Badly judged centralization can stifle initiative, constrain the ability to tailor products and services locally, and burden business divisions with high costs and poor service. However, insufficient centralization can deny business units the economies of scale or coordinated strategies needed to win global customers or outperform rivals.
McKinsey Quarterly, To Centralize Or Not To Centralize
So how do you answer the question? Especially when none of the executives interviewed in 30 different global companies volunteered an orderly, analytical approach for resolving centralization decisions when interviewed. After all, benchmarks, politics, and fashion — the usual approaches — are not the answer.
In the above referenced article, McKinsey put forward a decision making framework based on three questions. According to the framework, centralization should only occur if at least one of the following questions can be answer affirmatively.
- Is it mandated?
- Does it add significant value?
- Are the risks low?
For the most part, SI agrees. The only disagreement is with the explanation of value. According to McKinsey, it should add 10% to the market capitalization or profits or be part of a larger initiative that will add 10%. Significant value is not always immediately quantifiable, especially where innovation is involved. Thus, SI would also recommend centralization if the following question can be answered affirmatively:
- Will it increase the chances of innovation without significantly reducing any of the benefits decentralization provides?
If, for example, the only downside to centralizing a certain buy is that you have to add more users to your online supply chain platform and buy a few more licenses, this would likely be a case where you would centralize the buy as it would provide opportunities to innovate in network design and inventory management.
Today’s guest post is from John Shaw (Senior Director, Adoption Services) of BravoSolution, a leading provider of spend analysis, (e-)sourcing, supplier performance management (SPM) and healthcare sourcing solutions and a sponsor of Sourcing Innovation (SI). It is the seventh of an eight (8) part series, which, when complete, will form a white-paper that BravoSolution will be releasing to the general populace tomorrow.
Yesterday’s post (Part VI) provided a case study that describes typical challenges faced by an energy company in a (European) regulatory environment. In the case study, a 30,000-foot view would also show positive progression even though a number of users are not creating public notices or providing award notifications within the designated time window.
Today’s post provides another example of High Definition Adoption Management for a national producer of construction materials.
Company C: Measuring Efficiency
Our final company is a national producer of construction materials. The organization has recently created its first centralized sourcing team and that team is working diligently to bring more spend under management. The team knows there is an abundance of opportunities to provide value if they can simply find ways to be more efficient in applying their sourcing process to more spend.
When looking at sourcing efficiency, the organization is focused on the following areas:
- Spend Volume:
Measurements to track the amount of Spend being sourced through the system.
- Event Size:
Tracking how much spend is managed per event, a key indicator of efficiency.
- Event Speed:
Breaking the process down into its component steps and measuring duration.
These measurements help us to understand the speed and throughput of spend through the sourcing team.
Part VIII, the final part of the series, discusses some best practices for progressing from the 30,000 foot view to a detail view.