Procurement transformations are becoming increasingly common as companies seek to decrease their cost structure and increase efficiency. Considering that these efforts are often large and involve several functions, it’s important that companies take a thoughtful approach to centralized procurement. We recommend companies ensure their centralization activities are closely tied to corporate goals with a meaningful project to move the needle.
We Are Thinking About Centralizing Procurement, Now What?
Procurement is more than just a Purchase Order
How far will your procurement organization go? Will it include strategic sourcing, supplier selection, contracting, or supplier management? Or are you just looking to centralize the tactical purchasing efforts, like purchase order creation and management? What about invoicing and payments and supplier disputes? These are all major considerations when deciding on your organizational scope. Either way, you should look to define the processes end-to-end, decide what is in scope for centralization, and then make sure that interaction points with other parts of the organization are clearly drawn out.
Direct, indirect, or both?
Where is the largest opportunity for your organization? Is it in the direct material spend or indirect spend? Does your organization have a clean way of classifying between these two categories? If so, it might be good to focus on one area at a time. Direct and indirect spend can look very different n the type of expenditures, the type of suppliers, and the parts of your organization that would be affected by the change. There are, however, many synergies and opportunities for sharing best practices, resources, and tools, so that ultimately the goal to centralize all spend is worthwhile.
Is your organization working on a common procurement platform today? Is there a standard Purchase Order format and terms and conditions across the business? Does it get created, managed, and paid in the same system, no matter what part of the business you are in? If the answers are yes, then you are already on a great road toward centralized procurement. Don’t have common tools or technologies? Not to worry, you can still look at centralizing the processes and organization first and then work on the technologies as a next step. Just be mindful of the pains that might exist early on if the centralized group has to sustain multiple tools for too long.
Making sure you understand what the supplier experience is today is a very beneficial and often overlooked aspect of centralizing procurement. If your suppliers are used to receiving their PO in a certain fashion or having flexibility on delivery dates or costs, this is good to know up front. Often, these are aspects that will change as you start to centralize your procurement and get smarter about the way you manage your supply base. Including your key suppliers in your change management and communication plans will prove to be beneficial.
What Are Your Goals?
Centralized procurement can have many benefits for your company, your employees, and your suppliers. Often, there is a lot of waste in decentralized processes and many inconsistencies across your organization. It’s possible that you have one supplier receiving different PO terms in many different formats, making it harder for them to do business with you. You also might have multiple contracts with one supplier and be unaware of the volume of business you are doing with them.
Many times, much of the pain with these inconsistencies can be found in your payables department and listening to their voice in your change process is extremely important. If the payables team cannot agree what a supplier is really owed, it can be frustrating trying to find the person in the organization who has the relationship with the supplier or the contracted agreement or purchase order to help with the dispute. Centralization drives accountability and clarity into the process of overall supplier management, including ensuring you are really paying for what you received.
How Decentralized Are You Today? And More Importantly, Why?
Lastly, and maybe most importantly, where are you coming from as far as decentralization today? How decentralized are you? Is supplier management, PO management, and invoice and pay done independently across the business, or are some of these areas already centralized? And where there is decentralization, do you understand why? Sometimes digging into why the processes are spread across the organization can tell you a lot about the change management you might face in bringing them together into one procurement hub!
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