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December 29, 2015

Center Led Procurement: An Introduction

One of the hot topics in sourcing today is the trend toward center-led procurement organizations. This is where strategic decisions are coordinated centrally while transactional activities are decentralized across the organization, especially in large enterprises (>1 billion dollars).

Today we are going to compare and contrast center-led procurement with the traditional centralized and decentralized models of procurement, and review some of the advantages of the center-led model.

A classic decentralized model of procurement, where each business, functional or geographic unit is responsible for its own purchases, has a number of advantages. It empowers individual business units with autonomy and control over their process and design decisions and improves their overall satisfaction. It speeds process and issue resolution and allows your organization to take advantage of expertise at the local market. However, it has a number of significant disadvantages. It does not allow you to leverage your corporate spend or align the business unit objectives with the objectives of your organization. There is little coordination or information sharing between divisions, best practices are not shared, and supply costs and performance are uneven across the enterprise. Furthermore, your operating costs are often quite high.

A newer, centralized model of procurement, where all acquisition goes through a single, central organization, has many advantages. First of all, unlike the decentralized model, it allows you to fully leverage your corporate spend across the enterprise and drive standardized sourcing processes throughout the organization. The inherent economies of scale allow you to wield the full power of your spend, enhance operational efficiencies, and improve knowledge sharing and best-practice execution. However, it too has disadvantages. You lose the extensive knowledge of the individual local supply markets and consumption patterns afforded by the decentralized structure, which often results in suboptimal buys for many regions. The risk of maverick buying increases when your geographically dispersed site managers do not agree with centrally mandated decisions and this impacts local supply, quality or reaction times. Centralized procurement of commodities and services ill-suited for centralized buying can actually increase costs and/or diminish service quality. Reaction times to unexpected changes in supply or demand can be delayed, which is critical if your profit margins depend on demand-driven supply strategies.

A center-led model of procurement, however, gives you all the advantages of both the centralized and decentralized procurement models with minimal disadvantages. It provides a procurement center of excellence (COE) focusing on corporate supply chain strategies and strategic commodities, best practices and knowledge sharing, while leaving individual buys and tactical execution to the individual business units.

The center-led model is built on cross-functional teams that represent all of the key divisions and business units. It allows for the creation of flexible supply chain processes and commodity strategies that, when necessary, can be tailored specifically to adhere to local regulations or take advantage of local markets or tax breaks. Corporate spend can be fully leveraged on strategic commodity categories compatible with centralized sourcing while non-strategic categories unsuitable for centralized sourcing can be handled by the individual business units. You increase operational efficiencies and decrease overall operational costs while maintaining the ability to react quickly to unexpected changes in supply or demand. Best practices can be shared easily throughout the enterprise, maverick buying significantly reduced, and performance maintained at a consistent level.

Furthermore, a recent study from research indicates that organizations with center-led procurement considerably outperform their non-center-led counterparts in both spend under management and supply cost reductions achieved. Center-led companies have reported more than twice as much spend under management than companies with a decentralized structure and nearly 20% more spend under management than companies with a centralized structure. Moreover, center-led companies report 5% to 20% cost savings for each new dollar of spend brought under management. That’s probably why most companies have either completed, or started a transition to, a center-led procurement organization. With that volume of savings, why wait?

* Download this research to learn more about Best-in-Class competencies for sourcing functions and the trends that are shaping strategic sourcing today.

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