Why Decentralized Buying Is Dead!
Why You’re Increasingly Talking To Head Office
Sellers are increasingly being deferred to head office in their attempts to sell to the local plant or facility of a global corporation. That is because in most large organizations decentralized buying is dead, or at least dying. So, if you are selling at the edge of the organization, then look to the centre to insure your opportunities.
An End To Decentralized Buying?
Centre-led procurement is a key tenet of best practice. It represents an end to the decentralized approach where:
– Buying decisions are made at a; plant, business unit, or national level
– There is little organization-wide collaboration in the making of strategic sourcing decisions
– Managers are free to do their own thing.
How decentralized is the buying decision for what you sell in your key accounts?
Many sellers assume a decentralized approach to buying by their customers and rely on the freedom to buy of the buyer at a plant, or business unit level. That however leaves them vulnerable to surprises as the pull of the centre takes control of more buying decisions.
Which of your customers are ready to move to a more centre-led approach to procurement?
The Pull Of The Centre
Centre-led procurement is pretty much self-explanatory. It is procurement that is led from the centre. That means there is a coordinated and integrated approach in furtherance of the strategy of the organization. The following diagram shows the drivers of centre-led procurement.
To sum it all up: procurement is not going to be able to deliver superior business performance for the organisation unless it is centre-led.
Is there a pull towards the centre of the buying decision for your products and services?
Reasons Why Decentralization Is Dead
The rationale for decentralization was that each business had its own unique requirements and knew those requirements best – it also had existing supplier relationships. However, there are at least 14 reasons why decentralization doesn’t work in large organizations.
A. Decentralized Procurement Isn’t Strategic:
1. There is likely to be no long term vision and no clear consistent strategy for procurement. That typically goes hand in hand with a lack of clear accountability, with poor measurement of its performance and the results achieved. There is likely to be patchy adherence to buying procedures.
2. Tactical rather than strategic buying, with sourcing decisions being short term, and reactionary in nature. There is a failure to invest for the longer term – including in key; skills, systems and suppliers. Making real progress requires that procurement’s role cannot just be seen as finding the cheapest supplier.
Can you help your customers to adopt a more strategic approach to buying?
The easiest savings may already be taken, so procurement needs to adopt a more creative approach. This is particularly the case as it moves into more complex indirect categories where non price variables are more important. For deeper savings procurement will need to turn to strategies such as value re-engineering, demand management and supplier partnerships and innovation.
B. Procurement’s Scope Is Limited By Decentralization:
3. Lack of clarity regarding the role or scope of procurement. With less appreciation or support from the top, it’s authority is likely to be limited. It is more likely to be cast in the traditional more administrative role of processing POs, form filling and paperwork.
4. Procurement fails to reach the critical mass that is required to drive forward in key areas of best practice, such as; category management, use of procurement systems, supplier performance management and so on. There is likely to be limited benchmarking with competitors and peers in respect of procurement.
5. Limited career progression for buyers as well as less training and development. This is important in the context of investing in procurement, with a talented pool of ambitious ‘get ahead’ executives.
C. Supplier Management Suffers Under Decentralization:
6. No single voice to suppliers. May even be competing with other plants, or units for supplier attention. An array of varying prices and terms in place with the same suppliers.
7. Unnecessary proliferation of suppliers, as well excessive SKU/product variety and complexity. The organisation may be buying the same products, or components from many different suppliers, or variations of the same product from the same suppliers.
That means there are hundreds of suppliers, countless numbers of SKUs and thousands of supplier invoices extra to manage. All this means that the organisation is failing to leverage volume by aggregating and consolidating purchases with a limited number of selected suppliers to achieve maximum savings. It also makes supplier performance management more difficult.
D. Why There Is Less Visibility & Control Under Decentralization:
8. When everybody does their own thing there is reduced visibility and control. There is also likely to be siloed information and inconsistent reporting formats. This makes accurate analysis and tracking of spend difficult. Measuring the impact of procurement is difficult and so too is building the business case for change.
9. Poor use of systems to make all aspects of procurement more efficient. That includes increasing the level of administration in the procure to pay life cycle and limiting the ability of end users to order approved goods/services on-line.
10. Varying standards and level of compliance with external, as well as external standards, including; sustainability, buyer ethics, supplier standards, etc.
E. Procurement KPIs Suffer Under Decentralization:
11. Higher procurement costs- the cost of buying is likely to be higher. A duplication of procurement functions results in unnecessary overlap, a lack of synergy and most important of all additional costs.
Do you know the KPIs of your buyer?
12. There is likely to be more money being tied up in excessive inventory, work in progress and raw materials. This impacts on the liquidity of the business, its working capital requirements and its Return On Capital Employed (ROCE).
13. A centre-led procurement organisation is in a better position to manage supplier related risk and build supply chain resilience.
‘Centre-Led’ Versus Centralized Buying
The choice of the term ‘centre-led’, rather than ‘centralized’ buying is a deliberate one. The fact that procurement is centre-led, does not mean that some buying cannot and should not take place at the edge of the organisation.
Procurement can’t be everywhere. It does not have the budget or the manpower to reach into every single corner or the organization. That means it has to focus where it can have the greatest impact and use other methods to cover the rest of what is spent (e.g. procurement procedures, systems and framework agreements). The procurement style of the organization then determines whether the focus is on controlling with rules, or coaching for results.
Do you know the procurement style of your customers?
The key tenet of centre-led buying is that regardless of where in the organization the buying decision is made it should be consistent with strategic organizational and procurement strategies. So even if you are selling to the edge of the organization make sure to take into consideration what is happening at its centre.
Spotting Imminent Centralization
How do you know if the organization you are dealing with is going to become more centre-led with respect to procurement?
1. Look to see what has happened in its main competitors, as well as in its key customers.
2. Check to see how senior the head of procurement is at a group level, including whether he/she reports directly to the CEO/CFO.
3. Check for early indicators, such as
– The appointment of somebody with significant experience (from outside the organisation) to head up procurement
– The publication of a procurement policy
– The planned implementation of new procurement systems, or technologies.