Center Led Purchasing
One of the hot topics in sourcing today is the trend toward center-led procurement organizations where strategic decisions are coordinated centrally while transactional activities are decentralized across the organization, especially in large enterprises (>1B). This mini-wiki is designed to be a brief introduction to center led purchasing for those readers interested in finding out the basics of how the center led purchasing model differs from more traditional purchasing models.
There are three major models of procurement: the decentralized model, the centralized model, and the center-led model.
A classic decentralized model of procurement, where each business, functional, or geographic unit is responsible for its own purchases, has a number of advantages. It empowers individual business units with autonomy and control over their process and design decisions and improves their overall satisfaction. It allows for a quick sourcing process and speedy issue resolution and allows the organization to take advantage of expertise in the local market.
However, it has a number of significant disadvantages. It does not allow the full corporate spend to be leveraged or business unit objectives to be aligned with the objectives of the organization as a whole. There is usually little coordination or information sharing between divisions, best practices are generally not shared, and supply costs and performance are uneven across the enterprise. Furthermore, operating costs are often quite high in the decentralized model.
A newer, centralized model of procurement, where all procurement goes through a single, central organization, has many advantages. First of all, unlike the decentralized model, it allows corporate spend to be fully leveraged across the enterprise and it assists in the institution of standardized sourcing processes through the organization. The inherent economies of scale allow the organization to wield the full power of its spend, enhance operational efficiencies, and improve knowledge sharing and best practice execution.
However, it too has disadvantages. The extensive knowledge of the individual in local supply markets and consumption patterns of the decentralized structure is lost, which often results in sub-optimal buys for many regions. The risk of maverick buying increases when geographically dispersed site managers do not agree with centrally mandated decisions and this impacts local supply, quality, or reaction times. Forcing centralized buys of commodity or service categories not suited for centralized buying can actually increase cost or decrease service quality. Reaction times to unexpected changes in supply or demand suffer, which is critical if the organization’s profit margins depend on demand-driven supply strategies.
Center Led Model
However, a center-led model of procurement, where a procurement center of excellence (COE) focuses on corporate supply chain strategies and strategic commodities, best practices, and knowledge sharing while leaving individual buys and tactical execution to the individual business units provides the best of both worlds - all of the advantages of the centralized and decentralized models with minimal disadvantages.
The center led model, built on cross-functional teams that represent all of the key divisions and business units, allows for the creation of flexible supply chain processes and commodity strategies that can be tailored at the local level when necessary to adhere to local regulations or take advantage of local markets or tax breaks. Corporate spend can be fully leveraged on strategic commodity categories well suited for centralized sourcing and non-strategic categories not suited to centralized sourcing can be handled by the individual business units. Operational efficiencies are increased and overall operational costs are decreased and the organization maintains the ability to react quickly to unexpected changes in supply or demand. Best practices can be shared easily throughout the enterprise, maverick buying significantly reduced, and performance maintained at a consistent level.
Furthermore, a recent study from Aberdeen Group demonstrated that organizations with center led procurement considerably outperform their non-center led counterparts in both spend under management and supply cost reductions achieved. Center led companies reported more than twice as much spend under management than companies with a decentralized structure and nearly 20% more spend under management than companies with a centralized structure. Moreover, center-led companies report 5% to 20% cost savings for each new dollar of spend brought under management. That’s probably why more than 75% of companies surveyed expect to have either completed, or started a transition to, a center led procurement organization by 2008. However, with that volume of savings, why wait?
The Role of the Sourcing Professional
The role of a sourcing professional in a center of excellence (COE) following the center-led model of procurement is a challenging one. She must develop commodity strategies and sourcing policies that leverage the expertise and best practices of the enterprise and guide all buys for each affected category and, when appropriate, negotiate master contracts without specifying the individual buys or pull patterns of each of the business units. She must define, identify, and oversee the implementation of technology solutions that enable the automation of tactical aspects of purchasing at all levels of the organization without infringing on existing IT systems or processes or complicating the lives of the purchasing professionals in the individual business units. She must educate the organization on the importance of not only common processes, but of maintaining complete, consistent, and up-to-date quality data on which real-time reports can be generated that will allow her to measure savings, compliance, performance and detect any significant deviations that might need to be dealt with at the unit level or the center level.
