Decentralized or centralized—how should you organize procurement?
While a decentralized procurement model has been the historical norm, recent years have seen a surge in the number of organizations that have opted to embrace a centralized procurement format, through which all purchasing decisions within a company are routed through a single department arranged for that sole purpose. However, just because this is the trend does not mean it is universally advantageous to all organizations, or at least not in all scenarios.
The decision of whether or not an organization adopts a centralized or decentralized procurement model isn’t simply a matter of personal preference. There are foundational factors that determine whether or not either model is suitable for a company to adopt, or even if a combination of both models is the most ideal procurement solution. These factors can include the region an organization is located in, the industry it conducts business in, or whether it operates in the public or private sector.
With this in mind, we’re going to delve into both procurement models and identify the scenarios in which either of them might be a helpful system for your organization to implement.
The case for centralized procurement
There are a variety of reasons why organizations are either considering or already shifting toward centralized procurement. One procurement leader crafts a compelling argument by listing several of the potential benefits: “spend under control, supplier consolidation, supplier innovation, leverage with those suppliers. Fewer risks. Less fragmentation.” But when asked to predict if we will see more centralized procurement desks in the future, her answer was a clear no.
Having a specialized procurement team with complete oversight of the business can improve overall spend accountability, reduce the number of vendors teams are working with, and help companies to realize substantial savings with economies of scale—all of which ultimately drive efficiencies. Given the benefits, why aren’t procurement leaders all predicting complete centralization? It’s because most anticipate a blend, a careful balance between centralization and decentralization, to be the future.
“It’s still a mix because you have human behavior,” says the Senior Director of Indirect Strategic Sourcing for a Fortune 100 pharmaceutical company. “You’ll always have one-offs take place. But when you’ve got more than 80-90% of spend under management, that’s pretty good.”
For Nathan Haydn-Myer, Senior Manager of Procurement Operations and Supplier Management at VSP Global, “One of the biggest benefits from a centralized procurement organization is visibility across the board. Procurement can see what's happening from one side of the business to the next, and they're able to pull deals together or pull purchases together, that would have been separate otherwise.”
But Haydn-Myer also doesn’t believe that centralization is a cure-all. “If you have areas that have procurement desks and processes that are super mature, I could see those areas becoming a little more decentralized.”
To an extent, it seems that centralized procurement is part of a growth phase for organizations. While it may be necessary now, if only for the department to develop its identity, structure, and influence within an organization, more mature departments imagine being able to deploy their team in specialized procurement roles across the organization. If this were to occur, procurement departments would likely need to be well-oiled machines before decentralizing once more.
Generally speaking, the primary benefit to adopting a centralized procurement model is the ability to achieve greater cost savings through consolidated spend and economies of scale. However, there are several other benefits, including the accumulation of vast amounts of data through which organizations can achieve a greater ability to perform a variety of comprehensive spend analyses. This data allows organizations to enter negotiations armed with a higher caliber of information, and culminates with more informed purchasing decisions. In the modern era, this information has become simple to access due to the technological, software-driven renaissance of e-procurement, and the easy consolidation, storage and sharing of information.
Because centralized procurement systems appoint a central point of contact for suppliers, it eliminates spending by multiple stakeholders throughout the organization, thereby reducing maverick spending. This increases efficiency, and makes it easier to manage the inventory. Furthermore, it also simplifies the process of enacting strategic initiatives into the procurement process, like sustainability efforts.
While the advantages of centralized procurement are clear and plentiful, there are some potential downsides to it, depending upon your point of view. Forcing all decisions to be run through a central office adds a layer of bureaucracy to purchasing decisions that doesn’t always result in decisions being made in an expedited fashion. The purchasing process within centralized departments is often slower moving because the process of getting a purchase approved is inherently slower than making immediate decisions as soon as materials are needed, and also because the centralized method frequently calls for purchases to be bundled together to achieve discounts. This level of strategic procurement regularly saves money, but often sacrifices valuable time in the process of achieving those cost savings.
Another criticism of centralized procurement is that it occasionally receives undue credit for overall savings within the organization while hindering specific departments requiring materials that don’t benefit from price breaks, yet still have to get their purchases approved by the procurement team.
The case for decentralized procurement
Procurement leaders all seem to support one common argument in favor of decentralization: specialization. “I don't have buyers that are buying stuff for scientists, says the pharmaceutical procurement executive. “I have strategic sourcing people who run multimillion-dollar projects. It's the diffuse user base that buys what they need.”
