Category Archives: Supply Chain

The Dangers of Centralization in a De-Centralized World!

For years, centralization (and then center-led) was promoted as the best Procurement organization methodology because it would deliver many benefits including, but not limited to:

  • economies of scale
  • purchasing expertise
  • administrative efficiencies
  • specialization
  • volume discounts
  • optimal resource allocation

However, while it often delivered economies of scale, volume discounts, and specialization, it never increased purchasing expertise, just shifted administrative efficiencies and only optimized the resource allocation in the center … the rest of the business (and affected personnel) didn’t benefit at all.

Furthermore, these benefits were only delivered in times of free global trade, low/no inflation, and stable economies. Take any of these requirements away, and the discounts and/or economies of scale might disappear overnight and the specialization that was so highly sought might also disappear as well.

The reality is that the right model is really a center-of-excellence which helps to orchestrate best practice procurement across the multi-national/global organization, but, except in a few rare cases, doesn’t really carry out the day-to-day Procurement function. The reason for this is that centralized (and even center-led) suffers from all of the following drawbacks, which are only heightened in today’s global economic landscape.

Missed Local Opportunities

Most manufacturers and distributors aren’t truly global, and when you try to centralize on just a few suppliers, while it will keep costs down for some of your markets, it will increase them greatly in others because the manufacturer and/or distributor just doesn’t have the economy of scale or knowledge in those regions.

The reality is that the best sourcing outcome is one that takes advantage of opportunities at the global, regional, and local level — especially when local opportunities far exceed the national or global ones. The best example here often comes from services. I remember the first time early sourcing optimization providers tackled services projects where an organization regularly outsourced a number of services roles. Due to the perceived complexity of dealing with multiple contractor, manpower, and service management firms, most organizations would try to find 2 or 3 national firms to handle their needs. As a result, even though they would save 10% or so using optimization-backed strategic sourcing, they’d still regularly overpay by 30% to 40%, especially when fully loaded costs were considered. Most IT support firms had their key talent localized in a few offices in big IT hubs (San Francisco, Chicago, New York, Atlanta, Houston, etc.) and for firms that had local offices across the mid-west, so when you want them at remote locations, not only are you paying big-city rates, but you are paying high fully burdened costs. Most states have at least one big city with a few consulting or manpower shops that have the same breadth of resources. They may not be the very best, or the top talent you’ll need if you have a highly specialized problem, but that’s not 90% of your needs. The local DBA trained and experienced in your database, the local fleet/aircraft mechanic with 20 years, and the local HR manager will generally be good enough and almost half the cost. That’s why most organizations who focussed just on national/global providers would, despite their attempt to optimize spend, would overpay by 30%.

Plus, when you are trying to ensure a product or service sells well in local markets, it’s the local expertise that makes the right selection, not a buyer from half a world away.

Loss of Key Market Knowledge

A buyer in the US has no clue what a customer in China wants (unless she just came from China, in which case she probably doesn’t really understand the market she is now based in), and a buyer in the UK won’t get the slight differences in the US market and have no clue about Latin America.

Also, a remote buyer doesn’t typically know who the regional and local manufacturers are or what they are capable of. This is key, even if you decide to go with a remote supplier as the primary supplier as the regional and local suppliers will be your backup when the remote supplier becomes temporarily, or permanently, unavailable.

Supply Base Degradation

Having fewer suppliers doesn’t strengthen your supply base. It just shrinks it to a size that you believe is more manageable. But a strong supply base isn’t a small supply base, it’s a supply base where you have strong supplier relationships, are in a position to help develop the suppliers, and can actively manage performance in near real-time.

They key to performance is detecting issues quickly — as soon as shipments are late, defect/damage rates rise in the warehouse, warranty claims rise, or service levels fall — and then quickly meeting with the supplier to deal with them. This requires being close to the supplier both to detect the issues quickly and resolve the issues quickly. Neither happens when all your suppliers are half a world away.

Ever Lengthening Supply Chains

When over-centralization occurs, most of your suppliers will be half-a-world away for at least half of your markets. When this propagates through the supply chain, you have suppliers at each level commonly sourcing from half a world away. By the time you get to the source, raw materials in your product could have circled the globe three times. How is that efficient? It’s not. And it’s part of the reason that supply chain fragility, and delays, keeps increasing.

