By: Angie Walters
In any industry, the choice between procurement systems can quickly become a make-or-break decision. While there’s no single correct answer to the great procurement question, it’s relatively easy to break such systems down into three primary types, then use broad strokes to evaluate which might be right for your organization.
Defining Centralized Vs. Decentralized
A centralized model relies on decision-making that occurs primarily at the top of the organizational chart, with a single leadership body that draws up purchasing and ordering plans, then transmits those orders to lower-level warehouses and procurement centers for completion.
In a decentralized system, nodes in the supply chain have a degree of autonomy and are free to adjust ordering and inventory activities according to the best judgment of local managers.
Studies show that centralized procurement systems operate more efficiently on average, with ordering and manufacturing costs running about 10 percent lower when compared to decentralized alternatives. Most centralized organizations can complete a purchase order procedure more quickly with fewer individuals than decentralized regimes.
Centralized systems are strong performers in industries that don’t tolerate much deviance when it comes to inventory and supply levels. Centralized systems also benefit from more efficient scalability, as it’s cheaper to add additional subservient nodes under a centralized management structure than it would be to train autonomous managers throughout the supply chain.
However, centralized cost efficiency comes at the expense of local knowledge. It’s easy for centralized leaders to find themselves overseeing a web of subordinate locations that fail to meet their goals because local management doesn’t have the authority or insight to operate effectively.
The most successful decentralized procurement systems rely on the local knowledge of end-chain managers to optimize ordering and supply activities. This is most evident in retail sectors, where decentralized leaders are well-placed to keep their finger on the pulse of the local market and can rapidly adjust their activity in response.
Crucially, decentralized systems rely on a much wider spread of knowledgeable, well-trained leadership; and management costs grow accordingly. When a business is unable or unwilling to meet that standard, it’s easy for decentralized systems to spiral out of control, with inexperienced or untrained managers operating on gut instincts and anecdotal evidence to determine procurement activities.
Without correct training and guidance from above, it’s very common for local managers to adopt a “can I see it?” philosophy, where empty shelves or warehouse floors means more ordering is required. This tendency to view warehouses as storage locations, instead of conduits managing throughput, can easily lead to overspending that ignores inventory already existing in other areas of the supply chain.
Hybrid Procurement Systems
Hybrid models adopt a pick-and-choose approach to procurement, with a central leadership structure supported by local managers with some degree of autonomy. Advances in technology have made this easier, as communication and working processes can be more nimble, letting directives filter through hybridized structures more quickly than they could even a few years ago.
However, it’s easy for an organization to adopt a hybrid model and end up with the worst of both worlds. This is particularly the case for smaller businesses, where a single ordering manager feels overwhelmed and starts adding subordinate functionaries on an ad-hoc basis, leading to a tangled web of authority and leadership.
The most effective hybridized systems maximize communication along the organizational chart to ensure core standards are maintained and aggressively take advantage of technology to facilitate those goals.
Whatever your industry, it’s important to ask yourself what the organization requires. When clear-cut, unyielding procurement parameters are a necessity, centralized structures may be best. Alternately, fast-moving industries in volatile markets may be better served by some form of decentralization, whether complete or hybridized.
Contact the strategic business advisors at Goldin Peiser & Peiser for information on this topic or for other methods to make your business more successful.