Innovation Footprints

What if . . . ?

Supply Chain Management

#MarketVoices | Introducing My Weekly Column at FreightWaves

by

Brian + His Pencils

According to the International Monetary Fund, the world’s economy is worth $88 Trillion as of 2019. The Conference Board estimates that the global economy will grow at an annual rate of about 3% between 2019 and 2023, and at about 2.8% between 2024 and 2028. None of this is possible without supply chains; The networks of interdependent organizations that cooperate and collaborate with one another to move goods and information between producers and consumers. In the past this mission-critical activity was relegated to the unsexy confines of the business world – back office operations. That attitude is changing and it is changing fast.

The changes taking place in attitudes about supply chains are due to a combination of factors;

  1. Changes in consumption patterns driven by economic growth in China, India, Brazil, Russia and other markets outside North America and Western Europe.
  2. Changes in the buying behavior and consumption patterns of individuals and businesses around the world, accompanied by increasing awareness about how the production and consumption patterns of the past may be affecting climate change and the future of our planet.
  3. The inexorable forward march of technology, as it evolves to solve the problems that have arisen due to the preceding two factors; Connected devices, artificial intelligence, autonomous vehicles, predictive data and analytics, 3D printing, blockchain, advanced manufacturing, and advanced materials. These technologies, and others, have finally matured to the point where they are being tested in the world’s supply chains – to solve problems that could not be solved in the past, to eke out efficiencies, and in some cases to completely overturn how things have been done in the past.
  4. The politics of tradewars, tariffs, and geo-political groupings and alliances brings the interconnected, interdependent, and fragile nature of today’s global supply chains into stark relief for even the most uninformed citizen.

These concerns are not some theoretical or imaginary distraction; Supply chain is the basis on which corporations win or lose competitive advantage. In the space of a few decades Amazon has become one of the world’s most valuable companies at the expense of Walmart, Toys R US, Barnes & Noble, and other retailers, largely on its superior supply chain management,  and its expertise in technology. In its heyday, the same was said about Walmart. There are many more examples

Well functioning supply chains are also positively correlated with economic development: Regions of the world with well developed infrastructure and supply chains tend to experience superior economic growth in comparison to parts of the world with poorly functioning infrastructure and supply chains.

My column will study, analyze, and highlight the innovations that are being brought to market to solve problems in supply chain management, supply chain logistics, and supply chain finance, with a particular focus on how they are inextricably interdependent on one another. I will examine this topic across industries, and across regions of the world. Where possible we will look to data to help inform the discussion. Often we will highlight the specific individuals and organizations doing interesting work tying supply chain, innovation, and technology together in ways that create value for businesses, for individuals, for countries, and for the world; A 1% efficiency improvement in global supply chains represents aggregate value-creation of roughly $880 Billion.


The column will appear on FreightWaves once a week. If you have ideas you want to see me cover in future articles, send them to me via Twitter @brianlaungaoaeh or via LinkedIn. I believe that the best ideas come from the most unexpected places, so I want to hear from FreightWaves’ readers and anyone else who is obsessively enthusiastic about supply chains, innovation, and technology.

NRF Big Show 2019 – My EXPO Hall Tour Notes

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My Supply Chain Credo

Disclaimer: This blog post reflects my personal opinions only. It does not represent the opinions of REFASHIOND Ventures, or REFASHIOND CO:LAB. It does not represent the opinions of The New York Supply Chain Meetup, or The Worldwide Supply Chain Federation. It does not reflect the opinions of any other person who is associated with any of those entities. This blog post does not represent the opinion of any other individual or organization that is mentioned by the author. I do not have any business or commercial relationship with organizations mentioned in this article, however CIM Tours paid The New York Supply Chain Meetup a stipend for my services as a tour guide during NRF’s Big Show 2019.

