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Unfortunately, there’s no one-size-fits-all answer for procurement professionals seeking advice on the best operating model for their business.
It’s almost like buying a car: There are plenty of options that will be called the top makes and models, but in the end, the solution has to fit your unique requirements and challenges.
This article will help guide your decision by explaining some of the main procurement operating models, detailing the benefits and drawbacks of each, and giving some tips around implementation.
The Maturity Curve
Most organizations follow a maturity curve with procurement practices; they start with a decentralized model, then centralize as the function matures. Further along the curve, organizations may trend back towards decentralization as they evolve into a center-led model.
It’s rare for an organization to move from a centralized to fully-decentralized model, as the decision to change is usually based around consolidation.
Be Prepared to Change, Then Change Again
KPMG’s guide to procurement operating models notes that “even those [procurement functions] at the cutting edge will evolve in the future.” Leading organizations do not have a predesignated end-point when it comes to operating models.
Flexibility is key: it’s important to be prepared to revise or adjust your model in order to continue to deliver value and stay aligned with enterprise-level objectives.
Decentralized Procurement
“Decentralized” means that each office, division, or project manager in your organization has purchasing power to order supplies without seeking approval. It doesn’t necessarily mean that your procurement set-up is unstructured or disorganized.
Benefits:
- Preferred in situations where local sourcing is prioritized.
- No wait for approval when ordering supplies.
- A better understanding of regional and local supply markets.
- Ideal for addressing cultural challenges on a local scale.
- Faster sourcing of supplies in an emergency, without having to route through a central procurement team.
Disadvantages:
- Lost opportunities for bulk purchasing or negotiating better terms based on bulk.
- End-users placing orders are not procurement experts.
- Spend analysis becomes difficult or impossible due to isolated or unstandardized data.
- A greater chance of compliance and risk issues.
Centralized Procurement
In this system, all purchasing is handled by one department in one location. The procurement team has control of the budget and end-users submit a request for approval through this team.
Benefits:
- Cost savings through consolidated spend and economies of scale.
- More (and cleaner) data leading to a greater ability to perform a comprehensive spend analysis.
- Reduced maverick spending.
- Increased efficiency and a decreased chance of redundancy between departments.
- Better inventory management.
- Skilled procurement and negotiation specialists making purchasing decisions.
- Easier to maintain policies and procedures, reducing compliance breaches and risk exposure.
- Centralized point of contact for suppliers rather than multiple stakeholders scattered across the organization.
- More ability to move beyond tactical purchasing to focus on strategic initiatives such as sustainable procurement.
- Modern e-procurement systems mean the administrative burden of centralizing an organization’s purchasing is no longer a problem.
Disadvantages:
- Adds a layer of bureaucracy to purchasing decisions.
- Increased risk of poor service to stakeholders who may feel disempowered or kept at arm’s length.
- Higher chance of lagging processing or slow delivery times for centralized strategic buying decisions.
Center-led and Hybrid Models
Center-led organizations give some autonomy back to regions or individual business units, but end-users must operate within a strategic framework and policies set by the procurement team and enforced through e-procurement systems.
Some aspects of procurement have elements that are best managed from the center while others are best distributed. In a hybrid model, some purchases are centralized and others are locally sourced.
PurchaseControl gives the example of a hybrid approach in a restaurant chain, where locally grown produce like fresh fish could be decentralized or center-led, while company-wide (centralized) purchasing power is leveraged for staples such as flour and sugar.
5 Tips For Moving From Decentralized to Centralized Procurement
- Don’t rush – ensure the pace of change suits your organization.
- Take the time to win buy-in from stakeholders by focusing on company objectives, value-creation, and what’s in it for them.
- Keep in mind that business units may be reluctant to relinquish budget control.
- Ensure you have the team and systems in place to cope before moving to a centralized structure.
- Provide training and support for any new systems put in place.
Image Credit: Tashatuvango / Shutterstock
