In this study an attempt has been made to solve a problematic phenomenon regarding how a decentralised environment mediates the effect on supply chain performance (SCP) -by taking various dimensions of knowledge management (KM) -specifically in the dairy sector of Lahore, Pakistan. This study also explores the relationship between KM practices and SCP in the presence of a general system theory; the theory claims that every system is has sub-parts, and every sub-part is surrounded by other sub-parts. Decentralisation has a mediating role which influences the relationship between KM practices and SCP in the dairy sector of Pakistan. A self-administered questionnaire was developed, and data were collected through a random sampling of 355 supply chain members of different dairy organisations in central Punjab. The data was analysed by AMOS software and through structure equation modelling (SEM). The underlying study reveals that the hypothesis is accepted, that decentralisation mediates the relationship between KM practices and SCP at a 1% level of significance; it also reveals that KM practices (with the exceptions of knowledge creation and knowledge sharing) have a direct relationship with SCP. Meanwhile, statistical analysis also indicates that KM practices (with the exception of knowledge creation) have a significant positive relationship with decentralisation at the 1% significance level.