Background

During the fall of 2018, my co-founder, Lisa Morales-Hellebo and I met Daniel Hodges for coffee in NYC. We discussed what we were working on, and he told us about his company, Consumers in Motion Tours (CIM Tours). Paraphrasing the description from Dan’s LinkedIn profile; CIM Tours creates experiences that transform business. They guide CEOs, BODs and CMOs through technological, and consumer behavioral changes and the resulting disruption by exposing them to innovative ideas and technologies being used by startups and other cutting-edge companies. They utilize major conferences and workshops to accomplish this task. When he asked us if we’d be interested in leading the tours for the National Retail Federation’s 2019 Big Show Conference, we immediately said yes – after all, supply chain is our thing.

What is the National Retail Federation (NRF), you ask? It is a retail-industry trade organization that has existed for more than a hundred years. According to its website, the retail industry contributes $2.6 trillion to the United States’ gross domestic product – far outstripping any other industry. As an industry, retail is the largest private sector employer in the United States. The Big Show is the NRF’s annual flagship conference – the world’s largest retail conference and expo. This year it attracted 38,000 attendees, 16,000 retailers, and 800 exhibitors, representing 99 countries.

CIM helps delegates and attendees at conferences like NRF’s Big Show, the Consumer Electronics Show (CES), Cannes Lions, C2 Montreal, and the IoT Solutions World Congress, etc., navigate and explore the technologies and trends at the forefront of change today.

You can understand why Lisa and I were excited about this. Below are the notes I prepared for Lisa and I as we were getting ready to lead the tours. We led 3 tours, each 2 hours in duration, on each day from January 13 to January 15.

can you tell Lisa and I had just failed to find acceptably strong coffee to help us get through the first day of tours? The lines at Starbucks in the Javitz Center were too long, and we ran out of time.

Note: These notes are prepared directly from materials the participating companies provided us directly, or that I found on their websites. Any direct similarities between my notes and descriptions and other materials on their respective websites is deliberate.

ACCUSTORE

AccuStore is a store-intelligence software platform that helps retailers maintain and update store data in real-time. It helps retailers base decisions on a single-source of data to help execute store-specific initiatives.

Here are two examples of how AccuStore helps retailers.

Walgreens is one of the largest pharmacy chains in the United States. Walgreens implemented AccuStore to help them with marketing cost savings. With over 8,000 stores, they were throwing away money on marketing overages by sending the same generic sign kits to every store. Since each store had unique requirements, such as the number of windows or the number of fixtures, these sign kits were not only confusing for employees to install, but stores ended up throwing away up to half of what was being sent to them.

By using AccuStore’s store-specific profile data, store distributions are created for each individual store. So, each store receives only the signs that are appropriate for that location. Plus, marketing can now tailor POP by store to eliminate waste. Walgreens has saved over half a million dollars this year alone!

Another example of how retailers are using AccuStore is with the company, Crocs.

Crocs is a footwear brand. Crocs has saved tens of thousands of dollars during a single campaign because of accurate sign types and quantities. They needed to right-size their inventory so AccuStore developed a plan to gather and maintain their store profile data so they could send stores exactly what each store needed. Now, the information is available 24/7 via AccuStore’s cloud-based mobile platform. Plus, AccuStore helps Crocs gather store-specific information for inventory planning and store walks.

RELEX SOLUTIONS

RELEX Solutions helps retail businesses improve their competitiveness through localized assortments, profitable use of retail space, accurate forecasting and replenishment, and optimized workforce planning.

Here are two examples of how RELEX Solutions helps their customers.

Musti Group is the leading pet supplies and accessories retailer in the Nordics, with 264 stores in Finland, Norway, and Sweden. They needed supply chain integration between the company’s 5 distribution centers and 264 stores as managing changes and disruption in their supply chain was becoming a significant headache.

