If you are re-decorating your house, you know what you are in for – a series of visits to multiple furniture shops. You may expect to find one large international chain that could provide what you needed within 24 hours, albeit in less-than-appealing pastel shades of plywood. On the other hand, you may chance upon an independent trader who promises you splendid antique furniture, but that would take weeks to reach you as far-flung networks of dealer’s source and haggle over the right pieces. This is one of the many dilemmas that you are likely to face, and it goes to the heart of how procurement can affect a business vitally.
Too many people consider procurement to be a back-office function, treating it as an afterthought when running their businesses. It’s not.
With a little thought, your procurement model can be a key strategic lever that you can pull to maximize the value it adds to your business. Procurement management has seen a culture that has blindly focused on achieving savings and cutting costs. Many organizations simply follow a well-trodden path to a one-size-fits-all solution. It’s time for you to challenge this old thinking on procurement and explore its true potential.
Different procurement models have unique strengths and weaknesses. A model’s true value is realized by how well it benefits your business and improves performance. Like any function in your company, a new procurement model alone will not transform your business. Yet, as part of a cohesive and holistic strategy, a transformed procurement model will deliver significant results. Let’s look at the operations aspects of procurement.
There are three possible procurement model alignments – consolidated, distributed, and hybrid. In a consolidated model, a group of sourcing managers executes category strategy from a central unit. This drives procurement standardization across the business, increases spend leverage, and improves the sharing of knowledge. Knowledge of local supply markets is sometimes lost with the consolidated model due to the bureaucratic nature of the centralized unit.
In a distributed model each business unit holds responsibility for their category strategy individually. This speeds up the buying process, takes advantage of local expertise, and empowers business units to take their own procurement decisions. Distribution can create uneven performance across the enterprise with minimal chance of leverage and little purchasing co-ordination between business units.
In a hybrid model, governance of sourcing and category strategies is centralized while execution happens locally. By remaining flexible, this model maintains compliance while taking advantage of local supply markets. There is scope for inefficiency through duplication of roles and local preferences interfering with business-wide best practice.
To get the most out of a new model, whether consolidated, distributed or hybrid, businesses must consider the right process to procure the goods and services they need, use the right technology platforms to enable the process, and utilize services such as category knowledge and analytics to maximize effectiveness.
Fiat Chrysler is a prime example of how a shrewd procurement model can bolster other functions in a business. Through a centralized collaborative effort between engineering and procurement at Fiat Chrysler, 72 per cent of the components of any new car model can be derived from existing models. The remaining 28 per cent of components, typically unique to a specific model, are directly sourced from vendors around the globe. Between 2014 and 2018, since implementing this hybrid model, Fiat Chrysler estimates that it will make cumulative procurement savings of € 1.5 billion, while still bringing on new suppliers in Asia and South America.
Ultimately, procurement is about acquiring goods for your business. An analysis of what those goods are, and what provisions they need, is crucial to achieving the right strategy. An effective procurement model has to be right for your industry, not just for your business. Certain models tend to suit particular industries. The logistics sector, for instance, is best served by the distributed model. Though the unique nature of your business and factors such as corporate strategy and business unit distribution will influence the alignment you choose, it is helpful to have an indication of the procurement models that are best suited for specific industries. The figure below shows the procurement models and the industries they can be applied to.
While it is essential that you choose the appropriate procurement model for your business, it is equally important that the chosen model is implemented effectively. Due diligence is critical to its success. Decide the right approach after considering your organization’s overall corporate strategy and maturity. Harness your new procurement model to get the most out of procurement in the long term and ensure continued value.