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Understanding The Shape And Cut Of Procurement Organisations

Elaine Porteous clears up some common misconceptions about the ways  procurement  organisations can be structured, and demystifies some of the jargon…

Sergiy Bykhunenko/ Shutterstock

 Starting a new job can be both stressful and exhilarating. The people are different, the location is strange and the way they work is peculiar to that enterprise. There may be a seven-level procurement organisation chart or a loose, undocumented reporting structure to be navigated.  What is also daunting is the “in-speak”, the specific terminology which may be like a foreign language to you.

Let’s clear up some misconceptions about ways that procurement can be organised, and try and demystify some of the jargon.

An operating model is just the way the procurement function is set up to work.  Most companies start up being decentralised, unstructured and even disorganised until the workload grows.  As the functions expand and mature, there needs to be some form of formalising and centralising of the activities to consolidate the spend. Only then can we expect to make savings and reduce our risk exposure.

Centralised or centre-led?

Centralised procurement does have its benefits. It means more control over suppliers and contracts and it helps drive supplier diversity and corporate social responsibility (CSR) initiatives.  The risk is mitigated and skills development is made easier, expanding capabilities.  However, it can become a very bureaucratic and expensive cost centre. Too much data and not enough information can cause loss of focus and poor service to stakeholders.  People at the centre do not always understand regional and local supply markets and consumption patterns.  If “central” means the US and the region is Papua New Guinea, there may be cultural challenges too.   As procurement organizations move on and mature, over time, many of them become centre-led, taking some time to decentralise personnel and day-to-day operations.

Figure 1: The procurement journey

Image:  www.zycus.com

Wherever your organisation is on this curve, it is helpful to know what it means to be where.  There is no one best structure. The way your organisation works is influenced by the external supply market, the end-users needs and the overall company strategy. You just have to ride the wave.

Centre-led procurement organisations concentrate on defining strategy and policy for both their direct and indirect procurement.  Corporate spend can be fully leveraged on strategic commodities and services which are well-suited for centralized sourcing.  Non-strategic categories not suited to centralized sourcing can be handled by the individual business units or regions.

Centre-led procurement uses a category management structure which supports the rollout of sourcing and contracting plans to business unit and regional level.  The type of set-up is often called a hybrid model.

Category management means the bundling of third-party spend into buckets to extract more value.  The main aim behind category management is to aggregate the internal demand and achieve economies of scale by contracting the best suppliers at the lowest price.  In its best form, it involves an active category manager to roll out category plans, strategic sourcing and supplier management initiatives.

In a centre-led organisation, a global category manager would set the strategy for the category group, e.g. transport logistics, and for the sub-categories (also sometimes called commodities) within that group:  road, rail and air transport, freight forwarding, port activities and courier services.  At regional or divisional level, the category plans are followed and executed locally to achieve the best results for the organization.  This is the ideal but it is rarely implemented in full. Some categories are really challenging. Marketing services, technology and professional fees come to mind.

Cross-functional teams (CFTs)

To be effective, a category needs to be managed using one or more cross-functional teams.  A cross-functional team comprises representatives of key divisions and business units that work together, with procurement, to achieve the best results for the organization in that category or commodity. Although extensively used in strategic sourcing, CFTs are being used increasingly and successfully across process improvement, product development, quality assurance and the assessment of suppliers.    

The benefits are well-documented:  a more robust outcome, transfer of skills and learnings, improved internal cooperation and sustainable relationships.

Global organisations that run virtual CFTs have special challenges.  With the application of innovative methods and up-to-date online technology, it is now easier and more effective.

Whatever the operating model or the make-up of the CFT, the satisfaction of stakeholders and end users is paramount.  A stakeholder is anyone that has a vested interest in the outcome of your project or action.  He or she could be any one of these:

  • An internal departmental executives, manager or end-user
  • Another procurement team member
  • A co-opted subject matter expert
  • A supplier or a subcontractor
  • A member of the media or a regulatory body

Stakeholders are capable of influencing the success or failure of a project.