With an implementation period of a few months in 2015, RELEX Solutions; Optimized the flow of goods, for example, with deliveries scheduled for quieter days. Simplified Musti’s supply chain management – the complex supply chain is now managed by a single super-user – reducing the chaos that previously reigned when many managers at individual stores were involved. Improved campaigns the company runs by ensuring that there is adequate availability of promoted products. Inventory control now happens on a bottom-up basis using store-level data and optimizing transportation requirements.

Saarionen is a leading Finnish convenience foods manufacturer, with operations in Estonia as well. They needed demand planning software that is comprehensive, flexible, and transparent. They also wanted to introduce automation, so that planners could focus on exception management.

With an implementation period of 4 months in 2016, RELEX Solutions; Installed a system with error margins of less than 5% in weekly and monthly baseline forecasts for some standard high volume products. Improved efficacy for forecasting exceptions by incorporating the human expertise of the demand planners. Strengthened Saarionen’s position in its market.

Other Notes: Relex Solutions just raised a $200M growth equity round from Technology Crossover Ventures.

BOARD INTERNATIONAL

BOARD is a software platform for unified business intelligence, performance management, and predictive analytics.

Here is one example of how BOARD International helps its customers.

Coca-Cola European Partners is the world’s largest independent Coca-Cola bottler. It is the market leader in one of the biggest fast-moving consumer goods markets, worth over 100 billion euros. The business serves over 300 million consumers in 13 European countries.

Coca-Cola European Partners needed a supply chain finance solution to deploy across 48 manufacturing plants, 85 warehousing locations, cold drinks operations sites, and across its supply chain logistics organization. The company also needed the solution to be used by divisional CFO, heads of supply chain management, controllers, and department and plant managers. The company wanted to achieve: leaner financial operations, automated planning, and optimized reporting – underpinning a new way of doing planning based on comprehensive communication across the company.

Using BOARD, Coca-Cola European Partners has; Increased the efficiency of its finance activities with 10 percent manual inputs based on country specific data, and 90 percent pre-populated data. Reduced data transfer times from 24 hours to 15 minutes. Implemented a live status tracker based on BOARD’s automation capabilities. Implemented consolidation with one click, simplifying the process of performing full country consolidation for all of Coca-Cola European Partners’ operations. Implemented data transparency by effectively enabling automation and standardization. Increased ease communication around supply chain management and planning across the company.

Other Notes: I had the most fun with the team from Board International. We kept cracking jokes with one another, and it always seemed like we were old friends meeting after a long time apart. They also had an espresso station on the second day. The name “board” is supposed to evoke the flexibility that comes with working with a whiteboard to design a robust supply chain management solution for each customer – with no need to write a single line of code.

ANAPLAN

Anaplan is a software platform for enterprise-wide planning needs. The software enables financial planning, budgeting and analysis, demand and supply chain planning, sales compensation and territory management by connecting data, people, and plans.

Here is one example of how Anaplan helps its customers.

Sonos is a consumer electronics company with a complex supply chain enabling sales in 60 countries, and relying on more than 200 suppliers. Before Anaplan, Sonos was managing its sales, component sourcing, and supply chain through countless spreadsheets. As you can imagine, planning and forecasting was slow and prone to mistakes.

Sonos is now using the Anaplan platform to build end-to-end supply chain visibility and connect plans across resources, spend, and product lines.

The Sonos team started their implementation with supply and demand balancing. Then, they added a supply planning module, which enables a granular view of products at the factory level. Lastly, they incorporated demand planning to add forecasting into the mix.

Anaplan has helped Sonos:

  • Reduce tedious and mistake laden manual data entry and increase value-added work
  • Cut down the amount of time integrating spreadsheets from 70% to 10% of analysts’ time
  • The Global Planning Team can now execute a change in demand in one day, when this activity used to take 2 weeks.