Loss of Opportunities Due to Over-Standardization

Standardization is good as it decreases the total number of SKUs you need to track, products you need to buy, and suppliers you need to deal with. But if you standardized down to only a few options, and those suddenly became unavailable, then what do you do. You’ll be set back months to quarters, depending on how long it takes you to locate alternate options in the best case, and come up with new designs in the worst case.

Economies of Risk

The promise was economies of scale (which you hit as soon as you maximize a production line for as little a day, depending on how long retooling costs), but the realities are that what you got was economies of risk. Over centralization resulted in a single supplier failure, single border shut down, or single supply lane closure cutting off your entire supply chain. The more locations that depended on that supplier, border, or supply lane being available, the greater the impact will be.

Loss of Key Process Inefficiency

The promise was resource optimization and process efficiency, and while that was true for the centralized sourcing and procurement organization, the reality is that the efficiency didn’t extend beyond there. Moreover, it made remote operations, which are now fully dependent on a center office half a world away in a timezone where no part of the work day overlapped, less efficient. All requests have to go into a central message queue and, even in an emergency situation, it would be at least a day before a response, and possibly multiple.

This means that local procurement and inventory management teams can’t function efficiently. But the worst case scenario is when a disruption occurs and the local factories or warehouses can’t react and have to wait for days, or weeks, for guidance and possibly months for a new supply source to be identified. Without localized Procurement, process efficiency, especially during a disruption or disaster event, goes out the window.

The World Continuously Changes — Can Your Framework Keep Up?

One of our big themes for the past two years is that Procurement Has Not Changed, and has essentially not changed since the first known manual for public Procurement was published back in 1887. (Handbook of Railway Supplies).

Moreover, not only are the core goals, and processes, roughly the same, the core tech you need hasn’t changed much for two decades. As per our series on how you don’t need to read another state of procurement report for five years and myth-busting 2025 2015 procurement predictions and trends, the only thing that ever changes is the hype-du-jour and the tech-du-jour. Every other barrier to success, risk, concern, and tech is the same year after year after year.

That being said, your supply chains are breaking daily. That’s because, while the requirements for supply chain management haven’t changed, you never implemented the right systems to manage your supply chains (and the up-front procurements) to begin with — systems that understand that the world continuously changes (because many people can’t be happy with what they got — whether they got it good or bad — or the status quo) and you need to monitor and keep up.

As per many of our posts this year, including an updated checklist for major international procurements, most of your systems were built during the age of globalization with opening borders, minimal conflicts, reasonable levels of natural disasters, and efforts to secure major maritime routes were continuous. Now we are in an age of isolationism, borders are closing, sanctions are significantly restricting trade, conflicts are breaking out regularly with not only regional, but global, impacts. Major maritime routes are being cut off. Natural disasters are off the charts. Etc. (That’s also why old strategies for supply chain management are new again. And most of the 2008 trends are still relevant in 2026. See the series.)

As per the series Bob Ferrari (of Supply Chain Matters) on why Direct Sourcing Solutions Don’t Work for Direct, part of the problem is that your procurement solutions weren’t built to be supply chain aware. The other part of the problem is most supply chain software was built to support production with respect to S&OP needs, not real world monitoring, management, and mitigation.

A solution needs to support all of the long-term strategic, mid-term tactical, and short-term operational requirements from initial scoping and planning through final fulfillment which means that it’s not just point-based network design planning, strategic sourcing, supplier collaboration, demand management and EOQ, network management and source allocation, logistics and routing, warehousing, and delivery to customer. It’s also continuous market monitoring, context-based decision making, evaluation, and reconsideration; risk identification, monitoring, management and mitigation; re-orchestration and network updates; etc.

It’s the multi-level integrated framework Bob and I presented last year, which he presents again in his recent article on Materials Sourcing and Planning Decision Making Process Frameworks where he notes that the global wide supply network environment has contused to become ever more volatile and uncertain with each passing week and this requires be a more effective data management, data harmonization and analytics infrastructure. Your business and supply networks need to be ready. Our framework gives you the foundation (and, more importantly, notes that Gen-AI is just an interface to the real capabilities, it is not the miracle cure-all panacea that the silicon snake oil purveyors are making it out to be).

