Learn about the benefits and differences of both approaches.
It’s no secret that manufacturing is crucial to the global economy. It transforms raw materials into goods we consume daily, drives economic growth, creates jobs, boosts innovation, and helps countries participate in global trade.
But not all companies use the same manufacturing approach, with some opting for decentralization over centralization and vice versa.
What’s the difference? Which approach is better? Here’s what you need to know.
What is centralized manufacturing?
Centralized manufacturing is a production model where manufacturing occurs in a single central facility.
What are the pros of centralized manufacturing?
- High economies of scale. Companies that produce large volumes of standard products often use centralized manufacturing. Higher product volumes in a single factory lead to lower per-unit costs as fixed costs can be spread across a larger number of units.
- Consistent product quality. Products are produced in the same factory with standardized processes and procedures, allowing you to better control quality.
- Lower initial capital and investment costs. A single facility generally requires a lower capital investment than multiple ones.
- Easy coordination and management. It’s easier to manage production processes in one location compared to many.
What are the cons of centralized manufacturing?
- Inflexibility due to the cost of customization. A product change often requires an entire system change.
- Longer lead times. Because production is centralized, products must often be transported to various distribution points before reaching customers.
- Higher transportation costs. Shipping distances can be longer, leading to higher transportation costs.
- Greater supply chain risks. Any disruptions in one central facility can significantly impact the entire supply chain, as production cannot easily be shifted to a new location.
What is decentralized manufacturing?
Decentralized manufacturing is a production model where manufacturing is distributed across multiple plants to provide coverage to larger areas. Plants are usually located near customers.
What are the pros of decentralized manufacturing?
- Shorter lead times. You can more easily set up production closer to your market so products reach customers quicker.
- Lower transportation costs. Shorter shipping distances between production and customers lead to lower transportation costs.
- Flexibility to meet local demand. You can quickly scale production up or down across facilities, making you more flexible and responsive to meeting demand.
- Lower supply chain risk. The impact on the supply chain from a disruption in one factory is less severe because production is spread across facilities.
What are the cons of decentralized manufacturing?
- Higher production costs per unit. You don’t achieve the same economies of scale compared to centralized manufacturing.
- Higher investment costs. It generally costs more to set up multiple locations compared to one.
- Inconsistent product quality. Different locations have different standards and processes, so maintaining product quality can be tricky.
- Difficulty in coordinating production. It’s harder to manage different processes across multiple locations.
Centralized vs. decentralized manufacturing
By now you can likely infer what the differences are, but for clarity here’s a side-by-side comparison. Keep in mind that these differences may not always hold true.
|
Centralized Manufacturing |
Decentralized Manufacturing |
|
|
Production |
Concentrated in one or a few facilities |
Dispersed across multiple plants |
|
Economies of scale |
High |
Low |
|
Product quality |
Better due to standardized processes in one facility |
Can be inconsistent across locations |
|
Lead times |
Longer as production may be farther away from the market |
Shorter as production may be closer to the market |
|
Transportation costs |
Higher with longer shipping distances |
Lower with shorter shipping distances |
|
Initial investment |
Lower for one location |
Higher for multiple |
|
Coordination and management |
Easier to manage processes in one location |
Harder to manage operations across locations |
|
Supply chain risk |
Higher as a disruption in one location can impact the entire supply chain |
Lower as production is spread across locations |
|
Flexibility |
Production cannot easily be scaled up or down to meet demand. |
Production can more easily be scaled up or down to meet demand. |
Which manufacturing approach is right for you?
Neither approach is right nor wrong. The answer to this question will depend on thoroughly analyzing all relevant factors. First, weigh the pros and cons of each approach by considering all factors like lead time, economies of scale, and supply chain risk.
Next, consider other factors like market demand, customer base, company culture and values, type of product, and growth strategy. For instance, if you have a concentrated market, it may make sense to centralize manufacturing. But if your market is spread out across different regions, decentralization is probably the better choice. Similarly, if your company prioritizes sustainability, decentralized manufacturing may be more practical in helping you keep emissions down due to shorter shipping distances.
You may even choose to embrace both approaches. In fact, it’s common practice to begin with a single, centralized location at launch and then transform into a decentralized structure in response to growing demand.
Regardless of what approach you choose, Fishbowl is here to help. Gain complete visibility into your manufacturing workflows, streamline processes, and grow your manufacturing business with the industry’s most flexible ERP software solution.
Book a demo today.