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A Quick Look at Key Measures

Manufacturing: Centralization versus Decentralization

Which is better?
Should your organization centralize its manufacturing capabilities? Does the structure of your manufacturing operations really make a
difference? To help organizations find an answer to this question, APQC has analyzed the data collected through the Open Standards Bench-
marking CollaborativeSM manufacturing research.
Oftentimes in business, the right answer to a question is “it depends.” It depends on an organization’s business strategy, industry, or even
its geographic location. In the case of whether centralized or decentralized structures for manufacturing are more beneficial, however, the
data paints a very clear picture. Centralizing manufacturing operations is the way to go. It correlates with a number of positive outcomes.

Manufacturing controllable cost as a percentage of

There is a clear difference in manufacturing controllable costs as a 25.0%
percentage of revenue based on organizational structure for manufac- 20.63%
20.0% 18.03%
turing. The figure at right shows that centralized organizations have
costs that are about 10 percent lower. 10.56%
5.0% 1.36%
25th Percenle Median 75th Percenle
Centralized Decentralized N = 43

Scrap and rework costs as a percentage of sales

Another benefit of centralizing manufacturing operations is shown in 2.5%
the adjoining figure. Scrap and rework costs as a percentage of sales 2.30%
are lower for centralized organizations. Although the difference is not 2.0%
enormous, when even a fraction of a percentage point is multiplied by
organizational sales, the potential savings can add up. Centralized 1.5%
organizations may be able to recognize that scrap from one entity 1.00% 1.05%
could be used as an input in another entity. Additionally, centralization
may facilitate the ability to monitor several manufacturing locations to 0.5%
determine both where and why scrap and/or rework are occurring 0.15% 0.20%
more frequently. 0.0%
25th Percenle Median 75th Percenle
Centralized Decentralized
N = 72

Asset turns
If organizations are looking to improve efficiency, then monitoring 6.0 6.00
asset turnover is key. The figure on the right shows that centralized
organizations tend to have slightly higher asset turns than decentral- 4.41
ized ones. Monitoring asset turns can give insight into how well the 4.0
organization is employing its assets to generate sales, and taking a 3.0 3.00
centralized view enables greater control and visibility into those 2.0
2.10 2.00
25th Percenle Median 75th Percenle
Centralized Decentralized N = 43

54 Target Third Issue 2010 Target.ame.org

Annual raw material inventory turn rate
Looking specifically at annual raw material inventory turn rates,
centralized manufacturing organizations again tend to outperform
16.00 15.10 decentralized ones (see figure at left). As organizations strive to run
leaner and carry less inventory on hand, it is in their best interest to
12.00 consider all options that will allow them to achieve better results on
8.20 7.00
their inventory turn rates. Examining this indicator leads to the conclu-
8.00 sion that centralization is advantageous. In part, centralization enables
4.00 4.00 greater visibility, risk pooling, and the ability to remove redundant
inventory across multiple locations.
25th Percenle Median 75th Percenle
Centralized Decentralized
N = 78

Average producon schedule aainment during a

planning period for primary products
Shifting to look at scheduling and the impact of centralization, the APQC
96.0% data show that the average production schedule attainment during a
92.0% 90.00% 90.00% planning period for primary products is higher for centralized operations
versus decentralized ones (at left). Centralizing manufacturing can help
88.0% 85.60%
organizations forecast better, ensure manufacturing lines are producing
84.0% on a consistent basis, and sequence jobs to take into account constrained
80.0% resources, thereby improving production schedule attainment.
25th Percenle Median 75th Percenle
Centralized Decentralized
N = 57

Which of the following best describes the structure

of the manufacturing operaon with respect to your CONCLUSION
organizaon overall? Centralization would appear to win the benefit battle compared to
46.88% 48.96% decentralized manufacturing operations. However, the figure at left
shows that despite the benefits of centralization, still fewer than half of
40.0% the companies in APQC’s manufacturing database have a centralized
30.0% manufacturing structure. That means that there are still vast opportunties
20.0% to realize improvements in manufacturing costs, scrap and rework, asset
turns, and production schedule attainment.
Centralized Decentralized Other Source: APQC Research © 2009 APQC. ALL RIGHTS RESERVED.
N = 96

APQC, formerly the American Productivity & Quality Council, is an AME Alliance Partner. As
part of the partnership, APQC has granted AME members free access to the OSBC
benchmarking database, which is usually restricted to APQC members who have completed
the OSBC survey. To complete the survey and benchmark against the 5000 others in the
About Benchmarks database, including other AME members, go to www.apqc. org/AME.
An essential part of enterprise excellence is knowing where you are in The AME and APQC also collaborate on a Benchmarking Community of Practice (CoP),
comparison with where you’ve been before — and with what’s now with over 400 members. (See “AME/APQC Alliance Offers Benchmarking Data,” Target,
possible. Target selects graphs, charts, and tables from recently- Third Issue 2009, p. 40.)
published research to provide a snapshot of informative points that you For industry-specific benchmarks tailored to your organization, e-mail OSBC@apqc.org
can use to assess your organization. Source: OSBC Research ©2009 APQC. ALL RIGHTS RESERVED.
Last updated 06.09 KID M0204

Target.ame.org Target Third Issue 2010 55