By Guest Editor
The 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:
Jennifer 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.
George E. Krauter
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