UCD Michael Smurfit Graduate Business School

Program Information: Masters in Supply Chain Management

Course Module: BMGTP-43500 Global Logistics
Lecturer: Professor Gerry Ryan

CENTRALIZATION OR
DECENTRALIZATION
THE DILEMMA OF SCHNEIDER ELECTRIC
C ASE STUDY REPORT

We declare that the material contained in this project is the end result of our
own work and that due acknowledgment has been given in the bibliography to
ALL sources, be they printed, electronic or personal.

Group 10 Team Members:

Wanjun Li 13205500
Harshaanth Ahuja 13202089
Mohamed Faizal Batcha 13204968
Biao Jiang 13202557
Fan Li 13203883
Table of Contents Page No(s):

1. The Company: Schneider Electric............................................................................... 2

2. Centralized and Decentralized Warehouse System: Advantages & Disadvantages....3
2.1. Centralized Warehouse- Meaning…………………………………………………………...3

2.1.1 Advantages of Centralized Warehouse……………………………………………………4

2.1.2 Disadvantages of Centralized Warehouse……...……………………………………….5

2.2. Decentralized Warehouse- Meaning………………………………………………………..5

2.2.1 Advantages of Decentralized Warehouse………………………………………………...5

2.2.2 Disadvantages of Decentralized Warehouse…...................................................................5

3. Problem Analysis ........................................................................................................ 6

3.1 The Logistics Network Design………………..……………………………………………..6

3.2 Lead Time……………………………………………………………………………….…..7

3.3 Cost……………………………………………………………………………………….…8

4. Proposed Strategy........................................................................................................ 8
4.1 Characteristics of Products & Demand…………………...………………………………….8

4.2 Product Holding Cost……………………………….……………………………………….8

4.3 Short Term Solutions………………………………………………………………………..9

4.3.1 Why Choose South Sweden?.............................................................................................9

4.3.2 Importance of I.T Solutions……………………………………………………………...9

4.4 Long Term Solutions………………………………………………………………………10

5. Conclusion................................................................................................................. 10
References ........................................................................................................................ 11
Appendices……………....………………………………………………………………………………………………………12-15

Appendix 1: Current Schneider Electric Logistics Network System…………………………..12

Appendix 2: New Centralized Warehouse System………………………………………….…12

Appendix 3: Low Voltage Switchgears of Schneider Electric & ABB……………………….13

Appendix 4: Customer Training Courses Provided by Schneider Electric…………………...14

Appendix 5: Important Airports in South Sweden…………………………………………....15

1. The Company: Schneider Electric.
Schneider Electric (SE), which is based in France, is a multinational corporation that specializes in
energy management. It delivers products, services and solutions to its customers within the four main
markets: Energy and infrastructure, Industry, Data Centers and Networks, Buildings and Residential
(Schneider Electric, 2014).
In 1994, SE was present in 130 countries with more than 5000 sales outlets and 8000 manufacturing
and commercial units. In the markets of Nordic countries, SE had operated for different lengths of
time and had developed at different paces in different areas based on subsidiaries with a sales office
and a national warehouse in each country. The orders from different subsidiaries were sent to the
supply warehouse in France and then the goods were delivered directly to customers from France
three times a week. With this distribution network, the on-time delivery service performance
fluctuated between 60-100% in Nordic countries.
In the early of 1995, a centralized system was proposed to improve the efficiency of the logistics
through a centralized warehouse in Sweden for Nordic markets. This centralized warehouse would
send orders to France based on its inventory control every day, and then receive the goods from
France. It would also take orders from different sales offices in Nordic countries, and then deliver
products to them. With this centralized system, the transportation time to customers would be reduced
in one to three days based on different places, while the transportation cost would be a question since
the transport distance has increased.
What follows is an in-depth analysis of SE’s current distribution network and proposed centralized
system, the advantages and disadvantages of the two models and the further recommendations and
solutions.

2. Centralized vs Decentralized Warehouse System: Advantage & Disadvantages.

Companies that have a corporate supply chain department and various business units use one of the
two methods for making decisions for their supply chain; Centralized decision making wherein the
supply chain decisions are centrally made at the corporate level and the decentralized decision making
where supply chain decisions are usually made at the business unit level (Rangavittal & Sohn, 2008).

