In most organizations, a bit of a struggle, or shall we say, a mild dislike between the top level and the lower departmental level is almost a norm. The top management has its eyes set on the procurement costs, and always sees scope for improvement on that front. On the other hand, the departments tend to feel that they should have the final say on the procurement since they will be the ones using those products for creating products, or delivering services.
Organizations should decide on its procurement policy depending on a host of factors. There are three ways organizations can structure their procurement policies – local, centralized, and networked. There is no one perfect system, and each of them comes with their own set of advantages and disadvantages. In the local structure, the decision making is entirely entrusted upon the individual departments or local business centers. On the other hand, in the central structure, every procurement activity passes through a centralized command structure. However, in the/ networked structure, the central organizational authority acts as a primary node, and allows the other nodes to exercise control over the procurement.
Among all the structures, the local structure is usually the least effective procurement strategy. This structure restricts the organization’s ability to effectively leverage its size and geographic diversity. There was a time when each department’s knowledge of components, hardware, software, and so on, was specialized. However, barring a few rapidly changing industries, the rest of them have undergone standardization of components, and services. As such, the control has shifted more towards a centralized command, from the individual departments and branches.
The central command structure is often among the first of the initiatives that the top management of many companies tries to implement, whenever they wish to save costs. This is especially true for the organizations which have a powerful CFO. The CFOs tend to pick up inefficiencies in the processes, and the local procurement processes are replete with them. Although such organizations manage to reduce procurement costs, they also end up with a significantly reduced bottom line. This is because central procurement completely misses out on the localized expertise that was specific to a department or business unit.
The third is the networked command structure, wherein both the management and individual departments are involved in the decision making process. This strategy leverages the local expertise of the business units, while also allowing the management to document best practices and standardize the operations across the organizations, thus saving costs. However, one serious problem that these structures may throw up at policymakers in the organization. It is the decision on the roles and authorities of the people involved in the decision tree of the procurement.
There is no best structure that suits every organizational environment. However, some typical organizational structures have time tested procurement policies that work best for them. For instance, a completely centralized organization, operating out of a single location, achieves best results from having a completely centralized structure. On the other hand, a large organization which operates in multiple locations, which are subjected to highly volatility, be it political, social, technological, or others, it may be in the interest of the organization to allow the individual business unit heads to take decisions on the procurement.
In organizations that are geographically dispersed, or are immense in size and whose business heads are not subjected to high volatility in their markets, a networked procurement strategy is the clear winner. In such structures, the central command can enforce its decision on the local units by using various analytical tools. Most importantly, many industries are shifting today from a product to a service model. In such industries (say, IT), where the individual business units are offering highly customized and specialized services, the networked model has proven to be the most effective solution.
The final decision in this matter has to be taken by the organization by analyzing their entire structure and its operational constraints. Cost effectiveness should not compromise the end services, or product deliveries. There is considerable evidence to support that an organizational structure has the biggest say on what its procurement policy should be.