Mulani on Excellence: Maximizing worldwide effectiveness with a centrally led operation
By Narendra Mulani -- Logistics Management, 1/1/2009
Globalization has huge implications for supply chain executives. Reasons are numerous, but the main one may be that in order to capably walk the global walk, companies must excel in two often incompatible ways. First, they must design flexible, adaptable downstream operations to ensure differentiated products and services, and then they must achieve exceptional upstream efficiencies to contain or reduce costs (Figure 1).
Most companies understand this dichotomy, which is why cross-value-stream initiatives (outsourcing, shared services, mass customization, postponement and coordinated procurement, etc.) are increasingly popular. But these innovations are often compromised by autonomous organization models that are country, regionally, or even locally based. What’s really needed is a single, “centrally led operating model”—an approach designed to combine global efficiencies and local responsiveness.
Think of a centrally led operating model as an organizational construct wherein a company’s most important assets and many of its core business functions are consolidated, managed, and controlled by a single entity. This is not the same as a regional headquarters structure, which emphasizes multiple centers of responsibility for many processes, assets, and activities. In a centrally led operating model, most functions are either:
Consolidated into a principal trading company. This organization may oversee demand forecasting, order management, inventory/supply planning, supplier management, inventory management, accounting, IT application strategy, and management and HR policies.
Managed by shared services centers. Shared services centers are particularly good candidates for functions that thrive in “low cost countries” (e.g., salary administration, invoice processing, procurement).
Outsourced to third parties. Traditional logistics functions such as procurement, transportation, and distribution tend to be optimal choices for outsourcing. However, outsourcing can be a viable action for any activity not considered core to the company’s pursuit of competitive advantage.
Why Bother?
A centrally led operating model is particularly attractive for its integration and standardization potential—one single entity or operation into which a company’s best efforts and best practices can be concentrated. Procure-to-pay. Order-to-cash. Product life cycle management. Transportation and distribution. With processes integrated and standardized, it becomes possible to capture upstream and downstream efficiencies that might previously have been unattainable.
Centrally led operating models can also be catalysts for improved visibility and business intelligence. Information required for detailed analysis and modeling (e.g., of gross-to-net revenue or key customer and brand profitability) becomes more-readily accessible and consistently presented. Inventory levels—raw materials, in process and finished goods—can be ascertained across the region or around the world. In both cases, the net effect is better and more integrated planning and increased supply chain responsiveness.
With key functions concentrated in a central unit, most companies will find it easier to formulate effective strategies and deploy them consistently across the organization. Functions can be introduced or outsourced more easily. Not surprisingly, acquisitions can be more-swiftly integrated into the centralized structure.
With so many value-added functions centralized, rewards such as better control, greater synchronization, increased availability, improved service and better product mix frequently follow. Inventory levels often fall by 25 percent to 40 percent and overall logistics costs may drop by 10 percent to 15 percent. Cost of goods sold may also dip because it becomes easier to rationalize manufacturing and supplier bases and to negotiate purchasing contracts centrally.
A final benefit of a centrally led operating model is the potential to raise tax efficiency: Corporate governance practices generally dictate that profits be allocated according to the level of risk and value-added activities attributable to each one of a company’s business entities. And since profits accrue faster in a more favorable tax climate, it makes sense to locate centrally led operations in a lower-tax location. Freed-up cash flow—the result of reduced tax burdens, custom duties and sales tax/VAT outlays—is the key advantage.
Critical Success Factors
Not surprisingly, the journey from a regional or country-based structure is lengthy and complex. It’s also unique to each company’s particular physiology and psychology. Thus there is no such thing as a single recipe for success.
However there are numerous “critical success factors” that apply to most organizations. These include a solid vision and business case; high levels of specificity about roles and responsibilities; strong service level agreements; and a solid governance structure.
A centrally led operating model may not be the only way to create a company that is hyper efficient, hyper responsive and unusually good at balancing upstream and downstream priorities. But for many companies, it could become the foundation of a truly global operation, as opposed to an entity that just operates in a lot of countries.
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