Decentralization of Procurement is the next trend?
Procurement has been going through a fundamental transformation in the last two decades. Starting off as a predominantly administrative function of the supply chain manufacturing-heavy industries, it has emerged out of Supply Chain and it has now become a highly centralised unit that shifted focus from transactions to value-creation and leveraging the potential of the company’s supplier base. Procurement has infiltrated to previously untouched areas like Legal and Marketing. How could this transformation happen? What is the effect of specialisation of the sourcing profession? Where is Procurement placed on the corporate chessboard? What are the major disadvantages of the large-scale e-sourcing systems? In this article I am making an attempt to answer these questions.
Transformation and atomisation of procurement
Bulk of procurement’s transformation is in fact the story of Indirect Procurement coming of age. Bill of materials, equipment investments and much of Direct territory has always been in focus in traditional industries as the owners and managers recognised the importance of keeping the these cost level at optimum. With the rise of the service sector where the most of the spend is indirect, indirect sourcing departments started to grow and diversify.
Twenty years ago the buyer acted locally and kept eye on on the entire end-to-end procure to pay cycle, from selection and negotiation to order placement. Then came category management and with it, the increasing vertical specialisation of the buyers. They are now called sourcing managers, they forgot the transactional part of the deal - it is conveniently outplaced to remote service centres. Today categories are basically silos, there is very little cross-traffic among them, sourcing professionals are destined to master only one category or two.
This painfully high degree of specialisation is the very product of the procurement’s desire of close collaboration with several stakeholder groups, some of which have traditionally been handling their own purchases and suppliers before. Today in modern corporations there are several areas, e.g. IT or Facilities where the majority of services are outsourced, hence the department employees’ main task is to performance manage the vendors. We have this tricky situation now where the category-specialised procurement professionals try to persuade their stakeholders, who are in fact vendor managers, that there is a significant added value in the collaboration. As you can imagine, this is a bumpy road. There have been several attempts to introduce common targets with varying success. In some industries Direct procurement goes through the similar crisis as Supply Chain and Manufacturing is getting increasingly outsourced.
Internal politics and the power game
Many large companies spend half or more of their revenues on third party suppliers. Anyone high enough on the corporate ladder who is able to concentrate this purchasing volume in one hand emerges as an extremely powerful person in the company politics. At least theory would result such an almighty CPO. No wonder that this is rarely existing as it goes against the interests practically all other power-players in the Board. Eventually we find a landscape of scattered procurement responsibilities where teams sit in several departments, using different tools ad processes.
The rise of e-sourcing
There has been another revolution in the meantime: the rise of the horizontally integrated e-sourcing suites. These are great for workflow management, transparency and special uses like e-auctions, but they are very expensive, hard to roll-out and integrate to existing ERP’s, contract management systems and so on. Adoption in the procurement community is also questionable as it tends to be easier to mandate some stand-alone tools than an entire workflow system. Many times these tools are just not flexible enough to be adaptable to real life cases. If Procurement department is not a monolithic centralised function, adoption of a single tool is almost impossible. The other disadvantage of these e-sourcing suites is difficulty of high-level, real-time reporting. Most of the really important information can not be delivered to the management dashboard unless literally everyone uses the application for every project which requires a high degree of discipline. This, as we have seen, is not easy to accomplish.
The inevitable decentralisation
I envisage future procurement as a decentralised function that takes advantage of most of common processes and policies that were introduced in the era of centralisation, as a bare minimum:
- common vendor master
- common new supplier onboarding process
- common contract and price management
- common guideline of procurement savings calculation and reporting
- common procurement performance management dashboard