Originally posted on on the e-Sourcing Forum [WayBackMachine] on Saturday, 12 August 2006

Yesterday we introduced you to the center-led procurement organization that blends key category spend leverage, process standardization, and knowledge sharing of centralized organizations with the empowerment, execution, and fast reaction times of decentralized organizations that are able to take greater advantage of their local markets and resources on which they are more knowledgeable. Tomorrow we will discuss some of the best practices of center led organizations but today we will describe the role of a procurement center of excellence and some of the challenges in its initial formation.

The role of a sourcing professional in a center of excellence (COE) following the center-led model of procurement is a challenging one. You 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. You 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. You 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 you 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 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.

Most of the challenges fall into the usual people, process, and technology triumvirate, with the measurement challenge encompassing all three.

The people challenge is significant. The first thing you have to do is identify the right people with the right skill sets to lead the organization and the category teams that the COE will need to create. 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 CPO (or CSCO), should have enough experience to bring it all together. You may not be able to locate the necessary talent internally and may need to recruit in an increasingly tight skills market.

Then your core team needs to build cross-functional category teams that include key representatives from all major geographies, business units, and key suppliers with whom you have strategic relationships. They have to teach these teams to speak a common language and work together as a cohesive whole.

The process challenge is significant as well. You are 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 technology challenge is simultaneously easy and daunting. You know you need to automate routine transactions and processes to allow you to focus more on strategy, analysis, and managing exceptions but the sheer number of technology providers and solutions can be daunting. Furthermore, you have to work closely with your IT department to reach a seamless and fully integrated source-to-settle infrastructure that fully mirrors the best practices that you have defined. However, the effort is more then 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.

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].