For years, centralization (and then center-led) was promoted as the best Procurement organization methodology because it would deliver many benefits including, but not limited to:

• economies of scale
• purchasing expertise
• administrative efficiencies
• specialization
• volume discounts
• optimal resource allocation

However, while it often delivered economies of scale, volume discounts, and specialization, it never increased purchasing expertise, just shifted administrative efficiencies and only optimized the resource allocation in the center … the rest of the business (and affected personnel) didn’t benefit at all.

Furthermore, these benefits were only delivered in times of free global trade, low/no inflation, and stable economies. Take any of these requirements away, and the discounts and/or economies of scale might disappear overnight and the specialization that was so highly sought might also disappear as well.

The reality is that the right model is really a center-of-excellence which helps to orchestrate best practice procurement across the multi-national/global organization, but, except in a few rare cases, doesn’t really carry out the day-to-day Procurement function. The reason for this is that centralized (and even center-led) suffers from all of the following drawbacks, which are only heightened in today’s global economic landscape.

Missed Local Opportunities

Most manufacturers and distributors aren’t truly global, and when you try to centralize on just a few suppliers, while it will keep costs down for some of your markets, it will increase them greatly in others because the manufacturer and/or distributor just doesn’t have the economy of scale or knowledge in those regions.

The reality is that the best sourcing outcome is one that takes advantage of opportunities at the global, regional, and local level — especially when local opportunities far exceed the national or global ones. The best example here often comes from services. I remember the first time early sourcing optimization providers tackled services projects where an organization regularly outsourced a number of services roles. Due to the perceived complexity of dealing with multiple contractor, manpower, and service management firms, most organizations would try to find 2 or 3 national firms to handle their needs. As a result, even though they would save 10% or so using optimization-backed strategic sourcing, they’d still regularly overpay by 30% to 40%, especially when fully loaded costs were considered. Most IT support firms had their key talent localized in a few offices in big IT hubs (San Francisco, Chicago, New York, Atlanta, Houston, etc.) and for firms that had local offices across the mid-west, so when you want them at remote locations, not only are you paying big-city rates, but you are paying high fully burdened costs. Most states have at least one big city with a few consulting or manpower shops that have the same breadth of resources. They may not be the very best, or the top talent you’ll need if you have a highly specialized problem, but that’s not 90% of your needs. The local DBA trained and experienced in your database, the local fleet/aircraft mechanic with 20 years, and the local HR manager will generally be good enough and almost half the cost. That’s why most organizations who focussed just on national/global providers would, despite their attempt to optimize spend, would overpay by 30%.

Plus, when you are trying to ensure a product or service sells well in local markets, it’s the local expertise that makes the right selection, not a buyer from half a world away.

Loss of Key Market Knowledge

A buyer in the US has no clue what a customer in China wants (unless she just came from China, in which case she probably doesn’t really understand the market she is now based in), and a buyer in the UK won’t get the slight differences in the US market and have no clue about Latin America.

Also, a remote buyer doesn’t typically know who the regional and local manufacturers are or what they are capable of. This is key, even if you decide to go with a remote supplier as the primary supplier as the regional and local suppliers will be your backup when the remote supplier becomes temporarily, or permanently, unavailable.

Supply Base Degradation

Having fewer suppliers doesn’t strengthen your supply base. It just shrinks it to a size that you believe is more manageable. But a strong supply base isn’t a small supply base, it’s a supply base where you have strong supplier relationships, are in a position to help develop the suppliers, and can actively manage performance in near real-time.

They key to performance is detecting issues quickly — as soon as shipments are late, defect/damage rates rise in the warehouse, warranty claims rise, or service levels fall — and then quickly meeting with the supplier to deal with them. This requires being close to the supplier both to detect the issues quickly and resolve the issues quickly. Neither happens when all your suppliers are half a world away.

Ever Lengthening Supply Chains

When over-centralization occurs, most of your suppliers will be half-a-world away for at least half of your markets. When this propagates through the supply chain, you have suppliers at each level commonly sourcing from half a world away. By the time you get to the source, raw materials in your product could have circled the globe three times. How is that efficient? It’s not. And it’s part of the reason that supply chain fragility, and delays, keeps increasing.

Loss of Opportunities Due to Over-Standardization

Standardization is good as it decreases the total number of SKUs you need to track, products you need to buy, and suppliers you need to deal with. But if you standardized down to only a few options, and those suddenly became unavailable, then what do you do. You’ll be set back months to quarters, depending on how long it takes you to locate alternate options in the best case, and come up with new designs in the worst case.

Economies of Risk

The promise was economies of scale (which you hit as soon as you maximize a production line for as little a day, depending on how long retooling costs), but the realities are that what you got was economies of risk. Over centralization resulted in a single supplier failure, single border shut down, or single supply lane closure cutting off your entire supply chain. The more locations that depended on that supplier, border, or supply lane being available, the greater the impact will be.

Loss of Key Process Inefficiency

The promise was resource optimization and process efficiency, and while that was true for the centralized sourcing and procurement organization, the reality is that the efficiency didn’t extend beyond there. Moreover, it made remote operations, which are now fully dependent on a center office half a world away in a timezone where no part of the work day overlapped, less efficient. All requests have to go into a central message queue and, even in an emergency situation, it would be at least a day before a response, and possibly multiple.

This means that local procurement and inventory management teams can’t function efficiently. But the worst case scenario is when a disruption occurs and the local factories or warehouses can’t react and have to wait for days, or weeks, for guidance and possibly months for a new supply source to be identified. Without localized Procurement, process efficiency, especially during a disruption or disaster event, goes out the window.