In: Operations Management
For manufacturing operations, it is sometimes wise to disperse them – as a means of controlling risk, or where the shipping cost of getting to the customer is a high percentage of the total product cost. What are any two reasons why you might elect to centralize manufacturing all in one spot, rather than dispersing?
In centralized process, major activities such as strategic decision making, budgeting, planning, manufacturing activities etc., are concentrated at a single location. On the other hand, in decentralized process the major activities are scattered at multiple locations. There is no single solution that can be applied across all manufacturing companies. The decision on whether to centralize or decentralize operations often depends on several factors such as the product characteristics, kind of manufacturing process, raw materials required, geographical location, customer location, business strategies, etc.
The two main reasons that can drive centralized manufacturing at a single spot are:
1. Economies of scale: A manufacturing company can achieve economies of scale by centralizing its manufacturing operations. The per unit production costs can be minimized by utilizing the same equipment for the manufacture of different products. In addition, inventory turnover rates of the raw materials and production efficiency are on the higher side. Hence, the company can save costs, produce better quality and standardized products and ensure knowledge-sharing of best practices.
2. Prompt execution of decisions: The decision making process is streamlined under a centralized process. The decisions can be taken by the management and can be quickly and efficiently communicated to their subordinates. The implementation process is shortened and less complicated.