Whilst the purchasing organizations in large and small companies often share the same core functions – structure, organization and culture can be very different. Large companies with multiple business units (often geographically dispersed) are typically faced with the question of how to tackle their procurement function, providing continuity of supply, minimizing risk and leveraging spend across the organization.
Procurement functions typically fall into one of three models.
1/ De-centralized
This is characterised by business units executing their procurement activity locally – they will typically be responsible for supplier selection – executing orders, and managing supplier relationships and improvement initiatives.
2/ Centralized
Most if not all procurement is carried out by a central function within the organization – this is often facilitated through a single MRP system where requirement and fulfilment can be managed through a single system. Supplier relationships are managed centrally and performance management takes place centrally.
3/ Hybrid
The third option, and arguably the most common, is a hybrid of centralized and decentralized where the operational element of the procurement activity (i.e. the requisition and purchase order process are carried out within the business unit) and either part of or all of the strategic procurement element (supplier selection, performance management, deploying key initiatives) are run centrally.
Key Benefits of Consolidated procurement
There are a variety of benefits associated with consolidated or centralized procurement – these include
• Centralized deals and contracts with major suppliers
• Consolidated performance measurement
• Relationship management
• Deploying key initiatives and championing technology
The key benefit from centralized procurement is a global view of the supply chain, total visibility across all suppliers from a top level – viewing the consolidated spend not just of individual suppliers but from suppliers within groups or holding companies. This view can facilitate effective account management and consolidation of spend.
Problems of Group Procurement
Whilst deploying a group procurement function can bring many benefits it is not without its problems – some of these are:
1/ Communication challenges – both with the external suppliers and with internal customers
2/ Maverick Spend outside of agreements made by some business units not buying into group procurement deals
3/ Cultural issues around ownership of the purchasing process
4/ Product/Niche knowledge
Reasons for deploying centralized procurement
Large organizations deploy group procurement initiatives for two traditional reasons
1/ Cost Saving
2/ Efficiency
Cost savings are traditionally obtained through consolidating spend (supplier rationalization) and negotiating discounts based on that spend. Large and geographically spread companies will often have a diverse and fragmented supplier base. Through the deployment of commodity programs spend can be grouped and appropriate deals be found (including through sourcing suppliers in low cost countries).