How to Determine Procurement Organisation – Part 1: 10 Objectives for Procurement

A discussion has been running in the Procurement Professionals Group on LinkedIn to explore why do centralised procurement initiatives often promise substantial savings, then fail to deliver to the bottom line? Apart from historically falling short of expectations, we are facing new issues such as increasing emphasis on corporate social responsibility and sustainability. The discussion prompted me to write a short article setting out 5 models for procurement organisation and start another discussion, Is centralised procurement past its sell-by date?  What alternative model would you suggest, and why?” For this latest discussion I suggested, irrespective of what worked in the past, we should focus on what will work in the future.

The question of centralisation vs. decentralisation, and this article, are most pertinent to large multi-national corporations. When I think of moving away from centralisation (reversing the general trend of the last 20 years) I am thinking about the drivers for change… also that there is a logical process to determine the best model. I am not suggesting that there is a ‘right’ model for all circumstances but a series of internal and external factors which, when taken into consideration, will indicate the preferred model. I shall return to these factors and the process in a future article. For the time being I want to concentrate on the purpose of Procurement in terms of the achievement of certain business objectives.

Procurement must take its part in the delivery of a set of business objectives listed in Table 1. The 10 objectives sit on the price-down-to-value-capture continuum (i.e. price down, cost down, cost out… value creation and value capture), from purely tactical to highly strategic. Whether Procurement should take the lead is a subject for future debate. To contribute effectively demands a capability maturity not found in many procurement organisations.

TABLE 1

The mis-selling of central procurement

Standardisation and upskilling of procurement have been selling points of centralisation, together with the promise that procurement will be more strategic. But has centralisation been mis-sold?

Undoubtedly, a more professional approach has delivered benefits in short-term cost cutting and generally bringing spend under control. Central procurement in large corporations can bring benefits from harmonization of approach, developing capability, methodology, governance, etc. Where business units cannot justify full-time experts it makes sense to provide them centrally.

However, centralisation is failing to live up to expectations when it comes to creating value. In value creation, business skills and cross-functional working are more important than detached functional skills. Silos of excellence offer no solution. Apart from building a brand, value creation opportunities are specific to individual value chains so must be pursued within strategic business units, not as corporate-wide initiatives. Where it is not possible to justify specialists at local level they may be provided centrally. Ideally we would want to embed the skills within SBUs.

As for standardisation, arguably the benefits are diminished as we move up the price-down-to-value-capture continuum. There are few procurement teams operating at the value-capture end. This is pioneer territory. Procurement standardization at the value-capture end may even be detrimental. Pioneers do not follow accepted ‘best practice’; to do so would guarantee mediocrity!

The conclusion? With the exception of narrowly focused businesses, fully mature procurement and centralisation are in conflict and, at worst, incompatible.

 

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