One of the ongoing topics in sourcing today is the continued trend toward center-led procurement organizations, where strategic decisions are coordinated centrally while transactional activities are decentralized across the organization, especially in large enterprises (>1B). This post is will be 1 of 2 designed to be a brief introduction to center led purchasing for those readers interested in finding out the basics of how the center led purchasing model differs from more traditional purchasing models.

There are three major models of procurement: the decentralized model, the centralized model, and the center-led model. Today we will take a closer look at the advantages and disadvantages of the Decentralized and Centralized models. For more detailed information on these models view our eSourcing Wiki by clicking here.

Decentralized Model

A classic decentralized model of procurement, where each business, functional, or geographic unit is responsible for its own purchases, has a number of advantages. It empowers individual business units with autonomy and control over their process and design decisions and improves their overall satisfaction. It allows for a quick sourcing process and speedy issue resolution and allows the organization to take advantage of expertise in the local market.

However, it has a number of significant disadvantages. It does not allow the full corporate spend to be leveraged or business unit objectives to be aligned with the objectives of the organization as a whole. There is usually little coordination or information sharing between divisions, best practices are generally not shared, and supply costs and performance are uneven across the enterprise. Furthermore, operating costs are often quite high in the decentralized model.

Centralized Model

A newer, centralized model of procurement, where all procurement goes through a single, central organization, has many advantages. First of all, unlike the decentralized model, it allows corporate spend to be fully leveraged across the enterprise and it assists in the institution of standardized sourcing processes through the organization. The inherent economies of scale allow the organization to wield the full power of its spend, enhance operational efficiencies, and improve knowledge sharing and best practice execution.

However, it too has disadvantages. The extensive knowledge of the individual in local supply markets and consumption patterns of the decentralized structure is lost, which often results in sub-optimal buys for many regions. The risk of maverick buying increases when geographically dispersed site managers do not agree with centrally mandated decisions and this impacts local supply, quality, or reaction times. Forcing centralized buys of commodity or service categories not suited for centralized buying can actually increase cost or decrease service quality. Reaction times to unexpected changes in supply or demand suffer, which is critical if the organization’s profit margins depend on demand-driven supply strategies.

Each of these models have their benefits and should be examined closely to identify the best fit. A global corporation with a worldwide supplier network requires a strong procurement organization. It is because of the globalization of our economies that our procurement models have evolved from Decentralize (local) to Center Led organizations.

In my next post, I will discuss why center led is the ideal model for corporations with global supplier networks.