Supply Excellence
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My Two-Cents

May 3rd, 2006 · by Tim Minahan · 2 Comments · supply management

Enterprises have long struggled with how to best organize procurement and supply management groups to optimize and continuously improve supply costs and performance. High transaction costs traditionally limited their choice to two options:

1. A highly centralized organization that leverages corporate spending and drives standard sourcing, process, and technology decisions as well as execution from a central command and control group. While offering greater spending leverage and operational efficiencies, centralized structures result in higher incidences of unapproved spending, process circumvention, and uneven performance.

2. A highly decentralized organization that empowers business units and sites with autonomy and control over supply, process, and technology decisions, as well as sourcing and procurement execution. This structure improves satisfaction at the site- and business-unit level but fails to leverage corporate spending, is costly to operate, and leads to inconsistent supply cost and performance across the enterprise.

The introduction of web-based sourcing and supplier management technologies have helped enable (and accelerate) a third option: the center-led model, which blends spend leverage, process standardization, and knowledge- and resource-sharing attributes of centralization with the local empowerment and execution characteristics of the decentralized model.

In fact, a three-month examination of 102 chief procurement officers I conducted while at Aberdeen Group revealed that 75% of enterprises will have completed or be in the process of shifting to a center-led structure by 2008. Benefits of the model increased spend under management and greater year-over-year cost reductions. Center-led organizations also were more likely to have direct reporting lines into C-level executives and were larger users of supply management automation. (Evidence: Dennis Gawlik, Managing Director of Supplier Management at Alaska Airlines, told the IACCM audience that his group is currently evaluating supply management suites to accelerate and sustain the impact of its center-led organization.)My research and face-to-face discussions with supply management organizations concludes that transitioning to this new center-led model requires:

  • Executive-level support and reporting structure for procurement transformation.
  • A multi-year plan that aligns supply and business goals.
  • Cross-functional and cross-organizational teams.
  • Coordinated cost and performance metrics across functions and businesses.
  • Use of an end-to-end supply management automation platform. 
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2 responses so far ↓

  • 1 Charles Dominick, SPSM // May 4, 2006 at 12:17 pm

    Yes, many organizations are finding great value in center-led structures. What’s especially nice about them is that you can approach that structure from either of the two polar opposite structures: totally centralized (like many manufacturers) and totally decentralized (like many universities or operating companies that have been collected through M&A by a parent company).

  • 2 Tim Minahan // May 6, 2006 at 7:33 am

    Agreed. I anticipate that the debate of center-led versus centralized structures will be one of the leading areas of analysis among enterprises for the coming years. Center-led structures have only become practical within the past few years as advances in automation have reduced transaction costs and improved information visibility and process control. Check back here for continued discussion on this issue.

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