Originally posted on on the e-Sourcing Forum [WayBackMachine] on Friday, 11 August 2006

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).

Today we are going to compare and contrast center led procurement with the traditional centralized and de-centralized models of procurement and overview some of the advantages of the center-led model. Tomorrow we will delve in to the role of a sourcing professional in a procurement center of excellence and overview some of the challenges you and your company will face in shifting to a center led model. We will wrap up on Sunday with an overview of some best practices and strategic focal points that will help you get the most out of a center led organization.

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 speeds process and issue resolution and allows your organization to take advantage of expertise in the local market. However, it has a number of significant disadvantages. It does not allow you to leverage your corporate spend or align the business unit objectives with the objectives of your organization. There is little coordination or information sharing between divisions, best practices are not shared, and supply costs and performance are uneven across the enterprise. Furthermore, your operating costs are often quite high.

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 you to fully leverage your corporate spend across the enterprise and drive standardized sourcing processes through the organization. The inherent economies of scale allow you to wield the full power of your spend, enhance operational efficiencies, and improve knowledge sharing and best practice execution. However, it too has disadvantages. You lose the extensive knowledge of the individual local supply markets and consumption patterns of the decentralized structure, which often results in sub-optimal buys for many regions. The risk of maverick buying increases when your 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 service quality. Reaction times to unexpected changes in supply or demand suffer, which is critical if your profit margins depend on demand-driven supply strategies.

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 gives you 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. You increase operational efficiencies and decrease overall operational costs while maintaining 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 then 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?

For more information on center led procurement, see the “Center Led Purchasing: The Procurement Organization of Tomorrow” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].