” supply chain, and in the article that follows Michael Kotendzhi gives an introduction to the perceived benefits and drawbacks of such a system.
In a time where the global supply chain is threatened in ways not seen for decades, there is increasing chatter that perhaps the only way to modernize it is to change its very nature.
Take, for example, a recent editorial from a Sweetbridge Blockchain Alliance adviser who is advocating for widening the scope of a decentralized supply chain to cover not just cryptocurrency but the world’s market.
Or, Michael Yevgen Kotendzhi reports, there’s a take in the Harvard Business Review that raises the question of whether the supply chain risks have finally started to overshadow its rewards.
And then there’s the view of the Biden Administration, which sees global trade vulnerable to such threats as climate change and its ripple-effect impact as impacting the supply chain for decades to come.
Michael Kotendzhi explains that the COVID-19 pandemic may have put the spotlight on the fragility of a centralized global supply chain, but is an alternative decentralized supply chain the answer? And what will a decentralized supply chain mean for the future of global trade?
What is a Decentralized Supply Chain?
A supply chain is a network of business production and product exchange relationships. Michael Yevgen Kotendzhi says a centralized supply chain reflects a traditional model of doing business where a single location includes both a company’s warehouse and headquarters.
In this type of system, processes are managed from a location that’s remote but can effectively serve multiple sites and have them all operate under the banner of one type of supply chain process.
However, Michael Yevgen Kotendzhi explains that larger companies within a centralized supply chain may have multiple locations, such as one on the West Coast of the United States and one on the East Coast. Overall, however, each location is a large hub that is overseen by a headquarters approach.
A decentralized supply chain shakes up the traditional system by having a company’s operations widely spread out throughout a network of smaller warehouses and offices.
Usually, these network entities are closer to the company’s key customers. In this approach, there may be fundamental differences in the products available in each region. For example, a detergent that way sell very well in the Midwest may not be popular in the South. In the decentralized supply chain, that specific product would not typically be widely available where it sells poorly.
Additionally, Michael Kotendzhi says each location within a decentralized supply chain generally has more autonomy than one in a centralized supply chain.
This means individual locations have more power to control the business they do in their region and make long-term strategic decisions to suit their best interests. Amazon is an example of a company that uses a highly decentralized approach to the supply chain.
Benefits of a Decentralized Supply Chain
Advocates for a decentralized supply chain system frequently cite the following as advantages:
• Improved Customer Service
When operations are closer to a customer, there are almost always faster shipping times which yields greater trust. Michael Yevgen Kotendzhi says a company may also refer to itself as a local business and have an elevated presence in a community.
• Greater Flexibility
While centralized supply chains are often stifled by overarching rules and regulations, those within a decentralized system have much more space to make different decisions and more freedom to conduct new product trials more efficiently.
• Lower costs
While a decrease in product cost isn’t a given in a decentralized system, it does greatly increase the chance of locally lower prices because logistical costs can also be largely cut.
Disadvantages of a Decentralized Supply Chain
And on the other hand…
• Increased Inbound and Operational Costs
Michael Yevgen Kotendzhi explains that since there are more facilities involved with a decentralized supply chain, that means more building costs, as well as more insurance and staff expenditures.
And if there are no local suppliers available within multiple decentralized regions, it often leads to larger shipping fees across the network. Inventory management may also be more expensive.
• Less Control
Depending on the type of company, more decision-making freedom within a decentralized system isn’t always a good thing. Michael Kotendzhi says that businesses that need a powerful central entity may find it difficult to adapt to a decentralized supply chain and different business units may use decentralization to focus on their individual interests rather than what’s best overall for the company.
• Higher Investment in an Unstable Economy
Michael Yevgen Kotendzhi explains that decentralization means more money going toward everything from warehouses to transportation costs. In periods of global economic instability, that comes with high risk and lower reward.
The Bottom Line
While a centralized supply chain has overall bolstered the global economy in many ways, the pandemic has exposed cracks in its effectiveness. More decentralization may be on the horizon – and may reinvent the modern global economy as we know it.