Other Notes: Imagine what a surprise it was to see Vivek Soneja, a member of The New York Supply Chain Meetup at the Anaplan booth! We have grown so quickly that it’s hard to get to know everyone – especially since I am usually running around trying to make sure that our events go on without a major hitch . . . So it was cool to see one of our members in action outside the context of one of our meetups. Lisa and I must have beamed with pride when he turned around and told everyone within earshot about how great The New York Supply Chain’s events are. In his words; “You have to check it out. They are doing an amazing job.”

Booth 1304: Anaplan at #NRFBigShow2019

MANHATTAN ASSOCIATES

Manhattan Associates designs and builds supply chain software that connects front-end customer facing solutions with back-end operations and execution.

Here is one example of how Manhattan Associates helps its customers.

Adidas Group is the second largest sportswear manufacturer in the world. Adidas sought to improve its supply chain systems across all its brands, with a global implementation.

Manhattan Associates’ Distribution Management software has been implemented at 3 strategic sites in the United States, Europe, and Asia.

This has led to; A standardized distribution systems model for Adidas, enhanced supply chain control and visibility, and improved inventory accuracy.

Other Notes: They refused to let me have a cup of coffee during the first tour, on the first day. I’ll leave it at that. I had just spent a few minutes talking up their company to the delegates on the tour, and they wouldn’t even let me have a fucking cup of coffee!?

DSI

DSI delivers mobile supply chain technology solutions focused on helping companies advance their business to meet the accelerated demands of the digital economy.

Here is one example of how DSI helps its customers.

Rally House is a national sports apparel and gift store. It specializes in immersing its customers in hometown pride by stocking products unique to each local areas professional and college teams. To do this, the company needs an efficient inventory management system, moving away from centralized planning and distribution and more towards in-store fulfillment. This became more of an issue as the company expanded to 61 stores, in 9 states, with products for hundreds of different teams, represented by thousands of SKUs.

Rally House was  already using DSI’s warehouse inventory management software, and so by implementing in-store logistics, the company transformed its stores from showrooms into warehouses.

DSI enabled Rally House to eliminate their central distribution center within a few months and move all shipments direct to store from their vendors using their existing apps. This change eliminated weeks of costly lag time associated with the movement of warehouse shipments and expanded available inventory to customers.

Rally House’s distribution processes have been simplified significantly on every level. As demand ebbs and flows for products or for specific team merchandise, stores can stock accordingly and have inventory on the floor in days instead of weeks. Individual stores can now respond faster to time sensitive and regional events—such as World Series Championships—by moving product direct to their stores.

Other Notes: DSI was the most mobile-focused of the companies on the tour. I’d even perhaps go as far as describing them as mobile-first and mobile-only – obviously an exaggeration, but you get the point.

ENVISTA CORP

enVista is a global consulting and software solutions firm that helps its customers to optimize supply chain efficiencies to drive cost savings, and unify commerce to drive customer engagement and revenue.

Here is one example of how enVista helps its customers.

Saddle Creek Logistics Services is a privately held, asset-based 3rd-party logistics provider. It provides omnichannel fulfillment, warehousing, and transportation services. It operates 19 million square feet of space, across 45 locations with 3,300+ employees.

Saddle Creek wanted an order management system as it grew. Because of the nature of its business it was important for such a system to work for various types of clients . . . from those who ship hundreds of orders per month, to those who ship millions of orders per month. It also had to integrate with a variety of supply chain software solutions used by Saddle Creek’s clients and suppliers.

enVista provided an out-of-the-box multi-tenant order management system. Saddle Creek’s developers work closely with enVista to enhance the product for Saddle Creek as well as Saddle Creek’s clients. The enhancements include automated order processing and exception handling.

Saddle Creek now has:

  • Full visibility to all clients using the order management system in a single snapshot.
  • The system is seamlessly connected to 14 different systems between Saddle Creek and its customers, with as many as 80 different integration points.
  • Greatly reduced manual order processing for Saddle Creek’s customers and clients.

