Centralizing Logistics Leads to Mixed Results

Many organizations are centralizing logistics functions to consolidate operations and improve efficiency.

Of the organizations participating in APQC’s Open Standards Benchmarking in logistics, 64 percent have adopted a centralized logistics structure.

The benchmarking data show that efforts to consolidate logistics have the potential to reduce needed warehouse space - and the associated costs - as well as standardize logistics processes.

In order to determine whether centralized logistics structures also improve logistics performance, APQC compared the quality of deliveries, inventory management, and logistics costs of organizations using a centralized structure with those using a decentralized structure.

“Although the quality of shipments may not be affected by logistics structure, the fewer stockouts associated with a centralized operation could mean an improved experience for customers”Becky Partida, Research Specialist-Supply Chain Management, APQC

Our data reveals a complex picture: the two groups are nearly identical when it comes to the quality of deliveries to customers, but organizations with centralized logistics structures have better inventory management and higher logistics costs than their counterparts with decentralized logistics functions.

Delivery Quality
Organizations with centralized and decentralized logistics structures differ little in their perfect order performance. APQC defines this metric as the percentage of orders delivered on time - with all order line items filled correctly, completely, and without damage; and with an accurate invoice.

The performance of the two groups is identical at both the median and top-performer level, and has only a 3 percent difference at the bottom-performer level (see Exhibit 1).

These results indicate that whether an organization has a centralized or a decentralized logistics structure makes little difference to the quality of orders actually shipped to customers.

However, with a 92 percent perfect order performance rate at the median, both groups have room to improve. To determine how centralized logistics structures can affect logistics processes before orders leave the warehouse, APQC analyzed inventory management performance.

Inventory Management
In evaluating inventory management performance, APQC first looked at organizations’ stockouts. Companies with a centralized logistics structure have a lower value of sales order line items that are unfulfilled due to stockouts or production capacity as a percentage of revenue than those with a decentralized logistics structure (see Exhibit 2).

At the median, there is a 0.15 percent difference in the value of sales order line items not sent to customers due to stockouts or production capacity. The difference is larger at the bottom-performer level: 0.72 percent between the two groups.

For an organization with $1 billion in annual revenue, this means that having a decentralized logistics structure could result in an additional $7.2 million in line items not being delivered to customers.

Although the quality of shipments may not be affected by logistics structure, the fewer stockouts associated with a centralized operation could mean an improved experience for customers. Reducing the amount of sales order items that are unavailable to ship would contribute to customer satisfaction and reduce the potential for lost business.

APQC also looked at the value of inventory carried by the two groups. Organizations with a centralized logistics structure have a lower value of inventory being held in warehouses than organizations with a decentralized structure (see Exhibit 3).

At the median, those with a centralized structure have about $64 worth of inventory per $1,000 in annual revenue, compared to $76 worth of inventory per $1,000 in annual revenue for organizations with a decentralized structure.

“Centralized structures seem to spur more effective planning and management of inbound materials and management of inventory”Becky Partida, Research Specialist-Supply Chain Management, APQC

A lower value of carried inventory can lead to several benefits for companies with centralized logistics structures. Specifically, it can result in lower costs to store that inventory and fewer employees needed to manage it. Lower inventory value can also reduce the amount of inventory lost to obsolescence and shrinkage.

Even though organizations with a centralized logistics structure consistently carry a lower value of inventory, the difference between the two groups is less notable among top- and bottom-performers.

Overall, the results indicate that organizations with centralized logistics structures may have consolidated warehouses as part of their centralization efforts and can therefore carry less inventory.

Yet whether or not these organizations have actually consolidated warehousing, carrying less inventory while having a lower percentage of stockouts means that they can more accurately plan their operations and stock to meet customer demand.

Logistics Costs
APQC’s data shows that both centralized and decentralized organizations have mixed results with regard to logistics costs.

Exhibit 4 presents the median total logistics cost for both types of structures, as well as the median costs for individual processes within logistics. At the median, organizations with centralized logistics structures spend nearly $23 more per $1,000 in annual revenue for logistics than organizations with decentralized logistics structures.

Centralized logistics operations also spend $1.59 more per $1,000 in annual revenue to operate warehousing and $6.73 more per $1,000 in annual revenue to operate outbound transportation than their decentralized counterparts.

However, organizations with centralized structures spend $0.30 less per $1,000 in annual revenue to plan and manage inbound material flow.

The lower cost to plan and manage inbound material flow among organizations with centralized logistics functions may be a result of their having fewer warehouses. With fewer locations needing deliveries of materials, the cost of planning and managing incoming materials would decrease.

Taken together, the lower cost to plan and manage inbound material flow, lower inventory value, and lower percentage of stockouts achieved via centralized logistics structures indicate that these structures facilitate better logistics planning and management.

The higher overall logistics costs for organizations with centralized logistics structures can be influenced by several factors. These organizations may spend more on outbound transportation because they have fewer warehouses and thus need to ship products farther to reach customers.

They may also be more sophisticated in their logistics functions and thus invest more in technology to support logistics processes. And more sophisticated technology may require more staff for its use and maintenance, which would add to total logistics costs.

Structure Strategically
APQC’s research indicates that centralized logistics structures, while achieving consolidation efficiencies, have little effect on the quality of order delivery and may increase overall logistics costs.

However, centralized structures seem to spur more effective planning and management of inbound materials and management of inventory. In particular, organizations with centralized logistics structures spend less to manage inbound materials, have fewer stockouts, and hold lower inventory values.

The choice between a centralized or decentralized logistics structure depends heavily on the individual circumstances of the organization. If better management of inventory or inbound materials is a priority, then a centralized logistics structure may be the best choice.

On the other hand, consolidating logistics efforts may involve consolidating warehouses, which can have its downside. Having fewer warehouses may increase the possibility of a supply chain interruption if one or more warehouses become unavailable because of a natural disaster or other unforeseen circumstance.

Organizations considering centralized logistics structures should factor in the need to develop contingency plans to address this possibility.

The key for each organizations is to identify the strategic priorities of its logistics function and determine whether the potential benefits of a particular logistics structure offset the possible negative effects.

About APQC: A member-based nonprofit founded in 1977, APQC is the leading resource for performance analytics, best practices, process improvement, and knowledge management. For more information, visit the APQC Company page on 24/7.