As already mentioned in Sect. 3.1, the structural organisation is essentially the hierarchical framework of the organisation within which structures and responsibilities are defined (Fig. 3.1). To set this out, positions (the smallest organisational units) are established and related to each other in such a way that competencies and communication channels between task bearers can be designed efficiently and innovatively. The structural organisation of Purchasing is connected not only with the strategic direction of the business but also with the existing company structure. In smaller companies with only one production facility, a centrally organised purchasing is often the chosen approach. However, for corporations with production facilities all over the world a decentralisation of Purchasing can be preferable. At the extreme, particular purchasing activities may be completely outsourced to specialised external service providers. A modern approach combining centralised and decentralised purchasing is the “Lead Buyer”
concept within the framework of commodity group management. The advantages and disadvantages of the four approaches mentioned above are described in the following sections.
PURCHASING
PRODUCTION DEVELOPMENT &
ENGINEERING Executive responsibilities
Operations
QUALITY MANAGEMENT Fig. 3.1 Role of purchasing in the corporate structure
3.2.1 Centralised Purchasing
Centralised purchasing concentrates the complete procurement processes of all necessary demands within the company. This means that a centralised department within the company is authorised to engage in purchasing activities. It is completely forbidden that particular business units or special departments purchase anything autonomously. As a rule, a centralised Purchasing department will be located at the company headquarters or at the production facility with the greatest demands. Some advantages of centralised purchasing are:
Volume Purchasing Thanks to the aggregation of company-wide demands, Pur-chasing is able to negotiate better purPur-chasing conditions with suppliers. As a rule of thumb, doubling the purchasing volumes will result in a 10% reduction of costs.
Furthermore, by aggregating the volume the position of Purchasing is strengthened which means that further price concessions by the supplier or the business may be given the status of preferred customer, and better conditions, better service, and better cooperation can be obtained.
Improvement in Professionalism Centralisation of Purchasing makes it possible for purchasing activities to be conducted solely by professional experts. In this way, the whole Procurement process will become more professional, especially with regard to purchasing methods such as price and value analysis, procurement market research, conduct of negotiations, and contract law.
Homogeneous Supplier Structure Conducting purchasing activities centrally will allow for a homogeneous supplier structure to be set up. In this way, one can ensure that the same items are not sourced from different suppliers or that the same conditions are secured throughout the company.
Unambiguous Responsibilities In the case of a centralised Purchasing depart-ment, there are clear and company-wide responsibilities. Therefore, compliance with processes and guidelines can be better controlled and communication will be better and quicker.
Efficient Procurement Processes Through centralised purchasing, demands that occur regularly can be processed in a standardised manner, possibly by automated procurement processes.
Uniform Control A centralised Purchasing department allows for the generation of uniform key figures pertinent to the purchasing activities for all business areas, which means that purchasing results can be shown company wide.
Centralised purchasing therefore has a number of advantages. However, the bigger a company is, the more often disadvantages will emerge that essentially can be attributed to great distances between the Purchaser and the user. These disadvantages are, amongst others.
Bureaucracy Depending on how big a company is, centralised purchasing may soon end up with excessive bureaucracy as in some cases user demands will reach the centralised Purchasing department via many other people. Therefore, handling costs might rise disproportionally and the complete procurement process might become inefficient.
Spatial Distances If the distance to the users is too great, centralised purchasing might lack necessary knowledge with respect to the operations. As a result, the centralised Purchasing department will have to be specifically informed of all changes of consumption, technical modifications, and problems. So there are disadvantages with respect to information flow and flexibility.
Target Conflicts If the accountability of procurement successes and failures has not been clearly defined, there may be conflicts between centralised Purchasing and the organisational units responsible for the result.
Poor Acceptance Centralised purchasing is often regarded as an alien element by the local organisations. This is due not only to spatial distances, but also the prevailing impression that local organisations have no say in decisions, will often result in local organisations’ jeopardising the realisation of strategic targets. There-fore, central Purchasers must use their skills to communicate decisions intelligibly and transparently in order to establish them as joint decisions accepted by all.
Cultural Peculiarities Differences of culture, mentality, and language pose risks as they can easily produce misunderstandings.
Normally the field of centralised Purchasing is subdivided according to the category of procured items such as raw materials, mechanical items, optics, or industrial goods. In this case, the responsible member of the centralised Purchasing department is in charge of all procurement activities with regard to his or her respective category.
An established variation of centralised Purchasing is the functional principle.
The purchasing activities are segmented in uniform process steps that are allocated to the individual members of staff. In the course of increasing process orientation, this approach tends to become less important.
3.2.2 Decentralised Purchasing
A decentralised Purchasing organisation is the opposite of centralised Purchasing, as shown in Fig.3.2. The most extreme type has all purchasing activities conducted autonomously by the special departments in which the respective demand occurs.
This type of Purchasing organisation, for which no professional Purchasers are required, is seldom in practice. Instead, Purchasing departments are established within the responsible organisational units specifically for the purpose of managing demands that occur just there. In the case of affiliated groups, the respective units
may be subsidiaries or production facilities while in the context of Project Purchas-ing one individual Purchaser may be allocated to a Product Development team to be in charge of requirements occurring in this particular project.