You are strongly encourage to read Bob’s article on Materials Sourcing and Planning Decision Making Process Frameworks and study the framework within, and if you haven’t, go back and read our series on why Direct Sourcing Solutions Don’t Work for Direct. It will be worth your time.

Forget Lean Sourcing, It’s Time for Mean Sourcing!

While it sounds like lean sourcing, which can be defined as a strategic purchasing approach focused on maximizing value and minimizing waste, should be the ultimate solution to strategic sourcing, especially when you consider some of the core activities in Procurement:

  • Value Addition: Identifying exactly what the end customer values and eliminating products, features, services, or luxury materials that do not contribute to it. (Supports Value Definition and Value Stream Mapping)
  • Process Standardization: Simplifying workflows to reduce bottlenecks, speed up purchasing cycles, and lay the foundations for automation. (Supports Flow)
  • Strategic Partnerships: Cultivating close, long-term relationships with a compact, reliable supplier base rather than continually chasing the lowest bidder to streamline the supplier network. (Supports Pull)
  • Continuous Improvement: Cultivating a culture where buyers regularly refine practices and reduce inventory. (Supports Pursuit Perfection)

it should be the perfect solution. But it’s not. The problem is that Lean was born out of manufacturing, not supply chain, and not sourcing and procurement. Here are the problems with Lean in Sourcing/Supply Chain:

  • Myopic focus: Taken to extremes, not only results in a company minimizing not only product lines, and the components used, but their focus on the product lines that consumers want. This is profitable and successful in the short term, but consumer preferences for products change over time, and if you don’t keep up with shifting consumer trends, you’ll be too late to capitalize on major opportunities. (Just like Blockbuster missed out on Netflix, Kodax on digital cameras, and Xerox on the personal computer.) And if you don’t keep an eye out on new developments, you’ll miss opportunities for new integrated components and working with engineering to save money.
  • Automation First Philosophy: the whole point of process standardization was to allow for consistency, transparency, productivity, error reduction, and resource optimization, not necessarily automation — but the interpretation has been to automate everything without any thought as to whether or not humans can do it better or Human Intelligence (HI!) is needed
  • Long Term Agreements: a long term agreement is not a partnership, it’s just a long term contract; most Procurement organizations have failed to grasp what a strategic partnership is! (Japan gets it with keiretsu, but that’s about it.)
  • JIT: you want JIT in terms of factory production, especially since factories have limited space so you don’t want to pull from the warehouse too fast, but it’s one thing to JIT from a local warehouse, it’s another thing to try to JIT across global supply chains filled with fragility and unpredictability and constant disruptions

In other words, in order to succeed from lean, you have to modernize Lean for Procurement and the modern world. And get a little mean while you’re at it.

  • while the primary focus is optimizing costs against the value stream, the secondary focus is pushing strategic partners for new designs and products that will change both the value of the customer offering as well as the cost of production and service; in other words, you’re only happy with the status quo today, you expect proposals for improvement tomorrow
  • constantly push for process redesign where you can reliably use unintelligent automation (with rules-based deterministic certainty and adaptive exception management) and not hallucinatory agentic / Gen-AI for true efficiency improvements; it also keeps platform/cloud costs way down even as throughput scales by orders of magnitude
  • shift from cost focus in agreements to co-development focus — that’s the way you form true partnerships
  • migrate to balanced inventory management where you keep extra stock on hand of critical/scarce/hard-to-get materials and components sufficient to cover at least the average delay time when a disruption occurs — it can also optimize logistics costs and production costs at a different economy of scale, making up for the slightly increased inventory costs (which only need to be a fraction of their traditional inventory-cost based percentage with smart inventory management)

In each of these cases you are forcing more than just the process (which your team and suppliers will think is mean), putting cost second (which the C-Suite will think is self-centered because it’s all supposed to be savings to please the board members), and putting more burden on your internal networks (which your team will think is really mean, considering your operations and consultants have spent decades shifting to suppliers).

It might seem mean, but modernizing your practices in a resilient and collaborative fashion is what it will take to thrive in today’s global landscape.