2.1. Centralized Warehouse.

According to Kokemuller (2014), Centralizing warehousing is a system where a retailer or its supplier
maintains a single centralized warehouse versus several facilities spread out to cover an area. A
centralized approach offers a number of benefits compared to a decentralized warehouse system.
2.1.1 The advantages of Centralized Warehouse:

a) Logistic Advantage:

Lower Fixed Distribution Costs: Since fewer resources are needed to run one warehouse as opposed
to several, centralization has a positive effect on costs relating to warehousing activities.
Lower Variable Costs: Variable costs of warehousing such as labor, transport etc, can be kept at a
minimum or at a constant when the total amount of inventory decreases overtime.
Lower Inbound Costs: It means that distributors or a warehouse of a company can save on shipments
from manufacturers as a centralized warehouse can take in large quantities at a single location, versus
having shipments go to multiple locations. This enables better value not just to the company but also
to the end customer and ensures higher profit margins (Kokemuller, 2014).
Integration of Activities: Centralization helps in integrating all the warehouse and logistical activities
under one roof and these results in lower management costs. As such the company can concentrate on
other core competencies.
Lower Learning Costs: Since all products are centrally located in one warehouse, old products can be
phased out quickly and the distribution system can adopt faster to volume fluctuations.

b) Service Advantage:

Shorter & Secure Lead Times: A centralized warehouse helps in achieving shorter and secure lead
times on all the products. The warehouse can send goods and other consignments to customers much
faster thus reducing lead time.
Higher Delivery Precision: Since all the products are centrally located in one warehouse, more
deliveries can be carried out correctly. The number of deliveries and the time windows can be
matched simultaneously.
Differentiation: A centralized warehouse can store products of various shapes and sizes. The
possibility of customizing solutions increases with a centralized system.
Better Information: With all the products being centralized, it is easier to manage inventory levels.
Consequently the customers can be supplied with more precise and accurate information on delivery
times by the company.
Customer Service: The best people, equipment and inventory systems are all centrally located in a
centralized warehouse. This is beneficial as the warehouse can focus on the needs of the customers
and provide good customer service (Kokemuller, 2014).
2.1.2 Disadvantages of Centralized Warehouse:

a) Delay in sending materials to the departments and branches.

b) Increase in material handling cost as staff will be required for transportation from stores to the
various production units (materialsmanagement.info, 2014).
c) Greater risk of loss by fire because if a fire breaks out, entire stocks can be lost bringing
production to a halt (materialsmanagement.info, 2014).

2.2. Decentralized Warehouse.

Decentralized Warehouse is when there are multiple warehouses, each warehouse is treated as a
separate entity rather than a whole. The warehouses have their own locks and keys. The stock is
organized in a way that will help in optimizing the inventory (Lee, 2014).
2.2.1 The advantages of Decentralized Warehouse:

a) The storing and controlling function can be easily accomplished.

b) Delays in material handling will be eliminated thus ensuring savings in material handling costs.
c) The chances of loss by fire are reduced with a decentralized warehouse.
d) The need for any internal transport costs between the distribution centers is minimized under a
decentralized warehouse.
e) Finally, needs of individual departments can be easily fulfilled with a decentralized setup.
2.2.2 The disadvantages of Decentralized Warehouse:

a) Higher Costs of supervision as more experienced people are needed to supervise the day to day
functioning of the warehouse.
b) A decentralized warehouse requires a very high amount of investment as facilities have to be set
up in multiple locations with the latest equipment, technology and inventory management
systems.
c) More time spent in stock taking.
d) Higher cost of staff and stationery.
3. The Problem Analysis

Network planning and location of the facilities of a company is important in order to ensure the
company is able to serve the customers better and also in a timely manner. During the planning stage,
the company needs to consider all major logistical costs, namely transportation, inventory, and facility
costs and also the company needs to consider practical restrictions, such as capacity and customer
service beyond the cost (Ballou, H. and Srivastava, K.)
Schneider Electric (SE) management plans to move from one end of logistics planning which is a
decentralized system to the other end of the planning system which is a centralized system in Europe.
The comparison of this strategy can be categorized in to three categories which are different in terms
of the logistics network, the lead time and finally the cost.

3.1 The Logistic Network Design

Nordic Countries (Denmark, Finland, Norway and Sweden) SE operation is based on subsidiary that
consists of sales office and national warehouse in each country (Appendix 1). When a customer places
an order in any or the Nordic Countries to any of the SE subsidiaries sales office, the subsidiaries will
deliver the materials from their warehouses. Once the material needs to be replenished, the
subsidiaries team will send the order to the parent company’s warehouse in France. Each item has its
own standard lead time and each subsidiary will place an order based on the item lead time and
estimate demand from the customers. The current network as shown in Exhibit 1.

