Centralized vs. Local Sourcing and Procurement Governance Models
By Bill McBeath
on Jul 27, 2010
Large or divisionalized companies face the conundrum of how much power and decision-making to give to a centralized sourcing group vs. to the local procurement teams at each division, region, or business unit. The right decision is definitely not one-size-fits-all. We explore some successful models that have been deployed.
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Centralized vs. Local Procurement
It is not uncommon for companies to grow by acquisition, creating many semi-autonomous divisions. Other factors drive fragmentation of spend as well, such as geographic expansion and product line proliferation. Eventually, a company wakes up one day to realize that they have very splintered and fragmented spend, and worse yet, have no idea what they are spending across the enterprise. The response may be a pendulum swing in the other direction regarding control of the procurement function. A centralized sourcing group with strong authority is formed in an attempt to consolidate spend across all the divisions. Unfortunately, it is also not uncommon for local requirements to then be overlooked or overruled in the new organizational priorities, sometimes with disastrous consequences.
Consequently, there typically is tension between choosing a centralized vs. distributed approach to procurement and sourcing, especially in large, multi-division corporations. Each approach has its advantages and disadvantages. Without a strong centralized procurement team and effective enforcement of contract compliance, a company can never realize economies of scale and cannot effectively consolidate spend across the enterprise. Conversely, without the input and control of local procurement personnel, the unique needs of various locales and/or diversified divisions are frequently not met. Companies with mature sourcing disciplines have been able to reconcile these seemingly conflicting requirements. Companies accomplish this each in their own unique way to fit the needs and strategy of their business. Examples are illustrated in the four mini-case studies below.
The following four examples illustrate the diversity of approaches to achieving the right balance between centralization/consolidation and local requirements. These examples provide some ideas and approaches that can be useful for various situations.
Example 1—One major diversified company has business units in high tech, industrial automation, power systems, medical devices, transportation, consulting and systems integration services. They have dedicated global category managers for each high level spend category across all of the business units. These global managers develop centralized strategies, but with input and consensus from the operating companies. People from the operating companies feed information to the manager during negotiations with the vendor, and the global buyer has to get consensus from the divisions. For example, in the procurement of paper, the global manager for paper creates the over-arching strategy and negotiates with the paper companies based on volumes that the operating companies have committed to. Then the buyers in the operating companies execute against the strategy. The company understands that it is critical to funnel the volume through the contract if they want to realize savings.
Example 2—Another highly diversified conglomerate, which has divisions in lumber and forest products, transportation, food, retail, construction, and ship-building has four centralized corporate purchasing groups: direct materials, capital projects, MRO and process improvements. Each corporate purchasing group has its own 6-Sigma balanced scorecards and specific performance targets. The purchasing manager from each subsidiary is a dotted line manager reporting back to the corporate purchasing VP, providing the organizational linkage from central to divisional procurement.
Example 3—A major white goods manufacturer’s business units are organized by major region per brand. They have a sophisticated brand strategy that considers which customers each brand is targeting, and tries to avoid cannibalizing other parts of the business. For them, brand strategy is king, but their central global procurement group is organized by commodity (e.g. electric motors) matrixed by region. Sometimes the regional organization may not want to sacrifice their objectives for global goals, because they are accountable for profitability and other metrics. In these cases, a discussion is made to reach agreement on what is best for the enterprise. The organization is learning how to balance regional needs by gradually expanding the global function and influence—for example, they now have global product engineering.
Example 4—A large F100 industrial manufacturer leans towards giving more power to the divisions. The mantra of their CEO is that the corporate staff is never small enough. The corporate procurement group which had about 160 people nine years ago now has 20 people. This requires constantly reinventing themselves and their role. The corporate procurement group works for the company’s 'Strategic Procurement Council,' consisting of sourcing leaders from each of their 11 major businesses. The Strategic Procurement Council sets the agenda and has the final say about what the central group’s priorities and goals are and how they will spend resources.
In Part 2 of this article, we will take a more in-depth look at how one high tech manufacturer balances centralized vs. local sourcing and procurement.