Other Notes: During one of the tours – I do not recall which, we were lucky enough to catch Jim Barnes, CEO of enVista at the booth. Watching him engage with the delegates on the tour reminded me why it’s so important for early stage startup founders to be able to sell and engage with customers. His intensity level and mastery of the issues the delegates were curious about was without comparison throughout the tours we gave during the event. You could tell that in affected the delegates, they paid rapt attention. For example, he went fairly deep into the philosophical underpinning of enVista’s approach to unified commerce in a way no one did during the remainder of the event.

Booth 4249: enVista Corp. at #NRFBigShow2019, Jim Barnes – facing me, speaking with the delegates on the tour.

MAGSTAR

Magstar provides enterprise resource planning solutions with integrated POS and CRM software for retail supply chains. The company provides Enterprise Resource Planning, Point-of-Sale, Customer Relationship Management, Warehouse Management, Business Intelligence and Analytics, and Mobile Solutions specifically designed for the SMB market. It promises the same functionality and support provided by the big vendors, without the cost. For example, they said each customer is assigned to a specific customer support employee at Magstar for the duration of that customer’s relationship with Magstar.

Here is one example of how Magstar helps its customers.

Fields Canada is a mid-sized retailer with 62 locations and a warehouse. The company needed to reduce inventory cycle time, and gain full control over in-store inventory.

Using Magstar’s Total Warehouse, Fields was able to:

  • Gain real-time visibility into inventory.
  • Reduce time to store by 14+ days.
  • Reduce cycle time by 70%.
  • Implement a paperless warehouse – no more missing pallets.
  • Simplify ship-to-store processes
  • Implement instant purchase order creation.
  • View inventory trends across peak seasons.
I do not always attend conferences, but when I do it is most likely a supply chain conference where I’ll be trying to learn about supply chain, technology, innovation, and startups.

WHAT DID I GET OUT OF DOING THIS?

I always find it fascinating to understand how customers describe the problem that they want technology to solve. Many times technologists and entrepreneurs think they are solving one problem, when customers think about the problem from a completely different perspective. The number one cause of failure among startups is the failure to find product-market-fit, which is an indication that the startup has solved a problem that customers are unwilling to pay for. Activities like this help me gain a better understanding of how customers see their world and the role that technology can play in helping them achieve their goals. One may say that on the rare occasion when I attend a conference it is to enable me do market research. I met executives from all over the world, and got to see the various perspectives from which they were thinking about deploying technology where they live and do business.

About The Worldwide Supply Chain Federation

The Worldwide Supply Chain Federation is the collaborative, and mutually supportive coalition of open and multidisciplinary grassroots communities focused on technology and innovation in the global supply chain industry. Founded in August, 2017, The New York Supply Chain Meetup is its founding chapter. Local chapters are run by volunteer organizers who each build a team to manage chapter activities and events. You can learn more here: The Worldwide Supply Chain Federation – Our Manifesto.

About REFASHIOND Ventures

REFASHIOND Ventures is an emerging early stage venture capital firm that is being built to invest in early-stage startups creating innovations to reinvent global supply chain networks. REFASHIOND Ventures is based in New York City. The Worldwide Supply Chain Federation and The New York Supply Chain Meetup are initiatives of REFASHIOND Ventures.

Update #01, at 23:54 EST on Sat Feb 16, 2019: Removed ghost bullets by changing from bullets to paragraphs for Board, and Manhattan Associates. Added whiteboard analogy for Board International.

#ChainReaction: Notes on Centralized, Decentralized, and Distributed Systems

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Brian + His Pencils

This blog post is the first in a series of blog posts I will write as part of my effort to take an inventory of what I am learning about supply chains, digital tokens, and distributed ledger technologies.

I expect these blog posts to be frustrating for most people to read because I suspect they will come-across as disorganized, and confused. That is a reflection of the complexity of the topics I am trying to learn.

If you feel I have got something completely wrong, please do not hesitate to let me know. As Marcus Aurelius puts it;

If anyone can refute me—show me I’m making a mistake or looking at things from the wrong perspective—I’ll gladly change. It’s the truth I’m after, and the truth never harmed anyone.

