Wednesday, September 9, 2009

Different Types of Organizational Structures for Purchasing Function.

Enterprises have long struggled with how to best organize procurement and supply management groups to optimize and continuously improve supply costs and performance. Traditionally, enterprises have faced two primary options for organizing procurement operations – each with its pros and cons:
a) Centralized organizations leverage corporate spending and drive standard sourcing, process, and technology decisions as well as execution from a central command and control group. While offering greater spending leverage and operational efficiencies, centralized structures result in higher incidences of unapproved spending, process circumvention, and uneven performance.
b) Decentralized organizations empower business units and sites with autonomy and control over supply, process, and technology decisions, as well as sourcing and procurement execution. This structure improves satisfaction at the site- and business-unit level, but fails to leverage corporate spending; is costly to operate; and leads to inconsistent supply cost and performance across the enterprise.
A recent research of supply management executives at more than 100 global enterprises found that procurement’s role in strategic operations has increased dramatically over the past five years. Macro-economic factors, such as globalization, regulatory pressures, procurement automation, outsourcing, and supply market instability, are driving more companies to view procurement as a catalyst not only for supply cost reduction and assurance but also for market expansion, product innovation, and compliance.
In response to such elevated expectations, many enterprises are moving to up-skill their procurement teams and employ new supply management strategies and systems infra-structures. However, transforming procurement into a center for value creation will require companies to overhaul both how they organize the procurement function and how they align supply management operations with overall business activities and goals.
Traditionally, high operation and transaction costs and limited information flows forced most enterprises to adopt one of two procurement operating models: centralized command and control or highly decentralized operations. Each of these organizational models offered benefits and challenges.
Centralized Procurement Structures
Centralized organizations leverage corporate spend and drive standard sourcing, process, and technology decisions as well as execution from a central command and control group. Centralized organizational models provide economies of scale that improve spending power, enhance operational efficiencies and knowledge sharing, and enforce process and policy standardization.
While good in theory, centralized procurement models have not always performed well in practice. This has particularly been the case in large, geographically dispersed organizations, especially those that have grown through merger and acquisition. In these environments, site and plant managers often resist centralization, feeling that centrally mandated supply decisions and policies slow operations and do not satisfy local supply and quality needs.
As a result, centralized procurement groups often report high incidences of unapproved (“maverick”) spending, process and policy circumvention, and uneven supply measurement and performance
Decentralized Procurement Structures
Decentralized organizations empower business units and sites with autonomy and control over supply, process, and technology decisions as is the case in Askari Cement Ltd Wah (business unit of Army Welfare Trust) & other allied units of AWT. In a decentralized environment, sourcing decisions and procurement activities are executed by individual business units or plants. This structure improves satisfaction at the site and business unit level and speeds process and issue resolution by avoiding much of the bureaucracy and “red tape” that comes with centralized procurement models.
However, the decentralized organizational model comes with many negative side effects. Decentralized models optimize to the individual site level, and neither fully leverage corporate spend nor support the supply or business objectives of the organization. In such environments, there is little coordination or information sharing between divisions and sites. Decentralized models do not share systems, expertise, and resources across sites, resulting in higher operating costs and uneven supply cost and performance across the enterprise.
Center-Led Procurement: Model for Strategic Operations
The above factors make fully centralized or decentralized organizational models ill-suited to support and sustain procurement’s new strategic role. Higher expectations and new (and global) market pressures require enterprises to consider alternative organizational structures that can provide the spend leverage, process standardization, and knowledge and resource-sharing attributes of centralization with the local empowerment and execution characteristics of the decentralized model. This has been the case in AWT also i.e. Center-led procurement model is adopted at some levels.
To better understand procurement organizational design issues and approaches, a research group interviewed more than 100 chief procurement officers (CPOs) and vice presidents and directors of procurement and supply management. This revealed that that “center-led” procurement is the preferred organizational model among supply management executives. In fact, more than 75% of enterprises will have completed or be in the process of shifting to a center-led procurement organizational structure by 2009.
This emerging center-led structure relies on cross-functional and -divisional teams, flexible process and policy standards that can be tailored at the local level, coordinated metrics and incentives, and an integrated procurement information systems infrastructure that automates and aligns source-to-settle processes across the enterprise.
New market pressures are pushing procurement to the frontlines of corporate strategy. But traditional procurement organizational models fail to provide the control and flexibility required to meet these new demands. As a result, an increasing number of enterprises are adopting a hybrid or center-led procurement model that offers the spend leverage, process standardization, and knowledge- and resource-sharing attributes of centralization with the local empowerment and execution characteristics of the decentralized model.
Center-led firms reported greater and more effective use of procurement automation, higher level reporting structures, and more efficient and effective operations. As a result, it is projected that the center-led organizational structure will emerge as a competitive differentiator within and across industry segments.
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2 comments:

Rakshana said...

Hi,
This is an awesome piece of article which explains about the procurement structure in an organization. Could you tell me how many hierarchies are there in the procurement structure?

florence said...

Hi
Good work, but please i think most people will also need the structure of the purchasing department like me.