The model is not cast in stone

As a procurement organisation matures, it is likely that executives will revise and adjust a hybrid or centre-led structure so that it stays aligned to corporate objectives and continues to deliver value.  The best model is always the one that delivers results through open lines of two-way communication and uses processes that are flexible enough to take into account regional and cultural differences.

Is Hybrid Best? The Centralised vs Decentralised Debate

Centralised, decentralised and hybrid models – is there actually a ‘best’ way to organise procurement departments. The debate rages on.

Recent studies, and accepted wisdom, have continued to confirm the trend towards a centre-led procurement model. Both fully centralised or decentralised procurement operating models have their downsides, and that a middle (or hybrid) road is preferable.

Centralised organisations unfortunately:

  • do not always understand regional and local supply markets and consumption patterns.
  • run the risk of maverick buying outside contracts.
  • are not suited to managing some indirect commodities.

In decentralised organisations, there is often:

  • inability to leverage corporate spend.
  • poor coordination of information and best practice sharing.
  • uneven supplier performance.
  • higher procurement operating costs.

The Centre-Led Model

The best centre-led procurement organisations concentrate on defining strategy and policy, as well as applying best practices to both direct and indirect procurement. They mostly employ a category management structure, which supports the roll out of their directives to business unit and regional level.

In the Aberdeen Group’s recent report, they noted that centre-led companies reported more spend under management than others. This was twice more than companies with a decentralised structure, and nearly 20 per cent more spend under management than companies with a centralised structure.

“Organisations with centre-led procurement considerably outperform their non-centre led counterparts, in both spend under management and supply cost reductions” (Aberdeen Group 2015).  

Leading from the Centre – Levi Strauss  

The Director of global indirect procurement at Levi Strauss, Celeste Smith, said recently that the while the company wants to create a centre-led global function, there should be good regional support.

“Success for me looks like centre-led, a global approach to managing indirect – not necessarily with global suppliers – but that we have a very consistent and disciplined approach to procurement globally.

“Centre-led means that everyone is on the same page in terms of methodology and approach. But I think it’s very important to have the same regional support.”

Levi Strauss has a global spend of around $1.8 billion (£1.09 billion), of which it wants to manage $1.2 billion (£723 million).

Leverage Central Knowledge – Fluor

Fluor is a world-leading engineering and construction firm. It also offer clients procurement and project management services for capital projects.

Fluor uses a centre-led procurement model, leveraging international procurement expertise and market knowledge, with the aim of providing the best value for their clients’ capital projects.

Their procurement organisation manages an annual global spend of more than $16 billion. This is done through consistent execution strategies across their worldwide network of 1,900 procurement professionals.

For example, Fluor’s local operation in South Africa uses a global logistics planning strategy to help clients overcome procurement execution challenges unique to operating in Africa.

Stakeholder Challenges for Hybrid

A hybrid model seems to combine the advantages of a centralised structure and decentralised execution with minimal downside. So why isn’t everyone doing it?

It’s not that easy. Whatever the model, the satisfaction of stakeholders and end users is paramount. The best model seems to be one that delivers results through open lines of two-way communication, and processes that are flexible enough to take into account regional and cultural differences.

One way to generate higher levels of stakeholder support is to ensure that the global category management structure is replicated in decentralised business units or regions, probably on a more limited scale.

It has been suggested that this type of structure encourages agility and innovation, as well as better compliance to contracts.

The Wheel Turns     

Procurement Leaders’ recent survey on procurement operating models found that no one single model can sustain the expected benefits indefinitely.

They report that savings delivered from a given procurement operating model can erode over time as behaviours become ossified. Incremental savings thus become more and more difficult to achieve. The model just gets tired.

A structural change may be needed to allow procurement to deliver value in new ways, and enable benefits to be sustained or even improved.

Procurement Leaders say that procurement organisations must tackle a wide range of hindrances that arise from change, in order to maximise the benefits from a change in operating model.

Their research also found that the greatest factor preventing transition in procurement is its own lack of change management capabilities.

As a procurement organisation matures, it is likely that it will revise and adjust its hybrid or centre-led structure, in order to stay aligned to corporate objectives and continues to deliver value.