Old Strategies for Supply Chain Management

How things have changed in two decades. When SI started, the craze, and the right approach, was new strategies for supply chain management. But that was then, this is now. As we’ve regularly explained over the past few months now that globalization has gone, isolationism has returned, natural and man-made disruptions are on a level not seen in decades, if not a century,

That means that survival is dependent not on new strategies, but old strategies when trade was restricted, dangerous, and lengthy.

Long Term Partnerships

In a recent post we suggested it was once again time to bring back Keiretsu, which can be briefly described as a long continual business relationship, and, in one way or another, has been a significant force in the Japanese economy for over four decades and, despite its long and varied history, criticisms, the Structural Impediments Initiative, and economic downturns, is still a strong foundation for many supply chain relationships in Japan

Whether or not you adopt the Japanese philosophy, the key to success in this unstable economic environment with fragile supply chains is to form solid partnerships where both parties support each other through tough times. If you support the supplier as much as you want to support them, it is much more likely that you will be their customer of choice and when stocks are low, shipping options are few, and support is limited. That’s key — being the one that keeps going when all your competitors shut down.

Localization of Production and Near-Shoring of Inputs

Producing in country B that is halfway around the world for country C doesn’t make any sense in an age where shipping costs are rising rapidly, can triple to quintuple on every pandemic and/or seaway closing, and where raw material supplies can dry up over night. The key to success is buying, manufacturing, and selling as close to the destination country / region as possible.

It’s not twenty (20) years ago when shipping was stable and super cheap, unexpected supply chain interruptions were usually limited to natural disasters or unexpected man-made disasters (plant fires, mine collapses due to insufficient shoring, etc.), and it was much cheaper to mass produce in a single locale (i.e. China).

Now, shipping is unstable and super expensive (while crude oil from about 1985 to 2005, adjusted for inflation, ranged between $40 and $60 per barrel except for the occasional spike; for the past five years, it’s been $80 to $100, with the pandemic and Strait of Hormuz strikes bringing it to $110 to $120), interruptions are daily, and China, which is now 18% or so of global GDP thanks, primarily, to US and EU outsourcing (on the advice of the Big X consultancies, led by McKinsey), is not as cheap anymore). This means that, for North America, South American production is cheaper than China. (Why do you think Foxconn, famous for Apple product production and suicides, has at least five plants in Brazil?)

It’s true that some raw materials, like rare earths, will always have to come from China (especially if you’ve in a country sanctioning Russia), but it costs less and makes more sense to just buy the raw materials which can be shipped very compactly (and even by cargo plane if needed) than finished goods that are often 90% empty space (like appliances).

In other words, the days of centralization in manufacturing, as well as supply chains, is over!

Controlled Verticalization

These days all the techbros want to be railroad barrons and be super rich to the point that it would be impossible to spend all their money unless they started buying small countries. What they forget is that it wasn’t just monopolies, a lack of regulation, and zero worker rights (which the current US administration is doing it’s best to reinstate by rolling back human rights, regulations, and anti-trust laws as far back as they can as fast as they can in the hopes of bringing in a new Gilded Age [while forgetting what followed]), but super efficient execution from source to sink.

The barrons not only owned the most lucrative businesses (like the railroads), but also all the subsidiaries that made the parts, shipped the parts, mined the raw materials, and shipped the raw materials. With vertical integration, they could, and did, optimize every single step of the supply chain.

This means that if you want to succeed, you need to optimize your supply chain. While you may not be able to own every company in your supply chain (since some electronic products require 10,000 components), you could own, or at least own part of, key suppliers and/or your parent company could own your key suppliers and/or key transportation companies. Whatever is critical to your operations, can’t be easily replaced, and could bring down an entire product line (and even your business) if it could not be obtained, that’s what you need to own.

Abandonment of JIT

For years, when supply chains ran smooth, supply was assured, and costs were manageable, JIT was all the rage. When inventory costs were an average of 20% to 25% of the inventory value, reducing inventory made sense (to a point — we’d argue it was taken too far). But when production line shutdowns can cost millions, supply chain interruptions are coming regularly and remediation times can take weeks or months, and customer loyalty might be at an all time low thanks to rapid inflation and limited funds, lack of supply is much more costly than inventory, especially if the inventory is well managed.

