The Fine Art of Procurement Organization Design

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Raw data doesn’t always paint a full picture — particularly when that picture is made up of complex layers and subtle shades.

This is certainly true of a survey we conducted recently about organizational design in procurement. Upon first viewing, the data points strongly to a continuing trend toward centralization of procurement activities. Indeed, 70% of those working in the function expect it to become more centralized, rather than less, over the next five years.

And yet, talking to chief procurement officers (CPOs) in more mature organizations — those who have already experienced highly centralized sourcing strategy and execution — for a new report, it soon becomes clear that there is a counterbalancing force at work.

Many of these CPOs are quietly revising their operating models and moving the organization design pendulum back toward a middle state between centralization on one side and decentralization on the other, as depicted in this graphic:

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What explains this about-turn?

Centralization Benefits

Before answering this question, let’s look at the main feature of the organizational design picture. Our data shows that, as in 2015 when we last asked the question, procurement is the most centralized of the core supply chain functions, and second only to strategy. Almost half of practitioners (49%) say direct materials sourcing is run by a central team, while 41% say the same about indirect goods and services.

There are good reasons for this. Leveraging size and scale to consolidate purchased items from fewer suppliers reduces costs and increases compliance. It enables procurement executives to build influence with key external partners to mitigate the effects of supply shortages and access innovation.

Centralization of resources, processes, tools and systems brings rigor and consistency to the way sourcing activities are conducted. It eliminates wasteful duplication of tasks and allows specialist teams to develop best practices in newer areas like sustainability, responsible sourcing and analytics.

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Over the past couple of decades, professional, centralized procurement has delivered billions of dollars in cost savings. Understandably, few CPOs are ready to give this up, even if year-on-year returns are diminishing.

At the same time, there is a sense that building up procurement’s capabilities has, in some cases, taken on a life of its own. This inward-looking focus can all too easily detract from what business stakeholders actually need from procurement to get their jobs done.

In the words of Quentin Roach, CPO at Merck: “Procurement is a service function. It should be about service excellence to the business.”

The length of time it takes to run a full-service strategic sourcing project is a particular issue — especially in the digital age, where speed matters. Several CPOs noted that there was often a conflict in their companies between procurement’s desire for rigor and discipline and the business’s desire for speed and agility.

Those who are moving the pendulum toward a more balanced state are doing so in a bid to be more responsive to business needs and better able to support future growth opportunities.

Two Structural Changes

This shift is playing out in the form of two major structural changes. The first is establishing, or strengthening, regional or divisional organizations to bridge the gap between centralized strategy and decentralized execution.

Procter & Gamble is a good illustration of a highly centralized procurement function realigning to support business needs more effectively. Each of its 10 product categories now has a business purchasing leader who reports into the CPO, Stewart Atkinson, but whose main relationship is with product category leadership.

Part of their job is to figure out where global scale benefits can be achieved by buying across the enterprise, and where a more localized approach makes more sense. They also need to ensure that P&G is integrating key suppliers into its product development process, so that innovation cycle times can be speeded up.

This is precisely the kind of higher-value-adding work that strategic procurement organizations will need to prioritize going forward. So the second structural change is about segmenting tasks and activities in a more concerted way to free up precious resources.

Our research suggests that procurement’s headcount will decline over the next five years. Digitalization and automation will both reduce the need for transactional work to be performed by human beings and hasten the devolution of buying control away from the center.

Given this landscape, the challenge for CPOs in the 2020s will be how to retain the undoubted benefits of centralization, while becoming ever more responsive to customer demands for speed, service and differentiation at a more local level.

That’s the fine art of procurement organization design.

Geraint John leads research and practitioner-contributed content in sourcing and procurement, supplier management, supply chain risk and globalization at SCM World, A Gartner Community.

 

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