A recent Fortune Magazine cover story revealed an all-company e-mail from Ford Motor Company President Bill Ford saying, “The business model that sustained us for decades is no longer sufficient to sustain profitability.”

The article went on to list off other top execs from a number of leading companies that have recently made similar assessments of their own industries. “Across sectors business models that produced profits for decades have shut down.”

This same dynamic is true for the supply management discipline. Globalization, outsourcing, and risk and compliance management may have finally put supply management on the corporate agenda, but they have also revealed the failure of traditional (and largely decentralized) organizational structures.

The nearly 300 supply management and business executives attending Empower 2006 were quick to point out the need to overhaul traditional organizational, process, and systems infrastructures. “Transitioning to center-led or centralized organizational structure” rounds out the Top Five Supply Strategies these execs have planned for the next two years.

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 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 my experience, center-led organizations also are more likely to have direct reporting lines into C-level executives and tend to be larger users of supply management automation. Consider Qualcomm, which adopted a center-led approach in conjunction with rolling out its contract management initiative.

Under the new structure, the company’s contracts group and steering committee provide program vision, contracting and process business rules, system management, auditing, and training. They also manage the relationship with the company’s contract lifecycle management (CLM) solution provider.

Leveraging the visibility and controls of the CLM system, Qualcomm affords business units and functional stakeholders the latitude for decentralized data entry, contract administration and management, unique reporting, contract negotiations, and customer and supplier relationship management.

“We put a reliance on internal customers to provide the functional expertise to provide the unique language and terms required to ensure best value agreements that limit risk to the company,” said one executive.

Alaska Airlines also endorsed the center-led organizational structure as its first step towards procurement transformation. “Three years ago, Alaska Air was very tactically oriented organization,” Dennis Gawlik, Managing Director of Supplier Management, stated at the most recent IACCM Conference. ”Sourcing and contract management and sourcing were literally non-existent as functions, which the exception of airline operations which was very regulated and had very entrenched contract management capabilities.”

In response, the airline devised a center-led sourcing organization that trained standardized and reinforced a seven-step sourcing process. Alaska Air also developed a central contract function within the legal group. Both organizations were charged with bringing their expertise to coordinate sourcing and contracting opportunities across and provide support to the airline’s individual divisions and hubs.

“We did not have a mandate for [the business units and hubs] to follow our procedures and use our resources, so we actually had to provide tangible value and sell our way into opportunities one category and one division at a time.”

This timing of the centralized versus center-led discussion is appropos as I will be chairing an entire track on “Procurement Organizational Structure and Process” in Brussels next week at ProcureCon Europe 2006. Check back here for additional strategies on assessing and enforcing the right organizational structure for your company.

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