Centralization is the answer to procurement today. It’s just how it is. You see, the average Chief Procurement Officer or CPO doesn’t deal with just a handful of sourcing categories. The global enterprise is larger than ever and that means the average CPO is managing every single sourcing category that such an enterprise has to deal with. So, centralization is the only effective way to ensure efficiency.
There was a time when centralization itself was the big topic of debate. That’s simply not the case anymore.
Today, we have a very different debate taking place – the debate on how much centralization is actually necessary. Well, a recent survey from ProcureCon gives us a better idea. It gives us a deeper look into the 3 main centralization models that CPOs have adopted in the last year or so.
So, let’s take a look
The 3 levels of centralization
There seems to be some discrepancy between the various levels of centralization that CPOs deem necessary. All said and done, categories that can’t be sourced globally must be sourced on a regional level.
Anyway, here is what the 2018 ProcureCon CPO survey found out with regard to the question of how important centralization was to procurement.
The study primarily outlines three centralization models based on the responses received, besides a single strategy approach.
The first is the full centralization model, which was practiced by most CPOs. Here the CPOs use an extremely centralized approach to procurement. They establish policies and take charge of global spending to the highest extent possible.
Then comes the ‘centralized with local processes’ model, which was adopted by 25% of CPOs. Here, CPOs rely on a centralized framework but permit niche sourcing activities to be carried out on a local/regional level.
The third approach is the ‘center-led’ model. Here, policy is guided by excellence, but the
execution of the strategy is carried out in a distributed or self-serve manner.
The last approach is the one that avoids centralization. Here, leaders carry out strategy without any centralized leadership group.
The ideal approach
In general, there has always been a preference for the center-led model. In fact, in ProcureCon’s previous study, it was the center-led model that showed up as the organizational structure that most CPOs preferred. However, the idea that only an absolutely centralized approach would work isn’t true. There are several other ways in which organizations can ensure that they stay relevant. The only requirement here is that the chosen model possess a coordinated and comprehensive strategy towards procurement.
According to some experts, the model that dominates today is the centralized procurement model. There are several reasons for this. To begin with, a centralized procurement model provides a complete view and gives birth to synergies that deliver decreased operational costs, increased efficiencies, and optimized processes.
On the other hand, a center-led model does not provide the same kind of value that a 100% centralized model provides. The center-led model particularly misses out on the economies of scale that are associated with centralized models. Other than that, centralized models also provide more visibility into areas that are perfect for improvement.
Some experts, however, state that there will always be a need for support from local and regional sources. So, it shouldn’t come as a surprise that the ideal approach would be to split appropriately i.e. opt for the centralized approach where and when applicable and go for the localized approach where and when applicable. However, the key requirement, in any case, would be to ensure that the chosen model is a coordinated one.