As more Procurement organizations begin to mature, it’s imperative that they revisit this new classic SI post from three years ago as confusion on this subject can lead to poor decisions.
An article over in S&DC Executive on The Four Vs of Fixing a Decentralized Procurement Model noted that implementing a centralized model from nothing is no mean feat and then presented the Four Vs” as a good starting point to begin their path forward to centralization of selected spend categories. Centralization of spend is a necessary step on the path to a centralized sourcing model, but that’s all it is – a step.
In order to have a centralized sourcing model, you have to centralized:
all of the Sourcing and Supply Management Personnel have to be in the same business unit
- Technology, and
all of the operations, even if they are decentralized all over the world, need to run on a common base technology platform
all of the processes need to be migrated to common sourcing and supply management processes, with local sourcing only taking place on categories that are truly local (otherwise, sourcing should be center led)
Now, when you are transitioning processes, you should start with sourcing and procurement, as this one-two punch will give you the biggest bang for your buck. The application of good advanced sourcing techniques to categories never sourced this way, or to significantly larger spend volumes, will typically identify savings opportunities in the 10% to 12% range. Then, good procurement systems will make sure that the savings are captured by preventing maverick spend (if the spend has to go through the system and appropriate rules are in place) and making sure the invoices match the POs which will need to match the contracted rates.
And the first step in a good sourcing process is spend analysis, which, if you want to get it right, does require:
into all of the spend in the category being sourced
on the spend between sites (which will give you a quick estimate of savings potential)
- Velocity, and
to savings which results by choosing categories where contracts are expiring or have expired and where there will be little resistance
generated from the process in a way that can be measured, tracked, and reported to the CFO.
The four V’s covered in the article are indeed a good starting point on your journey to centralized the sourcing process, but that’s just one aspect of transition, and it doesn’t even address technology or talent, two key factors in the centralization of a Supply Management function.