Organizing Procurement Department Operations

Procurement Operations Management requires effective and efficient:

PurchTips Edition #456

Organizing Procurement Department Operations

  • Planning
  • Organizing
  • Leadership
  • Control

Following an initial assessment, the position of a Procurement Department within its corporate environment must be made clear. A clear direction for the procurement department must be developed, articulated, and shared. The direction does not need to have specific goals associated with it at this point, but rather a broad overview of what is expected to be accomplished.

The general direction may be based on one of the following items or perhaps something totally different that is specific to your organizational direction:

  • Procurement must help the organization improve quality
  • Procurement must reduce costs to support profit targets
  • Procurement must assure continuity of supply in order to cope with growth. This is also mandatory in time of severely supply chain disruption in events such as the global COVID-19 Pandemic
  • Procurement must execute Risk Mitigation Strategies to reduce the impact of supply chain disruptions
  • Procurement’s role is to provide a streamlined procure-to-pay process for its internal customers
  • Procurement must work with suppliers to bring innovative ideas into the organization

With a direction, procurement leaders better able to determine if the current organizational structure will help or restrict their ability to be effective in pursuing that direction. It may maybe realized that changes are required.

There are five common organizational structures for procurement departments:

Centralized – In a totally centralized procurement environment, the only people who place purchase orders are the staff of the procurement department. Anyone who needs a product or service for their department must submit a requisition to the procurement department, where a buyer will create a purchase order. Those organizations that choose a totally centralized structure do so for two reasons: control and total leveraging of spend. With a totally centralized procurement department, you can ensure that all spending is channeled with the proper suppliers, thereby maximizing your volume with those suppliers as well as your maximizing your discount. Despite these advantages, totally centralized procurement is not popular today. The thought of paying a professional to place $25 orders for simple items like office supplies makes executives shudder during a time where the pressure is high to keep labor costs low. In addition, the delays involved are unacceptable, especially since many low dollar purchases are simply “rubber-stamped.” A concern that some have with totally centralized buying is that decisions are made outside of the area possessing the expertise about the purchased product or service.

De-Centralized – In a totally decentralized environment, there is no central procurement department. Each area is responsible for its own procurement. While this may be favorable in terms of the cycle time involved in placing an order as well as keeping the decision making within the area possessing the expertise about the purchased product or service, it is very unfavorable in terms of control and cost containment. With totally decentralized procurement, the opportunity for fraud is very high. And, without combining the enterprise-wide spend, the organization is not able to take advantage of its volume and maximize its discounts.

Lead Divisional Buying – Some organizations have multiple divisions, often in multiple locations. Some of these divisions buy the same things as other divisions while others buy things that only their division buys. To keep decisions in the area possessing the expertise about the purchased product or service while also doing a better job of leveraging the organization’s volume for discounts, some organizations adopt the lead divisional buying approach. In lead divisional buying, the division who purchases the highest volume of a product or service is responsible for sourcing that product or service not only for their own division but for all other divisions. The “lead division” will establish the contract with the supplier and all other divisions will be able to buy from that contract.

Center-Led – The prevailing structure in today’s procurement world is the centered model. In this model, the procurement department places very few orders. Instead, the procurement department’s role is to establish contracts with suppliers and develop efficient, controlled processes for end-users to place their own orders directly. This structure ensures that Procurement’s labor is spent on strategic activities, rather than tactical activities like placing orders.

Hybrid – The larger the organization, the more difficult it is to make a single one-size-fits-all structure work. So, in those organizations, it is very common to find a hybrid of the structures. Some items, such as raw materials, maybe totally centralized, with only Procurement placing the orders. Other items, such as office supplies, may follow a center-led structure while specialized categories, like telecommunications equipment, maybe totally decentralized to the one department in the company that handles such categories.

This hybrid model brings us to the discussion of what items should Procurement be handling and what should it be decentralizing or leaving decentralized. Again, the trend is for the center-led structure to prevail. And the interesting thing about a center-led structure is that it can be successfully approached from opposite structures: centralized and decentralized. It is a little easier to move from centralized to center-led because Procurement-managed contracts are already established and all that needs to be done is delegate the order placement. It is more difficult moving from decentralized to center-led because end users will likely be resistant to having their supplier selections reviewed – and possibly changed – by Procurement. But at least they will be familiar with the order administration process. And that second scenario is where Procurement is going. Procurement has finally proven itself to top management as a profit improvement engine, so now it is being tasked with reducing costs in new areas of the organization. However, this does not mean that Procurement instantly becomes responsible for every category of spend. There is a typical progression in which procurement departments apply strategic sourcing tactics. Every Procurement Organization should have a long-term plan for its work.

 

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The Future Direction of Procurement & Supply Chain

Procurement and supply chain are fields that have changed tremendously throughout the years. They are much more multi-faceted disciplines than they were even just a few years ago.
If you’re a procurement or supply chain professional and you haven’t adapted to new ways of carrying out your work, the world is passing you by. But it’s not enough to try to get to where procurement and supply chain are today. You must prepare for the future of these important business functions.

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Copyright 2020. This article is the property of the Next Level Purchasing Association and may not be copied or republished in any form without the express written consent of the Next Level Purchasing Association. Click here to request republishing permission.

By David Millington, SPSM, SPSM2, SPSM3 - Director of Education (Next Level Purchasing Association)

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