For the majority of organizations the leadership of sourcing and procurement should be the same. Why? Sourcing and procurement are part of the Procurement to Pay process and uniting the responsibility and accountability under one leader is more efficient and leads to higher net savings. A typical organization chart for a centralized sourcing and procurement organization looks like this:
the centralized procurement structure is efficient and eliminates duplicate positions. The centralized procurement org structure aligns sourcing and tactical procurement.
A center led procurement structure moves tactical procurement closer to the organizational structure of the enterprise.
There are multiple reasons for structuring a procurement organization in this manner, even though it duplicates positions and adds cost to the procurement function. The three most common variables for this structure are:
Although common, is this a wise structure for an enterprise to utilize? It is our opinion that the costs exceed the benefits. Even if tactical procurement personnel are dedicated, they should still be under the leadership and direction of the CPO. Why? A number of reasons:
- Strong organizational autonomy and a weak corporate structure
- Extremely disparate product or service lines that require focused management during the order to delivery cycle
- A portfolio organization that maintains duplicate corporate functions at the divisional or subsidiary level
During any period of time, even in organizations that donít experience seasonal demand, tactical procurement activity will ebb and flow. Being able to utilize resources across the organization reduces costs.
To facilitate workload balancing, you must cross train procurement professionals. This org structure facilitates well rounded procurement professionals with robust skill sets, increased value, and the ability to experience greater job satisfaction.
- Employee workload balancing
- Cross Training
- Supplier Relationship and Performance Management
- Corporate Governance
Suppliers may cross division boundaries for the same or different commodities. The global visibility to a supplierís performance can increase leverage and offer greater opportunities for the suppliers that perform well. These suppliers are leading candidates for strategic partnerships.
Cost is reduced as duplication of people is reduced although this is not the primary reason to move to centralized procurement organizational structure.
As business regulation increases and supply chains stretch across the globe, the CPO will become the target for greater regulation and litigation. Everyday, another failure to detect poor quality in the supply chain is reported to the news media. The CPO must be responsible and accountable for failures in the supply chain and have the ability to take action. In addition, an increasing number of corporations are trying to reduce the inducements that suppliers lavish on corporate buyers for preferential treatment. A centralized procurement structure can improve visibility to supplier and employee behavior. Corporate governance of the supply chain is the next target for the trial bar.
Is there any reason to implement a center led procurement organization? The answer is yes. If the enterprise is a portfolio organization (as are many private equity led groups) or enterprises that have grown primarily through acquisition, then it can be attractive to maintain a full corporate structure at the portfolio company. This is with the implied assumption that what can be bought can also be sold or taken public. It can be advantageous and cost effective to maintain the tactical procurement organization for a short time and not incur the costs of isolating the transaction organization when the enterprise is severed from the portfolio.
The centralized procurement organization is a more efficient structure for most organizations and although management theory in recent years has led us toward the weak corporate structure, the procurement organization should be centralized and serve the entire enterprise.