First, some context; I am a seed-stage VC who has been studying supply chain for sometime. I believe that the greatest technological shifts of the next 3 or 4 decades will happen at the intersection of supply chain, industrial processes, data and analytical decision-making. I believe this shift will transform the way global supply chains function in many different industries.

If you follow technology and business news then you know what some of the trends are that will lead to the kind of shifts I believe we are about to witness. They are; increasing efficiencies in industrial automation, exponentially faster, more powerful, and cheaper computing technology, the proliferation of electronic sensors capable of capturing large amounts of data in almost any industrial or non-industrial setting one can imagine, software that is capable of analysing huge troves of data in order to aid people in making decisions about complex processes and systems, and ubiquitous computing. The list goes on. A more recent addition to any list of ground-breaking technological developments is Bitcoin and its related technologies, including the Bitcoin blockchain, as well as other cryptocurrencies and their accompanying blockchains or distributed ledger technologies.

There is currently a lot of ongoing enthusiasm, and perhaps, even hype, about Bitcoin, the Bitcoin blockchain, other cryptocurrencies or digital tokens, and their accompanying blockchains or distributed ledger technologies. Mainly, the excitement is around the belief that this group of technologies has the potential to “disrupt” any number of existing business or social structures. Personally, I agree with the following statement by Marco Iansiti and Karim R. Lakhani;

True blockchain-led transformation of business and government, we believe, is still many years away. That’s because blockchain is not a “disruptive” technology, which can attack a traditional business model with a lower-cost solution and overtake incumbent firms quickly. Blockchain is a foundational technology: It has the potential to create new foundations for our economic and social systems. But while the impact will be enormous, it will take decades for blockchain to seep into our economic and social infrastructure. The process of adoption will be gradual and steady, not sudden, as waves of technological and institutional change gain momentum. ((Iansiti, Marco, and Karim R. Lakhani. “The Truth About Blockchain.” Harvard Business Review. February 17, 2017. Accessed February 04, 2018. https://hbr.org/2017/01/the-truth-about-blockchain.))

If you agree with the preceding statement, then you should also agree that, perhaps, before one dives into the intricacies of digital tokens and distributed ledger technologies it is useful to study centralized and decentralized systems in a broad, general sense. Therefore, though I will ultimately migrate to discussing centralized systems, decentralized systems, and distributed systems in relation to information technology systems, at the outset I am thinking more broadly in terms of social structures that exist in economic, political, and cultural organizations.

At the end of this process, I hope to have developed a good frame of reference for understanding why and how digital tokens and distributed ledger technologies will combine with other prevailing advancements in technology to cause the transformation in global supply chains that I believe is upon us. I hope this helps me see what is coming next – in a manner of speaking, and that the knowledge I will develop in the process helps me make better investment decisions.

If you have read any articles that discuss Bitcoin and its accompanying technologies, then you will recognize the recurring themes of centralization versus decentralization. So perhaps the place to start is in understanding when centralized structures should be desired and maintained versus when decentralized structures should be desired and maintained.

The following discussion is motivated by, and borrows heavily from, “Centralization and Decentralization: The Compunications Connection” by Stephen H. Lawrence. ((Lawrence, Stephen H. “Centralization and Decentralization: The Compunications Connection.” Accessed February 4, 2018. http://www.pirp.harvard.edu/pubs_pdf/lawrenc/lawrenc-i83-2.pdf. I am basically paraphrasing pages 6 – 26.)) In that paper there’s a quote from “The Computerization of Society”, a report prepared for the French Government by Simon Nora and Alain Minc;

It allows the decentralization or even the autonomy of basic units. Better still, it facilitates this decentralization by providing peripheral or isolated units with data from which heretofore only huge, centralized entities could benefit. Its task is to simplify administrative structures by increasing their effectiveness and improving their relations with those under their jurisdiction. It also allows the local municipalities more freedom. It reinforces the competitiveness of the small and mid- size business vis-a-vis the large enterprises.