Whether to centralize or decentralize procurement, as always, depends on the context. For larger organizations in which procurement has become a value-add function, as opposed to a cost savings function, there seems less need for a centralized team. Ernie Hernandez has centralized teams across different locations with individuals focused on specific specializations—a unique hybrid model. For him, it makes the most sense to have some categories with national vendors, and others with a regional or local vendor relationship. And yet, he also dreams of a concept that would “embed” his team within different departments. “I see a benefit to a balance. But a balance towards centralization. You've got to have some centralized planning with a lot of feelers out to the decentralization.”
The key to the equation seems to be finding an equilibrium. Teams require a centralized process. For decentralization to work, leaders will need a team that knows the needs of another department well enough to oversee their buying. Without specialized knowledge of other departments, centralization could prove to be a hindrance to the speed of an organization. The result of this could also mean less buy-in from different lines of business, and more fragmentation from a process standpoint.
Says Haydn-Myer: “If there are significant standard processes in place, I could see the company saying, let's just leverage the processes. Let's push those down into the business and we can start to decentralize procurement a little bit. But again, I think if you're a value-driven organization, that's not the case. I think you'll continue to see procurement centralized.”
Decentralized procurement is a frequent favorite of public organizations, or in companies that are mandated to make locally sourced purchases for one reason or another. Moreover, engaging in decentralized procurement is better when it is essential for an organization to acquire a firm understanding of local supply markets, and for addressing local cultural challenges. Aside from the benefits connected with making local purchases, decentralized procurement requires no waiting times between the recognized need for supplies and the purchase of those supplies, which is particularly vital in emergency circumstances.
Yet, centralized procurement has a fundamental advantage inasmuch as procurement departments are staffed by procurement experts capable of seeking out and negotiating the best terms on bulk orders. When orders are scattered across multiple departments of non-expert purchasers, spend analysis becomes virtually impossible because the data from purchases is unstandardized and disconnected. In addition, procurement personnel are familiar with compliance issues, and are less likely to place their organizations at risk through careless purchases.
In some public situations, centralization of procurement has been viewed as problematic, because it can be viewed as interfering with the day-to-day operation of government departments, and strips managers of much of their fiduciary controls despite the fact that they are stringently judged on the basis of their efficient oversight of those departments. In these instances, with recognition being granted to the cost saving benefits of centralized purchases, a common recommendation is for the decentralization of low-dollar purchases. Because of the added flexibility that comes from these sorts of arrangements, a hybrid model that mixes the most attractive features of centralized and decentralized purchases is expected to proliferate in increasingly more organizations as time moves on.
The impact on vendor relationships
Centralized and decentralized procurement will influence vendor relationships differently, depending on the context. Most procurement leaders predict that centralization should improve vendor relationships, at least when it comes to their business’s own interests. Consolidating agreements, establishing a clear point of contact, and increasing transparency will lead to simplified agreements that are more in line with business needs.
For Kane, centralization makes a lot of sense. “I’ve had suppliers come to me asking for one contract. I could have a better relationship with [the vendor] by having one person having the conversation and crafting the partnership. Divide and conquer is bad for everyone.”
For organizations that have long standing relationships with local vendors, centralization could prove a challenging decision—one that will require them to sever ties if price transparency paints a clear picture. “If you're centralizing and you've got better oversight in that vendor relationship, I think you could potentially create a rocky road for that supplier,” says Haydn-Myer. “But if those relationships with your suppliers are strong, and they understand the reasoning behind it, I think it can be a big boon to everybody involved.”
Much of the negotiation process is about matching the needs of each party. Having an account lead who handles all communication with a supplier should help with mutual understanding. Not only does it have the potential for an organization to cultivate better relationships with its vendors, but it could also lead to better deals with those that stand out.
Hernandez agrees. For a business with both local and national vendors, “if procurement is more centralized, it's going to be easier to have a relationship with that national supplier because it's a single category buyer or category manager,” he says. “And they should have a national account manager.”
Working upstream with vendors will help them to better value-match the needs of their partner organization. It will force them to improve their planning to meet demand or find new ways to innovate in order to match it.
Choose what’s best for your organization
Whether or not your organization should adopt a centralized or decentralized procurement model is influenced by several factors, and you should inspect your surroundings with great care to determine which model is best for your circumstances. In many cases, adopting a hybrid model, incorporating the best features of both procurement systems, is the most suitable choice for maximizing cost savings and maintaining organizational speed and efficiency.
As an added note of caution, if the transition from decentralized to centralized procurement is conducted in a careless manner, without explaining the reasoning behind the procedural change, it has been known to result in hurt feelings from managers that view the transition as being necessitated by their poor stewardship of resources. Therefore, it is advisable to establish that the change is not an indictment of their spending practices, but part of an overall cost-saving strategy designed to maximize savings and reinvest them into their individual departments.
