Choosing which procurement model an organisation adopts is a long-standing issue. The ramifications are high, as a poorly structured procurement capability being a primary driver of why organisations struggle with controlling their ongoing operational costs.
Traditionally organisations have flipped between two options. On one side we have a centralised approach – which is concerned with keeping procurement activities and supply management decisions under a single roof. Whilst at the other end we have a decentralised view – where each office, division, or project manager has purchasing power to order supplies at their own discretion without seeking approval.
Neither side has a compelling edge over the other, but as procurement continues to gain significance and increase its status as a strategic driver, the argument over which procurement model is becoming ever more important.
Arguments supporting a centralised model focus on the fact it supports standardised purchasing patterns and consolidates volume wherever possible. Additionally, it also increases controls and facilitates reporting which can easily be tied back to company targets, strategy and cost cutting metrics across the business.
What favours a centralised approach is that it creates purchasing synergy benefits, which can be divided into three main categories:
- Economies of scale: volume bundling and standardisation of categories
- Economies of process: reduction in both administrative work and duplication of activities.
- Economies of information: the sharing all available purchasing knowledge
Often centralisation is considered a means to simplify operations, as well as improving efficiencies. However, the reality is that this may not always be the case. Many of the problems of a centralised system stem from attitude problems, such as maverick buying and troubles controlling process remotely. A centralised system also fails to consider the idiosyncrasies and individual needs of every department, business unit, distribution centre, and/or facility which can generate resistance.
While centralisation promotes volume consolidation, it eliminates the flexibility and freedom individual departments might have to negotiate better contracts with local vendors or even form collaborations that may improve their operations. Centralised procurement sacrifices the extensive capabilities of individual supply markets, local knowledge and consumption patterns. This homogeneous approach can result in procurement of supplies that are suboptimal and ill-suited for the specific region which can increase costs and even diminish service quality.
Full centralisation is focused on eliminating costs but delivers low value and potentially low quality.
Larger organisations tend to prefer decentralised procurement functions because they are simpler to manage and keep activities specific to their region. In an international company the office in Japan would have little care or knowledge about who the office in Australia buys their printer paper from. In this approach, controls may be put in place at a regional or category level, but generally each unit is left up to their own devices.
The pro-decentralisation team focuses on better communication and coordination between procurement and operating departments. This approach means that supplies can be purchased by each department on demand to meet their immediate and long-term needs. This often means supplies purchased are better suited for the department as local managers are in the best position to understand the needs of their division. Decentralised procurement also speeds up order processing, with no wait time for approvals. If a purchase need arises, it can be sourced and filled immediately without routing through the company procurement process. In doing so time is freed up for central procurement to focus on more strategic value adding tasks.
However, the problem with decentralised procurement is that it can easily turn into a free-for-all operation where true value is left on the table. There is little coordination or knowledge sharing between divisions and they often work in a vacuum where nobody knows that an opportunity exists. This method also doesn’t allow the business to leverage on their total spend, where the option for bulk purchasing across departments and negotiating better terms based on volume are lost. Performing a spend analysis is far more difficult with a decentralised system – data in different systems is rarely standardised and is often disorganised.
Full decentralisation is focused on the power of the individual but delivers missed opportunities and potential rogue spending.
So which approach is best?
A 2018 benchmarking report by PASA on procurement transformation indicated that 29% of companies have chosen the centralised approach whilst 16% have chosen the decentralised model. However, most organisations (48%) have chosen a hybrid of both models (centralised and decentralised).
Further to this, when asked if an organisation would change its procurement model and to what, another 22% said they would be changing to a more hybrid approach. So potentially nearly 70% of businesses plan to be using some form of hybrid approach in the future – suggesting that this model is being recognised as the most successful.
If the move is to a more hybrid approach, the question that an organisation should be asking is not what model of procurement should I be using, but what do I really need from my procurement!
