Business

Making better broth, with lots of cooks

By Robin Mordfin     
December 09, 2013

From: Magazine

Too many cooks spoil the broth: for decades this notion has been directly applied to the analysis of supply chains. It has also been repeatedly proven, as researchers have shown that centralizing supply-chain decision-making leads to greater efficiency.

But research by Assistant Professor Elena Belavina and Karan Girotra of INSEAD shows that the notion doesn’t hold in a supply chain with longer-term relationships.

Traditional operations literature suggests there’s a trade-off between the benefits of specialization—giving authority to specialists representing different parts of the supply chain—and the improved efficiency of centralized decision-making. But for some time, the existence of decentralized supply chains with good performance—in emerging market cooperatives, microretailing, and other settings—have stymied economists. Belavina and Girotra take a look at these purported anomalies and come to the conclusion that more decentralized decision-making can improve the performance of a supply chain, depending on the probability of continued trade.

By unbundling supply-chain activities from a central decision-making body, more decision-makers are created. When there is a promise of future trade, these decision-makers, motivated by the desire to continue making money, work within their relationships to optimize the chain and use their specializations to improve the chain.

The researchers agree that where there is little or no chance of future interactions, decentralized decision- making in the supply chain is harmful. But when supply-chain partners have an intermediate-level chance of future trade, supply chains with decentralized decision making outperform those with more centralized decision-making. In supply chains with a high chance that the parties will trade again, decentralized and centralized decision-making chains perform equally well.

The lure of future or continued trade is key, since it aligns participants’ best interests with those of the entire supply chain. This incentive works if the reward of staying in the supply chain outweighs the immediate profits brought by selfish behavior. Further, there’s far less to gain by behaving opportunistically in a decentralized supply chain, as individuals have less influence. Ultimately, the economists show, there is a higher value attached to relationships in these supply chains because those relationships, when behavior is good, help create profit.

One example of the success of decentralized decision-making is Amul, an Indian dairy cooperative in which a network of independent processors interact with each other without any formal contracts. While a traditional view might consider this the height of inefficiency, Belavina and Girotra find the opposite: the lack of complicated contracts, and the processors’ focus on relationships and community, gives Amul excellent operational performance.

Belavina and Girotra demonstrate that supply-chain designers need not worry about specialization hurting efficiency so long as all the players have a stake in the success of the supply chain. When each player values a system that runs smoothly and recognizes that damaging the system for personal interests will not bring equivalent value, their incentive to behave well continues.

Work cited

Elena Belavina and Karan Girotra, “The Benefits of Decentralized Decision-Making in Supply Chains,” Working paper, September 2012.