Striking a Balance: Centralized vs. Decentralized Procurement

By Guest Editor

January 03, 2018 at 8:08 AM

balancing beam.jpgThe structure of a Procurement Department within an organization can dramatically impact the effectiveness of the sourcing and purchasing activities.  Over the years, more companies have made the transition to a centralized structure, bringing all purchasing activities under one cohesively managed unit.  While there is great upside to a centralized model in terms of consistency and overall leverage, decentralized departments in which purchasing is segmented amongst sites or business units also brings some value and benefit to an organization.  The key to optimizing purchasing comes from leveraging the benefits of both, and striking a balance between centralized and decentralized procurement models.

It is imperative to recognize the strengths that each model brings to an organization’s procurement practice.  A centralized procurement department has many; first, it drives standardization across the entire company.  For example, all purchasing activities follow a uniform process adapted to each category, best practices are easily communicated amongst leadership and it increases the likelihood that pricing received is competitive in the market and suppliers are being managed effectively.  Furthermore, a centralized structure also ensures spend is fully leveraged across an organization, creating more purchasing power in categories that transcend business units or sites.  All of these positive aspects should be used to an organization’s advantage, and require a centralized hub of knowledge and policy; this is where Centralized procurement shines, however it is not without some downside.

A true centralized procurement department does come with some disadvantages, such as, losing sight of local markets, and not taking advantage of regional or local supply bases in categories that do not make sense as a national account.  A common example of such a category is landscaping or snow removal, which is often most cost effective when sourced locally.  A second disadvantage is an increase of maverick spend amongst business units or sites who do not feel that their needs are being considered under the centralized strategy. This can lead to purchasing outside of approved suppliers, and hostility between the centralized team and site managers ultimately leading to savings leak.

Fortunately, it does not have to be a choice of centralized vs. decentralized.  Striking a balance between the two and developing a center-leaning, or center-led procurement department allows organizations to take advantage of the benefits of both, with little downside.  A center-led procurement structure centralizes the strategic aspect of procurement and sourcing, while leaving the tactical purchases to the individual business units.  At the core of a center-led model is a Procurement Center of Excellence (COE).  This is a team of strategic policy makers, project managers, and sourcing professionals who develop the framework for procurement activities.  This team identifies the strategic categories that would benefit from a centralized approach leveraging the entire spend of the organization.

The centralized team is also responsible for developing process around the non-strategic categories that are best left to the localized markets and subject matter experts within each individual business unit.  This allows for tactical buys to be executed without requiring frequent intervention from the centralized team, giving business unit’s freedom to take advantage of local markets or tax breaks.  This lowers the risk of disagreement between site procurement and the centralized team, and increases trust and collaboration on strategic categories with the greatest opportunity.

Making the decision to move to a center-led model begins with identifying if there is a need for both tactical and strategic category plans.  Taking a holistic view of spend across categories and business units and locating opportunity for consolidation or localized purchasing will give a high level snapshot of proper purchasing alignment.  The most important aspect is building the centralized foundation that is the Center of Excellence, and creating sound policy and procedures that align with the overall strategic goals of the organization.  Just as categories should be managed strategically, the overall department should be looked at from a continuous improvement point of view.  Part of being strategic is recognizing when simple tactical purchasing is the most effective use of resources in a particular strategy and aligning the organization structure to support the needs of the business units and organization as a whole.

About the Author:

Engel.pngJennifer Engel is a Senior Analyst at Source One Management Services, responsible for executing strategic sourcing and procurement transformation initiatives that enable supply management optimization for Source One’s Fortune 1000 clients. Working directly with clients and their respective suppliers, Engel supports all stages of the transformation process, from data collection and gap analysis to supporting go-to-market and implementation activities. 



Tags: centralized procurement decentralized procurement procurement department procurement organization
Category: News Article

Guest Editor

user_avatar


Please add a comment

You must be logged in to leave a reply. Login »


Related Content

Lean, Lean Six Sigma and Kaizen Success = People and Leadership First, Not the Process and Tools!

Tom DePaoli

Many organizations make huge investments in disciplined approaches to problem solving like Lean, Lean Six Sigma and Kaizens, which are labeled as “continuous improvement”. Read More

Creating a Roadmap for a Sustainable Procurement Future with ISO 20400

Suchismita Dhal

The International Organization for Standardization has recently released ISO 20400, a standard for sustainable procurement. It provides guidelines that can lead to improved Read More

An MRO Wish List for the New Year

George E. Krauter

Looking back at the year that has just flown by, procurement managers have much to be proud of…and some challenges to be frustrated about. One area of concern is MRO. On average Read More


Supplier Profiles

Staples

Staples Advantage is the one supplier that offers all the business solutions you need, all with the expertise of a specialty vendor. Read More

Digi-Key

It started in 1972 with an idea, a new concept in distribution. Today, Digi-Key Corporation is one of the fastest-growing electronic component distributors in the World. The stimulus for this growth is Digi-Key's customer-centered business philosophy… Read More

Lunney Advisory Group

Lunney Advisory Group was founded in 2007. Our firm is not your typical consulting company. Some members of our firm are highly qualified and experienced industry executives/practitioners while others are full time or adjunct university professors.… Read More


Webcasts

What CEOs Expect Of Purchasing

Guest Contributor

Procurement and supply management leaders have a seat at the table, and management’s expectations are high. But what do CEOs really want, and is purchasing delivering on these expectations? This webcast looks at how procurement and supply management … Read More

Growing Purchasing Influence On Indirect Spending

Guest Contributor

At world-class companies, purchasing’s influence touches just about every area of spending. But, how exactly do procurement teams get to the point where other departments approach them for help with sourcing such indirect categories as human resource… Read More

Procurement-Finance Collaboration

Guest Contributor

Procurement & finance are two business functions which are often at loggerheads with each other. One reason for this is the lack of perception alignment on an important metric of procurement and finance performance - 'savings'. Read More