Exhibit 1: Current Schneider Electric logistic network system.

The new proposed centralized warehouse network system will have a centralized warehouse located
in South Sweden. In this new proposed network, each Nordic Country will have their own subsidiary
sales office but all the orders will go to the southern Sweden warehouse for the delivery. The Sweden
warehouse will make a direct delivery to the customers in Denmark, Finland, Norway and Sweden
(Appendix 2). All the inventory for the Nordic Countries will be managed in the warehouse at
Sweden. Once the Sweden warehouse needs to replenish the inventory, they will place an order to the
main warehouse in France. The proposed network is shown in Exhibit 2.

Exhibit 2: New Centralize warehouse system propose by management

3.2 Lead Time

In terms of delivery lead time and delivery performance, in the current network system, the main
warehouse in France will make a frequent delivery to all the Nordic Countries in average of three
times a week. The transportation lead time is around four to five days and will be stored in the
warehouse operated by third party logistics companies. The delivery service performance of SE
Finland is about 90 to 95% by using this strategy.
In the new proposed centralized warehouse network, the France warehouse will have daily shipments
to the Sweden warehouse and it may possibly take around four days to arrive once the shipment is
made from the France warehouse. From the warehouse in Sweden, the material will be directly
shipped to customers in Denmark, Finland Norway and Sweden through truck and sea based on the
location of the customers. The lead time to deliver from the warehouse to the customer is estimated to
be around one to three days depending on the location of the customers.

3.3 Cost

In terms of cost, express delivery charge in the current system will cost around addition 30FIM from
the normal delivery charge but for the new proposed system, the express delivery charge will be much
higher as of 100FIM to 150FIM per shipment. However, this cost is possibly reduced if the shipment
method is changed to low cost shipment method like sea shipment since there is very frequent
shipment from Sweden to Finland. The increase in the logistic cost is practical since the delivery
distance is longer in the new proposed system.

4. Proposed Strategy

The solutions to whether to develop a centralised warehouse in South Sweden should be based on the
analysis of characteristics of demands, products, and costs and can be classified as short-term and
long-term solutions with regard to the lengths of time.

4.1 Characteristics of Product and Demands

As you can see in Exhibit 3, Product X is likely to represent low price products in SE’s product line,
e.g., low voltage switchgears and the demand of Product X can be as high as 1050 and as low as zero,
which leads to a significant standard deviation. Generally, these low end products have plenty of
substitutes from competitors and require certain level of supply chain responsiveness. Appendix 3
shows that similar products from Schneider’s competitor, ABB.
For Product Y in Exhibit 3, it represents high end product of SE, e.g., electricity generator protector as
shown in Appendix 3. For these products, what SE provides to customers is not only the product but
also related training as example in Appendix 4, which indicates certain degree of customer loyalty and
reliance to these products.

4.2 Product Holding Cost

In Exhibit 3, the holding cost for Product Y is about 100 times greater than Product X. This indicates
that SE can reduce inventory cost effectively if the inventory level of Product Y is substantially
reduced.
Exhibit 3: Demand data for two type of products

4.3 Short Term Solution:

In the short-term, SE could establish a centralised warehouse in south Sweden and use it to store high
price products like product Y, while keeping Product X decentralised. By doing so, SE could benefit
from the reduced costs brought by centralisation of high price product without undermining its service
level of low price product.

4.3.1 Why South Sweden.

South Sweden is an ideal location for a centralised warehouse because it is at the heart of Nordic area
and is a transportation hub for this area, which would ensure a quicker delivery compared to other
prospect locations.
There are important international ports and airports in south Sweden, e.g., Stockholm airport,
Karistianstad airport, Lidkoping-Hovby airport, the port of Sodertalje. An order from Finland or other
Nordic countries can be fulfilled from a central warehouse in south Sweden by air, truck or sea as
shown in Appendix 5.
Plus, Besides, Sweden is also an important market for SE. SE has over 300 employees now in Sweden
national warehouse, which are roughly twice as many as employees in any other Nordic national
warehouse (Schneider Electric). SE could keep its decentralised national warehouses in Nordic
countries to store product X and deliver them to customers while centralising high price product, e.g.,
product Y.

4.3.2 Importance of IT Solution.

Supply chain management is becoming a challenging and complex task for many companies, due to
the trend of extending product variety, increasing outsourcing etc (Lee, 2002). In the past years,
information technology contributed to the development of supply chain management (Droste, 2007).
One benefit that IT system can provide is more flexibility and product variety (Bruun and Mefford,
2004). So, it is plausible to implement an IT system help SE manage the challenges.