The main advantage of decentralised purchasing is the optimum proximity to the users. Process times are shorter, and quick communication and decision-making are a given. Furthermore, the Purchaser has the opportunity of acquiring know-how specifically oriented towards the users. Thus, this type of Purchasing organisation realises a high degree of orientation to the needs of the internal client.
However, the main advantage of decentralised purchasing is that due to the similarity of requirements at different organisational units many redundancies occur. Owing to the division of the requirements, decentralised purchasing will have to accept less market power, less standardisation, and, eventually, different commodity group strategies.
3.2.3 The Lead Buyer Concept
The Lead Buyer concept tries to combine the advantages of centralised and decentralised organisations (summarised in Fig. 3.3) and to compensate for the disadvantages of both approaches. The Lead Buyer concept is based on a centralised purchasing organisation that will normally be located at the organisational unit with the highest demands or highest degree of commodity group-specific competence. In this approach, demands of the same kind are aggregated company wide in uniform material groups. Material group managers are made responsible for the particular material groups. These managers are strategically responsible for the demands in all organisational units. Their tasks include the total supplier and commodity group management, the development of methods and the provision of market knowledge, as well as negotiating and
Centralised Purchasing Decentralised Purchasing
Executive board
Executive board
Sales Purchasing Production Adminis-tration
Plant 2 Plant 3 Plant 1
Sales Production
Adminis-tration
Plant 2 Plant 3 Plant 1
Purchasing Purchasing Purchasing
Fig. 3.2 Comparison between centralised and decentralised purchasing
concluding framework agreements and supply conditions. However, operational processing is conducted locally in the respective organisational units. Therefore, the order handling can be done flexibly and specifically to occurring needs. The result is a combination of centralised strategic and decentralised Operational Purchasing, in which both functions are clearly separated within the organisation. The main advantages of the Lead Buyer concept are, amongst others:
Uniform Strategy Thanks to the central management of the commodity group strategy, the strategy enjoys company-wide validity and will thus be implemented more easily and more efficiently.
Aggregation of Demand Demands are centrally aggregated into commodity groups that are managed centrally. Therefore, the economies of scale from centralised purchasing are realised while at the same time and individual requirements can still be ordered flexibly by the individual organisational units, all the while operating within the framework of agreed contracts.
Supplier Management The centralised material group management allows for the development of an efficient supplier management process. Therefore, the supplier portfolio can be purposefully formed and developed to serve company-wide demands.
• Bigger volumes
• Negotiation power
• Professionalising
• Homogeneous supplier structure
• Unambiguous responsibilities
• Efficient procurement processes
• Uniform control
• Bureaucracy
• Spatial distances
• Target conflicts
• Poor acceptance
• Cultural peculiarities
• Spatial proximity
• Short decision-making paths
• Problem solving focus
• High flexibility
• Low market power
• Redundancy
• Less standardisation
• Ambigious responsibilities
• Different strategies
advantages disadvantages
Centralised PurchasingDecentralised Purchasing Fig. 3.3 Advantages and
disadvantages of centralised and decentralised purchasing organisation
3.2.4 Outsourcing of Purchasing Activities
The trend towards concentrating on core competencies does not stop at Purchasing.
Nowadays, more and more particular purchasing activities will be outsourced. An example is the formation of independent companies, so-called Group Procurement Organisations, which will take over whole purchasing activities for a corporate group and also for other companies. These highly specialised purchasing companies show advantages and disadvantages similar to those of centralised purchasing.
However, by aligning them as profit centres a market-regulating effect on the accounting for services is being targeted.
A second method of outsourcing purchasing activities can involve the outsourcing of extraordinarily labour-intensive process steps such as accounting control or mere order processing. In this case, the strategic competencies will remain within the company while particular operational activities will be conducted externally.
The third approach is the outsourcing of particular procurement categories. This approach is especially used for services such as travel management or facilities management in order to achieve better conditions by exploiting economies of scale.
Practical Tip
Designing and managing the Purchasing organisation strategically and operation-ally in a company with facilities in diverse cultural regions poses a major challenge.
During my long global career as a manager responsible for Purchasing, I had to learn—sometimes the hard way—that managing from afar will never be appropri-ate with regard to the organisation of Purchasing and to global sourcing.
In most cases, a clear separation of Operative and Strategic Purchasing, a strategically managed centralised commodity group management, and a decentralised operational management have proven successful.
I optimised the global organisation by recruiting a small team of fully trained native speakers for a Procurement office in Asia which was directly responsible to me. The tasks of this office were of strategic as well as of operational natures and also included quality assurance measures. This Purchasing organisation is shown as an example in Fig.3.4.
Regular mutual visits at all facilities, integration in the annual purchasing planning process as well as in strategy development, regular intercultural training, development prospects, and control with the help of target agreements have proven very successful.
However, with regard to the overall strategic and global orientation of the organisation, caution must be exercised as the most severe obstacles lurk within the company. Here, the Purchaser must act like a salesperson solving the problems by smart purchase marketing.