The following is a short list of the services a professional in a center led procurement organization must be capable of providing the organization.
Deep Domain Expertise
Management, members of the individual procurement organizations, and stakeholders will all expect the procurement professionals in the center of excellence to have deep domain expertise, especially in strategic categories.
Alignment of Procurement with Business Objectives
Procurement is most valuable when it is able to create an overall supply chain strategy that aligns with the overall objectives of the organization. Everyone will be looking to the center of excellence to determine the overall supply chain strategy.
Education and Training
The members of the center of excellence will be viewed as the procurement experts of the organization. It will be up to them to share that expertise with the individual procurement organizations around the globe and train the individual agents and stakeholders in the strategies, processes and methodologies devised by the organization.
An improvement is not an improvement until measured. It will be up to the sourcing professionals in the center of excellence to start benchmarking immediately. Each category will need to be benchmarked before sourcing and these benchmarks will need to be continually updated.
It will be up to the sourcing professionals in the center of excellence to not only define procurement objectives for the entire organization, but to insure that those objectives are clear and understood by all of the individual purchasing groups.
Cross Functional Team Support
The key to success in any procurement category, particularly in a strategic one, is the formation of a cross-functional team of all stakeholders. It will be up to the professionals in the center of excellence to identify the right team members, form the team, and insure that each stakeholder has the support they need to make a contribution.
Management of Stakeholder Expectations
A center led purchasing organization is capable of generating considerable value to the business, but this value is not going to materialize overnight. It will be critical for the sourcing professionals in the organization to manage expectations continuously. Expectation management will be especially critical after the first generation of quick hit projects, designed to build confidence in the organization among the individual procurement units, starts to generate results.
eSourcing Project and Requirements Gathering Assistance
The key to procurement success is a successful string of sourcing projects. The sourcing professionals in the center of excellence will be called upon by the individual procurement organizations for guidance in individual sourcing projects. They should be capable of providing these organizations with templates and assisting them in identifying project requirements.
Procurement Activity Monitoring
The center of excellence will need to monitor activity throughout the organization to make sure proper processes are being followed, best practices applied, and contracts being adhered to.
Active Risk Management
With today’s focus on efficiency, lean “just in time” inventories, outsourcing, supply base reduction, centralized distribution, more and faster product launches, low cost country sourcing and supply chain globalization in a highly volatile global market place, companies are at greater risk than ever before. When one considers that 10% of active suppliers represent 80% of spend in many of today’s enterprises, and that many companies lack visibility into their supply chains beyond their tier one suppliers, supply risk management is becoming key to ensuring continued operations in a profitable manner. It is up to the professionals in the center of excellence to identify and actively manage organizational risk.
Best Practices, Robust Processes, and Methodologies
It will be up to the sourcing professionals in the center of excellence to select and define the best practices to be adopted by the organization, develop the appropriate sourcing processes for the organizational categories, and institute the best practices, robust processes, into the methodologies currently employed by the individual purchasing units.
Continual Process Improvement
Nothing lasts forever, and a best in class organization today will not be a best in class organization tomorrow if it stands still. This means that all processes must be evaluated on a regular basis, tweaked if necessary, and replaced when a better process is identified. Furthermore, all changes must be rolled out to the individual procurement units on a timely basis.
PSP Relationship Management
Sometimes best in class strategic sourcing is turning over categories, particularly indirect and services categories, to third party managed services providers who have expertise and capabilities to drive savings in these categories that cannot be found within the organization.
Ongoing Pipeline of Opportunities
It will be up to the sourcing professionals in the center of excellence to continually identify new cost reduction, and cost avoidance opportunities.
Challenges in Migrating to a Center Led Model
The transition to a center led model will be full of challenges, but given that center-led companies typically report 5% to 20% cost savings for each new dollar of spend brought under management, it will be worth it. Considering that changes to policy, operating models, and measurements will be required in the evolution to a cross-functional structure that reaches beyond the traditional realm of procurement into all company functions, effort will be required in the transition. But the new model will be capable of delivering greater strategic value to the organization, and will thus be worth it.