Centralized Systems

A centralized system is a system in which a master-node makes decisions or performs systemwide functions on behalf of all the other nodes within the system – subordinate-nodes. Subordinate-nodes only follow instructions issued by the master-node. It should be obvious that centralized systems depend on a reciprocal relationship of trust between the master-node and every subordinate-node. Centralized systems are also described as command-and-control systems.

Advantages of Centralized Systems

  1. Returns to Scale: Centralized systems generally benefit from increasing returns to scale, meaning that the system generates outputs at a rate that is proportionately greater than the rate at which it consumes inputs. More specifically, the value of a centralized system’s outputs should be proportionately more than the value of the inputs consumed by the system. This happens because resource-intensive decisions and functions can be performed by the master-node only, without burdening the entire system with performing those same functions. As a result, as the system grows, the per-capita system costs can decrease substantially. Increasing returns to scale are generally closely associated with increasing efficiency.
  2. Optimization: It is easier to optimize the outputs of a centralized system given a set of inputs because the effort that goes into optimizing the system’s output need only be expended by the master-node and not by every node within the system. As a result, in a centralized system optimization contributes to the system’s overall efficiency.
  3. Standardization or Uniformity: The hierarchical structure of centralized systems makes it easier to maintain standardization or uniformity within the system. Such standards are determined at the level of the master-node, and then they are implemented and enforced at each subordinate node according to rules established and maintained by the master-node. Standardization and uniformity ensures that the entire system operates as one unit, rather than as a collection of disparate, non-uniform, non-standardized entities. In certain instances, standardization and uniformity may be especially useful qualities if the system is to serve its intended purpose.
  4. Criticality or Importance: A centralized system is preferred when there is a disproportionately high cost associated with the commission of errors or mistakes at the level of a subordinate node. In other words, centralized systems are prefered when the weight of responsibility for avoiding mistakes is high, and the costs of this responsibility are borne by the master-node.
  5. Coordination & Interdependence: Centralized systems perform better when one must account for economic externalities. An economic externality is a positive or negative consequence that is borne by an entity which did not participate in taking the actions that led to that outcome. In other words, it is easier for the master-node in a centralized system to also account for systemwide externalities before choosing an action that is implemented by all the subordinate-nodes in the system.

Disadvantages of Centralized Systems

  1. Information Overload: Centralized systems can experience breakdowns in systemwide performance if the master-node experiences an information overload.
  2. Compulsion: Centralized systems are associated with bureaucracy and lack of freedom – from the perspective of subordinate-nodes. For example, centralized systems do not freely admit new nodes to the system unless such nodes are first approved by the master-node.
  3. Lack of Flexibility: Centralized systems are characterized by an inability to respond with agility and flexibility in the face of changing conditions. This can make centralized systems more fragile in the face of threats to the entire system.

Decentralized Systems

By contrast, a decentralized system is one in which there is no single master-node issuing systemwide instructions that subordinate-nodes must follow. Rather, in a decentralized system every node is responsible for its own decision-making and, is capable of taking whatever actions its independent decisions require it to take relative to agreed systemwide goals. It should be obvious that the trust-relationship in a decentralized system differs from that in a centralized system in an important way.

A decentralized system is one which requires multiple parties to make their own independent decisions.

