Centralized vs. Local Sourcing and Procurement Governance Models
By Bill McBeath
on Aug 3, 2010
How one major high tech firm uses global commodity management teams to provide centralized sourcing that still meets the needs of various product lines, functions, and geographies.
Full Article Below -
In Part One of this article, we explored four examples of large, highly diversified enterprises and how they dealt with difficult decisions about how much power and decision-making to give to a centralized sourcing group vs. to the local procurement teams. Even mid-sized companies operating in a single industry can still become highly globalized with multiple product lines and regions that have competing or conflicting sourcing requirements. As a result, they end up with multiple regional sourcing sites supplying to multiple customer sites, each with their own unique needs. Here we look at how one very successful high tech manufacturer dealt with these challenges. We will refer to this company as HighTech, Inc.
HighTech, Inc. has centralized the management of their sourcing network. For each commodity, they have a cross-functional commodity team, led by a highly empowered commodity manager. HighTech, Inc.’s commodity teams include regional buyers and quality engineers. And, on an as-needed basis, they bring in other functions such as product engineering, packaging engineering, product line managers, the master scheduler in charge of worldwide demand-supply, service parts management, product marketing, and others.
The commodity management teams must be cross functional, because the issues are so cross functional—matching demand and supply, solving quality and engineering issues, packaging issues, service issues, allocation when available supply volumes are insufficient, and so forth. These teams meet weekly or bi-weekly to review things like the long-term forecast vs. capacity, ongoing sustaining issues, supplier performance, quality issues, new product introduction activities, and various other issues with the suppliers.
The two secrets to making these highly cross-functional teams work are A) having the right representation on the team and B) having a strongly empowered commodity team leader. At HighTech, Inc., the chairperson of each team is a commodity manager from their worldwide sourcing group. That commodity team leader (global commodity manager) is given full authority over the commodity, full ownership and responsibility for those supplier relationships, and full accountability for supplier performance.
The commodity team leader’s empowerment is deeply institutionalized. Suppliers are 'locked down’ tightly on who in HighTech, Inc. they are allowed to respond to requests from—in other words, it is made clear that they must work issues through the commodity team leader. Suppliers understand that their destiny is in the hands of that team leader. Product managers are required to manage that supplier through the commodity team leader. No end runs allowed. Regional buyers know that if they want their fair share of products and want to have their unique needs met, they have to go through the team leader. Quality and product engineering also know that in order to resolve issues, they have to go through the commodity team leader—they can’t go around.
This type of strict control of the dialog with suppliers may be too restrictive for larger, more diverse enterprises. However, for HighTech, Inc., it forces regional or functional concerns to be resolved in a cross-functional setting. The weekly meetings are well attended, as all the various constituents understand that it is the place to get their problems with the suppliers or supply resolved. This combination of strong authority for the commodity team leader with vigorous cross-functional participation from the various functions and regions has worked well for HighTech, Inc.
Learn From Others; Customize for Your Firm
There is no single sourcing and procurement governance model that is best for all firms, because there are so many differences in product diversity, regional needs (e.g. differing regulatory requirements, cultural and taste differences, varying logistics infrastructures, etc.), business unit strategies, etc. However, that doesn’t mean that companies cannot learn from successful approaches taken by others. The five examples given in parts one and two of this article should provide some ideas for executives and managers on how to deal with these types of organizational issues.