With today’s multi-objective multi-scenario pareto forecasting models, demand over a reasonably sized time-window can be predicted to 98% accuracy for many categories, the chance of overstock can be minimized (while minimizing the size of stock-outs), and warehouse sizes and costs can be optimized as well. A slight increase in inventory cost prevents costly stock-outs and shut-downs, leading to lower operational costs overall.

Standardization of Technology

Right now, the average large enterprise has 1,000 or so SaaS apps on top of dozens of ERP instances across half a dozen major products. That’s not efficient — in fact, it’s the exact opposite. And it’s probably costing them at least 40% more than if they standardized on a single app for each function.

But it’s not just software you should standardize on — all forms of technology should be standardized. Production lines, equipment, and components used in your product lines should be standardized to the extent possible. Fleets should be standardized as well so you can standardize parts, training, and operations. The more you can standardize, the lower your overall costs will be.

An Updated Checklist for Major International Procurements

Twenty years ago we presented a slightly modified version of a great checklist by Mr Paul Emanuelli who presented key concepts for major procurements in the age of globalization and a movement by the mid-market to take advantage of the global sourcing opportunities big enterprise had been taking advantage of since the 80s. It wasn’t complete, but it was complete enough for an average organization and a great start.

But that was the age of globalization. Opening borders. Minimal conflicts. Reasonable levels of natural disasters. Efforts to ensure major maritime routes were not blocked by any disagreements or conflicts were made. Piracy was an issue, but alternate routes and good (military) security minimized impacts.

Now we’re in the age of isolationism. Borders are closing. Sanctions are restricting others. Conflicts and wars are breaking out with regional impacts. Major maritime routes are being blocked as a result of conflict, including the Red Sea and the Strait of Hormuz, putting trillions of dollars of trade at risk. Natural disasters, including droughts, are also limiting trade routes, including restricted passage through the Panama Canal due to water shortages. The rules have changed, and your Procurement (knowledge) needs to keep up.

This means two things:

1. Your Team Needs to Expand

When once upon a time you may have been able to get away with:

  • procurement lead
  • finance lead
  • legal counsel lead

Now you also need, at a minimum:

  • logistics lead
  • domain lead
  • (geopolitical) risk lead
  • compliance lead

These stakeholders will need to provide the following insight between them:

  • procurement: handles the details of the buy — cost vs expected return
  • logistics: handles the global supply chain – carriers, modes, import/export requirements, etc.
  • finance: handles the international economics — currency exchange, projections, international banking arrangements, tariff management and (VAT) reclamation
  • legal counsel: appropriate international legal frameworks, supplier home country law, local laws
  • domain lead: realistic supplier and product assessment vs. supplier claims
  • compliance lead: handles international compliance regulations — source country, intermediate transportation hubs, and local companies with respect to finished goods, raw materials, transport, and entities
  • (geopolitical) risk lead: keeps a handle on the international geopolitical conditions relative to the source country, destination country, and any intermediate countries the goods would have to pass through — and if they are likely to lead to sanctions, border closings, conflicts, wars or other situations that could prevent or significantly hinder trade

In other words, the analysis of a potential buy has become significantly more involved than it was 20 years ago, because it’s not just the buy, it’s the likelihood of supply assurance and affordability when exchange rates can fluctuate significantly almost over night or fuel, and thus carrier costs, can double or triple with almost no warning.

Once you’ve selected the team, you need to determine the extent of the project. Is it a sourcing project or a mega project. If you’re simply replacing a source of supply, and using a supplier in a region you’re already doing business in, it’s a project. If you’re looking for a source of supply for a new product or material, trying to enter a new country, and/or looking somewhere you don’t have a logistics network, it’s a mega-project. Just like a major technological project / system replacement, underestimating the effort involved is a recipe for disaster. Especially if the effort is not put in up front before a contract is signed and an issue crops up later.

This means that before the contract is signed, the following sub-projects need to be completed:

  • detailed product requirements assessment
  • detailed proposed supplier and product assessment
  • detailed proposed logistics / supply chain network
  • detailed legal frameworks review
  • detailed compliance and risk review
  • detailed business plan

Only then, can you move forward to:

  • contract framework
  • negotiations
  • final contract

International procurements are not as easy, or predictable, as they were 20 years ago. Now they’re mega-projects which require mega-effort to get right.