Ideally, they would use an approach that:
- Utilises the power of volume purchasing
- Aligns with the operational and strategic goals of the company
- Considers the purchasing needs and nuances for all departments
- Delivers spend visibility to the entire organisation
- Offers sharing across categories and business units
- Utilises an intuitive and easy to use technology platform
- Employs data analytics and tools to identify
This new frontier can be called ‘Centre-Led Procurement’ which sees a core procurement team or procurement centre of excellence focus on setting up the policies, infrastructure, best practices and knowledge sharing, while empowering those closer to the frontline to tackle the day-to-day purchasing activities themselves.
It allows for the formation of flexible processes and category strategies that can be tailored to adhere to company policies, local regulations, maintain existing contracts or take advantage of local markets. Corporate spend can fully leverage volume purchasing through centralised sourcing, while more niche categories unsuitable for centralised sourcing can be managed by the individual business units.
Operating efficiency improves, while operational costs are reduced – at the same time maintaining complete transparency and control over organisational spend. This approach provides the best of both worlds – all the advantages of the centralised and decentralised models with minimal drawbacks.
A recent Ardent Partners report revealed that organisations with centre led procurement significantly outperformed their equals in spend under management; centre-led companies reported more than twice as much spend under management than companies with a decentralised structure and nearly 20% more spend under management than companies with a centralised one.
The implementation of a centre-led approach raises some operational and structural concerns, for which a cloud-based procurement solution is the key enabler. The adoption of an e-procurement solution with a single source of master data can help standardise processes and reduce inefficiency while also ensuring transparency. It allows for central procurement teams of managers to set rules and policies that provides a standardised tool for the whole organisation. At the same time, it empowers the tactical purchasers to make their decisions without having to worry if it adheres to the company’s broader strategic direction. This simply means, focus can be directed on what they buy, rather than how they buy it.
think Procurement’s procure-to-pay technology is one such platform that can enable this centre-led approach.
From a procurement team perspective, think provides for an automated procure-to-pay platform which takes the grunt work out of the procurement process – delivering both direct and indirect savings.
It allows for a central repository of master data – either sourced externally by think or through a BYO supplier model. The procurement team can set the approval, delegation and workflow rules (all automated) which will make the procurement process less intrusive and more streamlined for end users.
Procurement can manage their suppliers and thus the contracted pricing – they can see the historical and projected transactional data and have better conversations with suppliers regarding assurance of supply and quality. They can be more strategic in their thinking and through collaboration help drive innovation across the entire business. It is also a central source of truth for all transactional data – from the purchase order, to the matched invoice and receipting documents.
From an end-user perspective, the think platform has a B2C user experience, like that of an Amazon or eBay, which requires minimal training, ensuring user adoption. It provides for a central source of all supplies needed to run their day to day departments – all of which is compliant with the organisation’s procurement strategy. Opportunities that arise from a department or region can be captured and centrally managed for the entire benefit of the organisation. A user can be safe in the knowledge that by using the one platform they can find all they need and at the best price – the procurement team has done all the hard work for them.
If a product is not on the platform the user has the mechanisms to request a quote (from approved suppliers) or communicate with the procurement team to start a sourcing project. Local, sustainable and socially diverse suppliers can be catered for and made available to specific regions – thus ensuring compliance with an organisation’s social procurement targets.
In the end, the aim is to have a more compliant purchasing process with an increased spend under management – so that the business can benefit as a whole. The procurement team can take a more strategic approach to their function (as the laborious day-to-day management has reduced) and the end user can easily find what they need to make their departments function.
A centre-led procurement model is the right way forward but needs the right technology to enable it. think Procurement’s P2P platform is modular by design which means that it can scale as your business scales – either through size or capability.
With the general consensus that automation is now required to improve the overall effectiveness of procurement but with as little as 25% of organisations with a fully automated P2P system – are you being left behind?
To learn more about how think Procurement can drive your centre-led procurement model visit our website at thinkprocurement.com or get in touch here.