There are three key areas they should understand as they consider CLP for their organizations.
In his book “Who Says Elephants Can’t Dance,” former IBM CEO Lou Gerstner voiced what Purchasing professionals have known for decades when he cited centralized purchasing as one of the first things a company should do to save money.
Consolidating common purchases across the enterprise provided the first great wave of procurement savings. But although there are still billions of dollars in savings to be captured from better execution of centralized purchasing, leading purchasing organizations see the limits of pure centralization and are forging ahead to explore new frontiers.
The limits of centralized procurement
In complex, distributed enterprises, complete centralization is not always practical or even desirable. For example, central purchasing organizations are sometimes unable to outperform local procurement buyers, with their knowledge of local supply markets and consumption patterns.
And of course certain goods and services categories – snow removal being the classic example – are simply not well suited to centralized purchasing. Even for categories that logically could be centrally purchased, organizational politics, tax considerations or regulatory requirements often require local procurement.
Many purchasing organizations have experimented with permutations of centralized and decentralized purchasing. After a few swings of the pendulum between these poles, and experiments with other hybrid models, many procurement leaders have embraced Center-Led Procurement as the synthesis of opposites.
CLP combines many of the most attractive aspects of centralized and decentralized purchasing models. It extends the reach of the Purchasing organization to lead and improve procurement processes regardless of whether they are executed centrally or locally.
Center-Led Procurement gives the central Purchasing organization influence over distributed purchasing process, allowing them to promote best practices into spend that they don’t directly control.
But like the old Wall Street admonition to, “buy low, sell high”, instituting CLP is easier said than done. Maximizing savings from CLP requires Purchasing leaders to think in new ways in three key areas: policy, operating models, and measurement. Spending some time now thinking about these three challenge areas can save time and trouble down the road.
The policy challenge
Appropriate policies and the mechanisms for creating them are even more crucial to success in Center-Led than in centralized procurement. While a completely centralized purchasing organization could (at least in theory) declare that all purchases must pass through it’s gates, CLP requires a more flexible approach.
The Purchasing organization must develop policies that structure and guide all buying, while leveraging the best expertise in the enterprise for each category.
Ironically, this may mean that purchasing policy is not determined by the Purchasing department. Purchasing’s power diminishes when dealing with far-flung and sometimes autonomous business units. Procurement organizations must realistically assess their political strength in the organization, because they risk damaging credibility if they unilaterally dictate policies that business units ignore.
Instead, smart Purchasing leaders gain influence by building cross-functional “category councils” with representation from all geographies, functions (e.g. finance) and in perhaps even suppliers represented.
Inviting non-purchasing experts into the policy-formulation process requires Purchasing to surrender some direct control in order to achieve broader influence. This trade-off ultimately leads to greater measurable savings because the policies that are developed with business unit buy-in receive much better compliance.
If you attempt to write specific policies for every corner case, you will quickly pass the point of diminishing returns. Better to focus on the details of the top categories, and the generalities of the less important ones. Because it isn’t practical to write explicit policy guidelines covering all situations, purchasing should lead the creation of “category councils” for setting policy on only for the most strategic 10-20 categories.
Purchasing’s contribution to these exercises include exposing and documenting hidden cost and savings drivers. As much as possible, make business leaders responsible for enforcement and manage the most egregious violations by exception.
Implementing and enforcing policy in CLP is significantly more complex than in purely centralized procurement. Technological infrastructure is a necessary, though not sufficient condition for enterprise-wide enforcement.
While procurement systems cannot write policy, they can help enforce it in distributed transactions. Automating routine transactions can also give Purchasing professionals more time to manage exceptions and conduct higher-level analysis such as contract coverage and compliance.
The operating model challenge
CLP is not itself an operating model, but rather a framework for applying multiple operating models according to which will save the most money in each particular situation. The most important of these operating models are centralized, transfer, central sourcing, and decentralized (see figure 1). Because Center-Led Procurement applies any and all of these models rather than advocating a particular one, it demands flexibility of both your organization and your systems.
The key challenge of mixing operating models is learning to guide transactions the Purchasing organization does not directly control. This differs from the coercive power to approval or rejection, requiring Purchasing to build new relationships with business stakeholders.
This is Purchasing’s own form of “Matrix Management”, and often requires new kinds of skills including: design and engineering to understand the contribution of innovation to price/performance, IT to understand the value of technically aggressive suppliers and improve internal systems, and interpersonal skills to influence others and sell procurement initiatives. This need for expanded skills has brought an influx of talent to leading purchasing organizations.
Mixing operating models also creates challenges with respect to information systems. Procurement automation must be flexible enough to implement different models based on any “sliced and diced” combination of category and organizational entity. For example, if a particular component is purchased centrally as a rule but is sourced locally for a subsidiary in China, CLP requires intelligent application of purchasing rules from central agreements as well as local sourcing for China.
One less obvious benefit of mixing and matching purchasing models is that you can decouple the physical and logical location of purchases and put individual parts of the process anywhere. One example of this is saving money by moving low value, low skill purchasing functions to lower cost locations. However as much or more benefit can come from doing the reverse and moving high value high value activities (e.g. best practices, rfq and contract templates, research on categories) to locations where the highest skills are available.
The measurement challenge
Center-Led Procurement requires new forms of measurement suited to Purchasing’s expanded oversight of traditionally decentralized categories. Measuring the savings from centralized purchasing is hard enough, but to show success in CLP Purchasing must face the much harder challenge of documenting savings in spend it does not directly control.
But taking immediate baseline measurements and showing rapid improvement upon them is essential. Center-Led procurement inevitably imposes new processes and often new suppliers on business units, which will push back unless Purchasing show evidence to senior management that the results are worthwhile.
Once initial credibility for CLP is established, the focus of measurement shifts. Aggregation of PO data for consolidation opportunities remains important, but more strategic measurements come to the fore. Purchasing leaders measure supplier performance, BU’s commitments to following policy, violations, contract compliance and leakage, regulatory compliance and more. With so many metrics to follow, Purchasing professionals need to be able to view up-to-date information themselves at any time rather than waiting for IT or external consultants to prepare reports.
Though it’s easy to tout the importance of measurement, most organizations find that poor data quality makes meaningful measurement very difficult. Purchasing must therefore take the lead in maintaining data quality and educating the entire organization on why this data matters to everyone. Despite best efforts to enlist local cooperation though, it is Purchasing must take the lead in committing both dollars and heads to this effort. Local IT departments are unlikely to have the resources, focus or political will to fully support this corporate-level objective.
Purchasing success often leads to bigger savings targets. Center-Led Procurement is generating interest among procurement professionals because it offers the chance to mine a previously untapped vein.
Despite the challenges it poses, Center-Led Procurement offers enterprises an expanded set of savings opportunities. For those willing to commit the needed organizational and system resources, CLP can provide the next great wave of procurement savings.
Things to remember with Center-Led Procurement?
Center-Led Procurement suits the procurement model to the needs of the business unit and the special characteristics of specific goods and service categories.
CLP applies different purchasing models – including centralized shared-service, decentralized and hybrid buying – depending on what is being bought, who needs it, and where it will be used.
Center-Led Procurement decouples the physical and logical locations of procurement activities. Buying is executed where and how it makes the most sense, while the Purchasing department contributes structure, expertise and measurement to the process.
Major manufacturing components such as drive trains for automobiles are usually centrally sourced by Purchasing. On the other hand, snow removal services are impossible to source on a strictly central basis because supply markets are highly localized. However, central purchasing organizations can still save money on snow removal by providing business units with best practices for contracting these services in local markets.