Which Procurement Operation Model Will Suit Your Industrial Business

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If you are looking for the best procurement operation model for your business, remember that there’s no one-size-fits-all answer. You will be overburdened with options that will be called the top makes and models, but in the end, your solution has to meet the requirements of your firm which otherwise will be of no use. The main procurement models come in the form of decentralized procurement, centralized procurement, and hybrid models. Take the suggestions of sourcing agents if you are unable to come to a conclusion. Each of the models has certain benefits and drawbacks. You need to consider both sides before making a decision. Besides this, you also need to adhere to some tips regarding its implementation.

The Maturity Curve

Most modern-day firms follow a maturity curve with procurement practices; they initiate with a decentralized model, then centralize as the function matures. Further along the curve, organizations may shift back towards decentralization as they evolve into a center-led and hybrid model. However, it’s rare for a business to move from a fully centralized model to a decentralized one. But, the decision to change is usually based around consolidation. Whatever the procurement model you choose, flexibility is key. You should customize your model in order to deliver value and stay aligned with enterprise-level objectives.

Types of Procurement Models for Your Business

Types of Procurement Models

Decentralized Procurement

In this type of procurement model, each office, division, or project manager in a company has purchasing power to order supplies without seeking any kind of approval. However, it doesn’t mean that your procurement set-up is unstructured or disorganized. Resort to procurement agents for getting further insights regarding this model.

Benefits

  • Where local sourcing activities are prioritized, decentralized procurement is the only option.
  • No need to wait for approval when it comes to ordering supplies.
  • A better view of regional and local supply markets.
  • It is appropriate for addressing cultural challenges on a local scale.
  • It enables faster sourcing of supplies in an emergency. This is indeed an added advantage for businesses as they don’t have to route through a central procurement team.

Challenges

  • Organizations can lose opportunities for bulk purchasing or negotiating better terms based on bulk.
  • Procurement experts are not the end-users who place orders.
  • In a decentralized procurement model, spend analysis becomes increasingly difficult for firms and sometimes impossible due to isolation or unstandardized data.
  • Chances of compliance and risk issues are higher.

Centralized Procurement

The centralized procurement model is very different from the decentralized one. In this system, all purchasing is handled by one department in one location. The budget of the company is controlled by the procurement team and end-users submit a request for approval through this team.

Benefits

  • Organizations have a chance of cost savings through consolidated spend and economies of scale.
  • Business firms gain access to more data that enhances their ability to perform a comprehensive spend analysis.
  • Chances of maverick spending are less.
  • Increased efficiency and a decreased chance of redundancy between departments of a firm.
  • Better inventory management.
  • Procurement experts and negotiation specialists are skilled enough to make a calculative purchasing decision.
  • Suppliers have a centralized point of contact rather than multiple stakeholders scattered across the organization.
  • Business firms get an opportunity to move beyond tactical purchasing while concentrating on strategic initiatives like sustainable procurement.
  • With modern e-procurement systems, organizations can lessen their administrative burden in more ways than one. With the assistance of sourcing agents, organizations can get acquainted with the popular e-procurement systems.

Disadvantages

  • It adds a layer of bureaucracy to the purchasing decisions of organizations.
  • Stakeholders have the risk of getting poor service and they may feel disempowered or kept at arm’s length.
  • There are higher chances of lagging processing or slow delivery times. It is because of centralized strategic buying decisions.

Read: Impact of Centralised Procurement on B2B E-Commerce Industry

Center-led and Hybrid Models

Center-led organizations give some autonomy back to regions or individual business units. However, the end-users must work within a strategic framework and policies set by the procurement team. The above-mentioned phenomenon is enforced through e-procurement systems. Some procurement elements are best managed from the center while others are distributed. Unlike the above two models, some purchases are centralized while some others are decentralized in the hybrid model.

How can Organizations Shift from Decentralized to Centralized Procurement?

Organizations need to adhere to the following tips if they want to shift from decentralized to centralized procurement:

  1. Companies should take a pace that suits them. It is advisable for companies not to rush from decentralized to centralized procurement model.
  2. Business firms need to take the time to win buy-in from stakeholders by emphasizing company objectives and value-creation.
  3. You should keep in mind that your business units may be reluctant to relinquish budget control.
  4. Before implementing any new system, you should provide training and support to your team.

Choosing the right procurement model is indeed a strenuous task for organizations. Talk to procurement agents about the needs of your organization, and they will come up with an effective solution. Assess your requirements before implementing a procurement model for your business.

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