6 Key Organizational Structures You Can Consider To Optimize Procurement
Should your organization be centralized or de-centralized? Many business leaders struggle with building the right organization structure for their procurement organization. While there are advantages for individual business units, a decentralized structure can create an environment where leverage and synergy are lost and category knowledge is not captured. Conversely, when an organization centralizes all its procurement, it can miss key local, geographic market opportunities and sub optimizes individual business unit requirements, creating dissatisfaction among stakeholders.
The goal of any organization is to maximize leverage and synergy, create expertise, drive cost and value improvement and accommodate geographic and local business requirements. The different possible organizational structures discussed recently in a webinar that organizations can adopt are:
Decentralized Purchasing with No Collaboration: This type of structure has a financial holding company, financial business or mergers or acquisitions which allow the company to work independently. Purchasing covers a range of categories of expenditure under the control of local site management. There is no integration between the global business strategy and local business unit. Though this structure is absolutely focused on to internal customer service but it makes no attempt to locate and exploit synergies and has almost little or no cross-business best practice.
Decentralized Purchasing with Limited and Managed Collaboration: Organizations in this structure are decentralized and brings together a purchasing council or collaboration cell to work on certain level of spend as a team. The problem is, though the team works for the entire organization, their activities are mostly focused on the independent business unit rather than to the best interest of the organization. The advantage of this structure is better coordination without the disadvantages of centralization and the complexity of dual reporting where it operates directly under the business unit manager or CPO or VP of Operations.
Centralized Control: The organization is channelled into a central functional team with authority over country or worldwide sites. This cuts through the organizational difficulties of dual reporting. It maximizes volume leverage and cost control. But it could be isolated from the local or regional market.
Centre Led: This structure puts a strong focus to help organizations to leverage synergy across a bunch of business units. It develops centralized expertise, as in most cases it deals with the suppliers who contribute to 80% of spend. This structure tends to be regional and operates in regional markets or markets setup for specific regions. Hybrid organizations are best suited for this kind of structure and it avoids the tendency for isolated, distant, heavy handed corporate control.
Profit Centre: All purchasing activities are run from a free standing business unit with normal commercial disciplines and requirements. Operators of profit centre make the money and return them to their own individual businesses. Its trading accounts holds responsibility, authority and accountability for generating benefits. But this is not much practiced, as not all organizations are willing to set up a separate business unit for procurement. The disadvantage of this structure is, purchasing rather than supporting the business can prevail and buying becomes more important than value for business.
Outsourced to a 3rd Party: It’s a powerful way of simplifying the internal purchasing process where the organization retains control over sourcing and outsources a part of the requirement or all of it.
For more knowledge about organizational structure and how to optimize the procurement organization, watch this on-demand webinar.