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Centralized Vs. Decentralized: Can Firms Succeed Using Procurement Methods?

All businesses are looking to save money, and they’re looking at all aspects of their operations to see where savings can be achieved. This includes procurement initiatives. Are centralized processes more efficient than decentralized ones? Could a company make the two strategies work in tandem?

How companies handle their procurement can vary as much by where they’re located as by what they do. As PYMNTs.com reported recently, while two out of three European firms use a centralized travel-procurement operation, for example, only one out of three North American companies do, according to the report from Egencia. Moreover, travel procurement can have as many nuances affecting strategy as product purchasing.

Corporate culture often is a prime reason a company chooses a centralized procurement system over a decentralized one. But, if maneuvered properly, a company’s culture also can transcend to create an opportunity where the two systems could work in harmony.

In a recent commentary in Supply & Demand Chain Executive, Jimmy Anklesaria, founder of Anklesaria Group Inc. and the author of a book on supply-chain management, noted that, while a centralized corporate procurement system could save companies billions, many companies continue to rely on decentralized systems, and for a variety of reasons.

Confidence factor

Confidence (or lack thereof) in central controllers’ ability to procure the right stuff is perhaps at the heart of many debates within companies, and governments, as they decide their procurement strategies. Ability to leverage cost also comes into play, but perhaps unrealistically.

Indeed, Anklesaria noted, just as state governments contend they are nearer to their “customers” and have a better understanding of their needs compared with the federal government. Division or business unit stakeholders don’t believe corporate procurement is capable of running their business and meeting the needs of their customers as well as they can. On the other hand, corporate procurement believes it knows best what the divisions require.”

The contention among some companies that corporate procurement is the best way to leverage volume also is misguided, Anklesaria said. Divisions within companies can band together and buy in bulk just as easily, he said. In a sense then, both centralized and decentralized systems can work together, if done properly.

What’s required

To make it work requires some thought and planning. For example, the divisions must focus on the company’s common objectives, which typically include providing the best value and satisfying the needs of the ultimate customer, not t mention the best return on investment to the shareholders.

The culture of service, where divisions pull the services they need from corporate procurement and not have the services pushed on them, creates a healthy relationship between the departments, to the benefit of the company’s ultimate customers and shareholders, Anklesaria said.

Indeed, ensuring the corporate procurement department can deliver a solid business strategy, provide good processes and recruit and retain top-notch talent will help enable the division-procurement departments to make the best decisions, Anklesaria said. The divisions are valued customers of corporate procurement and should be treated as such, he stressed.

Management issues

But key to succeeding requires top management believing corporate procurement is the best way to optimize procurement effectiveness; and the chief procurement officer (CPO) must be a highly skilled and a team player, Anklesaria said.

“In a decentralized corporate culture, it is critical the CPO be given the authority to execute the business strategy, as well as hire, train and fire staff,” he said. “If he or she is not given certain levels of power, even the most talented CPO will fail and the divisions will become mavericks and bypass central procurement.”

The type of procurement to handle in a centralized or decentralized fashion also can play a role in the strategy taken. Purchasing products is one thing, but procuring services has its own set of circumstances requiring review.

Outcome needs

As the Egencia report found, a centralized model for travel procurement favors personalized assistance to travelers, while the decentralized model tends toward an optimization 
of travel spend. As such, companies must examine their specific needs in terms of travel management.

“A centralized model would suit a business where travel arrangements are often complex and travelers require the assistance of a travel arranger because of
this complexity,” the report notes. “A decentralized model would better suit companies that have higher volumes of standard, simple trips.”

Just as Anklesaria suggests is plausible, however, it may be that one company operates both centralized and decentralized models.

For example, sales teams with remote territories and VIP travelers would rely on a travel arranger to organize their travel, while technical teams that visit the same sites on a regular basis might prefer having the autonomy to book their own travel based on their habits and preferences, according to the Egencia said.

As a travel-purchasing model, decentralization is gaining traction in Europe. [Travel-management companies] must be prepared to help their clients navigate this shift by offering relevant solutions and services to meet the changing needs of travellers as they evolve according to current and future economic, generational and technological trends,” the report notes.

 

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