4.4 Long Term Solution:

As analysed above, the potential benefits that SE can get from implementation of a centralised
warehouse in South Sweden come mainly from lower inventory costs for high price products.
According to Dankbaar (1997), alternatives to lean production have not found widespread acceptance
and even critics of lean production admitted that ‘‘lean production will be the standard manufacturing
mode of the 21st century’’ (Rinehart et al., 1997, p. 2).
So strategically, in the long-term, SE should consider to take a transition from decentralised inventory
to centralised inventory, because lean is becoming a trend for companies (Shah and Ward, 2007).
Practically, for a certain company, whether to centralise the low price products depend on the benefit
it can get and the costs it should take. Anyway, we suggest SE consider the feasibility of centralisation
of low price products and eventually all inventory in the future.

5. Conclusion

Based on analysis mentioned above, the warehouse centralized process for Schneider Electric is
inevitable. But the senior managers should also carry out centralized strategy flexible. Not only
considering the benefits from centralization, but also preventing the risk during this process. In order
to enhance the stability of operation of this company and meet demand of local customers, a
centralized warehouse should be built in South Sweden. In a short term period, the object of this
warehouse is to store and distribute those products with high price and random demands.
National warehouse will also act an important role in distributing other products with lower price and
stably demand in this period. South Sweden is a preferable location for its conveniently situation and
market. In other word, in this period of time, both centralized warehouse and national warehouse are
working in this period. When Schneider Electric accumulating enough experience to finish all
products centralization and distribution, this process will enter into the second step, in a long term
perspective, the national warehouse will be obsolete. All products including random demand and
stable demand will deliver to centralized warehouse and through centralized warehouse to customers.
It is no doubt that centralization will help Schneider Electric greatly reduce its cost and lower the
delivery lead time. But the precondition is Schneider will have enough experienced stuffs working in
centralized center and its technology system can support its business. Obviously, both of those two
requirements will need time to accumulate.
References:

Abrahamsson. M, 1992- “Timed direct distribution - Driving forces and logistical competitive
advantage with central storage of producer goods”, Doctoral Dissertation, Department of Management
and Engineering, Linkoping University, Sweden.

Advantages & Disadvantages of a Centralised Store available at

http://www.materialsmanagement.info/stores/centralized-stores-advantage.htm. Accessed on 3rd April
2014.

Ballou, H. and Srivastava, K. (2008), ‘Business Logistic/ Supply Chain Management 5 th Edition.’
Pearson.

Bruun, P. and Mefford, R. (2004). Lean production and the Internet. International Journal of
Production Economics, 89(3), pp.247--260.

Dankbaar, B., 1997. Lean production: denial, confirmation or exten- sion of sociotechnical systems
design? Human Relations 50 (3), 653–670.

Droste, A. (2007). Lean thinking, banish waste and create wealth in your corporation. Taylor &
Francis.

Kokemuller N, 2014- “The Advantages of a Centralized Warehouse”, Chron-Hearst Newspapers

available at http://work.chron.com/advantages-centralized-warehouse-16128.html. Accessed 5th April
2014.

Lee, H. (2002). Aligning Supply Chain Strategies with Product Uncertainties. California management
review, 44(3).

M. Lee, 2014- “Centralising and Decentralising Warehouse Operations”, for Royale International
Couriers available at http://opentoexport.com/article/centralising-and-de-centralising-warehouse-
operations/. Accessed 12th April 2014.

Rangavittal. G & Sohn T.H, 2008- “The Impact & Dynamics of Centralization in Supply Chain
Decision-Making”, MIT Engineering Systems Division, pp.1-89.

Rinehart, J., Huxley, C., Robertson, D., 1997. Just Another Car Factory? Cornell University Press,
Ithaca, NY.

Shah, R. and Ward, P. (2007). Defining and developing measures of lean production. Journal of
operations management, 25(4), pp.785--805.

Schneider Electric (2014) Schneider Electric Europe. Available at:

http://specifique.org/?port=schneider-electric-europe (Accessed 2 April 2014)
 Appendix 1: Current Schneider Electric Logistics Network System.

Appendix 2: New Centralized Warehouse System Proposed by Management

Appendix 3: Low Voltage Switchgears of Schneider Electric

Low Voltage Switchgears of ABB

Appendix 4: Customer Training Courses Provided by Schneider Electric
Appendix 5: Important Airports in South Sweden