Monday, 16 September 2013

To Centralize or Decentralize? That is the question...

Authored by Paras Sood

For many organizations, procurement functions undergo numerous transitions over their lifespan. Purchasing may originate reactively or tactically through stock purchasing rooms and localized buying, but as the procurement organization matures the driver swiftly becomes 'strategic sourcing' from the centre, identifying the best innovations from the supply-base, leveraging economies of scale.

But then comes the reversal... the impact of centralized sourcing is only answering certain supply management needs, but not responding to local demand and specialist requirements. Inevitably, control goes back out to the regions to prevent supply chain ostracism and keep the peace amongst end customers.
 

So where does the balance lie between centralization and decentralization? What is the role of regional / hub-based procurement professionals over their centralized strategic sourcing colleagues? What tools, processes and communications channels enable operational stakeholders to identify the best value from their procurement partners?


 

4 comments:

  1. The debate of decentralisation versus centralisation is a non debate. Any business model designed to support procurement will simultaneously include both centralised and decentralised activities. The mix of the two will depend on the type of organisation, its complexity, geographical distribution and what it obtains from the supply market.

    There are some activities that are best done at the centre such as governance, process design, legal approach/contract design, etc. There are other activities that will be devolved such as the distribution of buying services across an organisation. Then there activities that may be a mix of the two as in the case of the establishment of a sourcing team. In some organisations some categories may be managed by a central team. In other organisations the sourcing team may be distributed to those business units that have the expertise. This hybridisation is ‘centre led’.

    What does centre led mean? Specific specialised skills need to be centralised for maximum effect (in terms of the effective application of professional skills and expertise) while at the same time transaction support services need to be highly distributed and easy to use. Adopting this approach a procurement team will centrally support the deployment of both a 'shared' and 'distributed' procurement service across an organisation. This ensures that all purchasing activity is undertaken against centrally set and managed procurement policies and governance. While all transactions are undertaken consistently against contracts so as to maximise the return from strategic sourcing initiatives. Without this distributed organisation structure in place it would be a challenging proposition to gain consistent visibility into procurement activities, eliminate duplication and reduce processes costs. Given this the above approach is neither centralisation nor decentralisation of the procurement function.

    The above model was first articulated by Dr Richard Russill in the early 90’s. He called it a Centre Led Activity Networks (CLAN). The issue, however, has always been, firstly, the underlying information support systems have not been able to effectively support such a model of operation despite the promises of software vendors and secondly, organisations have been challenged in terms of recognising the needs to evolved and fully embrace what is a highly collaborative model of operation.

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  2. When considering where to "cut" the organisational design between centralised and central led it is highly important to ensure joined playing rules such as purchasing policies, working procedures, processes and especially how to measure results (KPIs). This is often a complicated discusion and involves different opinions regarding data management disciplin, real money vs funny money achievements etc.

    Then the journey towards the final (if theres is such thing as a final) organisation can begin where focus on targets for this organisation defines the need for competences and thereby the companies ambitions to payback from investment in having a purchasing organisation.

    Everything that support the purchasing organisation across divisions and/or specialised functions can generally be centralised and includes typically IT set-up, policy and procedure development, reporting structure, templates and consolidation as well as any function which can add value on project basis or offer specific competences.

    When deciding what to centralise it is furthermore important not to withdraw specific competences from functions where similar competences will remain. This could as example be purchasing of transport which probably could belong to a logistic function and still act according to joined definition of roles, responsibilities, working procedures, KPI measurement etc.

    The most important barrier to overcome is the risk of having internal purchasing competition where differenct functions is purchasing within same categories without joined category and supplier strategy - this is the root to failure for a purchasing organisation.

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  3. I work a lot in developing countries building public procurement capacity,,,,most have fully decentralised models. Given the skills shortages, staff costs and lack of consolidated common purchases, most would be best to chose the hybrid approach (mixed centralised/decentralised0. Unfortunately they do not!

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