The big debate between centralized vs. decentralized procurement seems to be heating up without one side edging the other in the discussion. As Procurement keeps gaining relevance within organizations and increases its stature as a strategic operation, organizations have been trying to decide the right fit Procurement model to adopt for achieving sustainable value.
Here’s where the debate stands; on one side we have the argument on Centralization, which focuses on keeping procurement under a single location where all supply management decisions are made, almost emulating a shared services function. The arguments pro-centralization focus on strategic alignment and standardization, in which procurement sets goals and targets based on the company’s growth enablement or cost cutting strategies, and governs the deployment of the corresponding initiatives from top-down that typically represent embracing a sweeping approach across departments. What favors this approach is that it supports standardized purchasing patterns and consolidates volumes wherever possible, it also increases controls and facilitates reporting that can easily tie to cost cutting metrics across the organization. The problem with a fully centralized approach is that it’s harder to adopt than one might think, particularly because it does not take into account the idiosyncrasies and needs of every department, business unit, distribution center, facility, etc. which creates resistance. Although it promotes volume consolidation, it removes the flexibility individual departments/units may have to negotiate better pricing with local vendors or even create synergies that may optimize their operation. Full centralization is a cost-cutting focused but low-value delivery approach.
On the other side, we have the argument on Decentralization, which you can imagine is in many ways opposite to the centralized approach. Larger organizations tend to like decentralized procurement functions because they are easier to handle, in a global company why would the facility in Germany care about who the plant in Mexico is using. A regional approach is as deep as they would go from a centralization perspective and even then it may be ad-hoc category driven. Companies that undergo rapid growth may have issues trying to centralize and operational integrations may be more critical than consolidating volumes for cost-cutting purposes. The problem with decentralized procurement is that it can easily turn into a free-for-all operation in which opportunities are missed – simply because nobody knows they exist as units operate in a vacuum, or because there’s a lack of governance to share, implement best practices and/or tie to a common goal. Stakeholders are free to engage and negotiate suppliers to their best of their – strategic sourcing – knowledge and establish good supplier relationships, but the company may be bleeding money.
So let’s resolve this conundrum once and for all and implement a “Hybrid” model right? A flexible approach where we do some centralized categories and some decentralized stuff too, and everyone is happy! Well, no. A Hybrid model may mean many different things but for the most part it will mean poor alignment, an alienated supply base, and many stakeholders’ battles lost (which BTW simply having to fight a stakeholder is already a lost battle). Hybrid procurement could go as far as some categories being addressed globally, where others are local or regional focused, or that some business units negotiate centrally while others segment out based on location, or a mix of local, regional, category negotiations that aggregates volumes when possible but that exceptions get in the way all the time. Confused yet? How and where do you even start?
So what’s the answer? What companies really need, especially those who find themselves having this argument is a procurement department that:
1) aligns with the strategic goals of the organization,
2) considers the sourcing profiles and nuances for all categories,
3) understands each business unit and stakeholder requirements,
4) provides visibility to the entire organization and leverages best practice sharing across categories and business units,
5) leverages data analytics and tools to identify, roadmap and execute on actionable sourcing strategies that would maximize value with minimum stress while adequately generating reports, and
6) enables organizational culture; in such a model all sourcing activities are centrally led and reported into but execution and tactical deployments is category driven and left to the sites and business units, which would enable volume consolidation while maintain a healthy supply base balance to support local or regional concerns.
This is called Center-led procurement, and as you can see, it operates as a center of excellence that entails a much more comprehensive structure, one that leverages the blessings of data management, as much as it does cultural alignment, or category management modeling. Center-led procurement maximizes savings without causing disruption, it enables superior supplier relationship management, aligns the businesses to the strategic goals of the organization, and provides key insights and visibility into the organization’s purchasing behavior.
We are fortunate to have helped many corporations move towards this model with great success, where not everything needs to be done at once, but rather done strategically so adoption follows a natural cadence that gains momentum rather that a swift paradigm shift and a headache.