Most of the challenges fall into the usual people, process, and technology triumvirate, although the measurement challenge mentioned above encompasses all three.
The people challenge is significant. First, the right people with the right skill sets to lead the organization, and the category teams that the COE will need to create, need to be identified. Combined, this team will need to have engineering, finance, management, and leadership skills in addition to traditional purchasing skills. Furthermore, the leader, which should be a Chief Purchasing Officer (or Chief Supply Chain Officer), should have enough experience to bring it all together. An organization may not be able to locate the necessary talent internally and may need to recruit in an increasingly tight skills market.
Then the core team needs to build cross-functional category teams that include key representatives from all major geographies, business units, and key suppliers with whom the organization maintains strategic relationships. They have to teach these teams to speak a common language and work together as a cohesive whole. Then they have to develop appropriate policies that fit the new operation model and oversee the distribution of these processes and methodologies to the individual operating units around the globe. This will require planning, training, and continuing education and support.
The process challenge is significant as well. The organization is most likely switching from a single operational model of purchasing to a framework that supports multiple models, depending on the best strategy for the category or specific commodity. Some commodities will be leveraged and negotiated across the enterprise in a centralized model, some commodities will be negotiated centrally but sourced locally in a mixed model, and some commodities will be sourced locally in a decentralized model, all depending on what the center of excellence decides is the best approach for that commodity. For example, a food service chain might source condiments globally, meat regionally but with local exceptions (as per health regulations), and building maintenance locally. The organization might be challenged at first to pick the right strategy for each commodity, which could also included managed services from a PSP, and each individual organization will have to get used to a new way of doing things.
The technology challenge is simultaneously easy and daunting. It’s obvious that routine transactions and processes need to be automated to allow the team to focus more on strategy, analysis, and managing exceptions but the sheer number of technology providers and solutions can be daunting. Furthermore, the team has to work closely with the IT department to reach a seamless and fully integrated source-to-settle infrastructure that fully mirrors the best practices that have been defined. However, the effort is more than compensated by the reward. According to the recent Aberdeen report, more than 80% of the Fortune 1000 companies that have adopted web-based sourcing and requisitioning tools have reported double digit cost savings, enhanced process standardization and knowledge sharing, and dramatic improvements in compliance and process efficiencies.
The best way to get the most out of a center led procurement model is to institute and follow best practices. This section describes some of the best practices that an organization implementing a center-led model should seriously consider.
Chief Purchasing Officer
A Chief Purchasing Officer (CPO) or Chief Supply Chain Officer (CSCO) on the executive team leads the purchasing center of excellence (COE). This insures that plans, and initiatives, are aligned with the business, diverts resistance, and helps bring each of the different business units on board quickly.
Cross Functional Teams
This insures that the right knowledge is in place to make the best decisions from strategic, tactical, and best practices viewpoint.
Multi-Year Supply Plans
This promotes better alignment and integration with strategic supply chain design and helps establish the center as a strategic leader in key commodity categories.
Coordinated Metrics and Incentives
Each unit needs to have their performance analyzed off of the same metrics, linked to actual value creation, and the incentives of each unit need to be tied to these metrics. Everyone wins or no one wins. This insures that procurement, as the biggest potential contributor to cost savings and cost avoidance, maintains a central role in the organization and that everyone sticks to the mutually agreed upon strategies and policies.
Web-Based Automation and Decision Support Tools
They allow for the transition to the center led model to be accelerated and extend sourcing activities to the desktop of every stakeholder in the organization while enforcing corporate policies and processes.
Keep up to date on the latest trends and success stories and share best practices and methodologies with each unit of the organization on a regular basis.
Speak to the Supplier Community with a Central Voice
This helps a buyer fully leverage organizational spend opportunities and facilitates shared process improvements. Furthermore, this will help the sourcing team select and integrate a key group of suppliers into the product design and specification process. Strong supplier management will allow the organization to take full advantage of supplier performance and this will lead to better quality, faster product introduction, shorter cycle times, and more value from the relationship.
A Selected Bibliography
Why center-led procurement is gaining in purchasing popularity by Dave Stephens, February, 2005
Michael Lamoureux, PhD of Sourcing Innovation