– Rohit Khare

Advantages of Decentralized Systems

  1. Impartial Standards: Decentralized systems are better suited when the emphasis is on effectiveness rather than efficiency. As a result decentralized systems tend to exhibit standards that stress the results that each node in the system produces and how those results contribute to overall system wide goals rather than how each node accomplishes the desired results.
  2. Initiative/Innovation: Since each node in a decentralized system is free to independently experiment with an eye towards maximizing system wide outputs, there tends to be a higher degree of innovation within decentralized systems. Once a superior method of accomplishing systemwide goals has been identified by one node within the system, other nodes will quickly copy that method if it increases their wellbeing. All else equal, this will lead to a higher level of system wide output.
  3. Responsiveness: In decentralized systems, individual nodes are more responsive to local conditions. This is because each node in the system is free to determine local priorities on an ad-hoc basis given information available to that node even if this information is not available to other nodes within the system. It is not difficult to see how this quality of decentralized systems contrasts with the standardization/uniformity quality that is present within centralized systems.
  4. Simplified Decision-making: Decentralized systems exhibit a simplified decision-making relative to centralized systems. This is because for a given situation, decisions can be made by only the relevant subset of nodes within the system while  non-relevant nodes conserve system resources. In such a situation, simplified and localized decision-making is an advantage of non-relevant nodes are not adversely affected by the decisions that have been made, and the resulting actions that have been taken, by relevant nodes.
  5. Minimize Information Resource Requirements: A decentralized system could be designed such that each node only processes information relevant for its role within the system. This way, systemwide resource requirements can be minimized since each node conserves resources by focusing only on information and activities relevant to its specific functions and does not concern itself with matters outside that sphere of relevance.

Disadvantages of Decentralized Systems

  1. Duplication of Effort: Decentralized systems can be designed such that each node within the system attempts to solve similar problems as other nodes in the same system – leading to duplicated effort. It is easy to see how this can lead to more waste than one would observe in a similar, but centralized system.
  2. Suboptimization: In decentralized systems, a single node or a subgroup of nodes, might decide to pursue activities that increase their own well being at the expense of the well being of the entire system. Trade-offs have to be made within a decentralised system to ensure that suboptimization is minimized by keeping incentives between all the nodes within the system aligned with one other, and with the entire system as a whole.
  3. Less Amenable to Standardized Change: Since each node is responsible for making its own decisions and taking actions independent of a master node, standardization takes a much longer time to diffuse through, and become adopted by the nodes within a decentralized system. As a result decentralized systems characterised by a lack of uniformity, whereas centralized systems are characterized by systemwide uniformity.

In a quest to find examples of decentralization in action within organizations that I am somewhat familiar with, I went looking for a book that discusses the topic. I found that in The Starfish And The Spider: The Unstoppable Power of Leaderless Organizations, a book by Ori Brafman and Rod A. Beckstrom, where they  introduce us to the major principles of decentralization; ((Brafman, Ori, and Rod A. Beckstrom. The starfish and the spider: the unstoppable power of leaderless organizations. Portfolio, 2006.))

  • When attacked, a decentralized organization tends to become even more open and decentralized.
  • It is easy to mistake a decentralized organization for a centralized organization because we are far more accustomed to centralized organizations. It is also easy to vastly underestimate the power of decentralized organizations.
  • A decentralized system does not have central intelligence; the intelligence is spread throughout the system. As a result the best information and knowledge is located at the edges of the organization, close to where things are actually happening.
  • Decentralized, open systems can easily mutate.
  • Decentralized organizations can seemingly appear out of nowhere because they can mutate so quickly, and because they are easily overlooked at the outset.
  • As decentralization takes hold within an industry, overall profits decrease.
  • The power of decentralization comes from the phenomenon that when people are put into a decentralized system they automatically want to contribute, and their contributions are usually remarkably of a high quality relative to what one might find in a centralized system.

So far I have not said much about distributed systems. Think of a distributed system as a hybrid between a fully centralized system and a fully decentralized system. Businesses that blend the best of both types of organizational architecture in their business model are not that uncommon, and when they do so successfully the results can be overwhelmingly successful . . . But, we can discuss that another time.

In my next post, I will more directly delve into cryptocurrencies and distributed ledger technologies. Till then, you may delve further into this topic by reading Chris Dixon’s “Why Decentralization Matters“.