I had an interesting call on Monday with two recent grads from a top-tier Supply Chain program that are now both part of a global supply chain rotation program at a large company that puts new hires onto a Supply Chain/Management fast track by exposing them to the variety of roles across the breadth of its business. Like bees hopping from flower to flower (or business unit to business unit) – a fantastic program – and, fantastic to see enterprises that emphasize the development of supply management executives. If you are part of a program like this (participant, organizer, sponsor, etc.), please let me know, I’d love to be able to share how different enterprises structure their programs. Programs like this are not today’s topic, but rather, one experience that this kind of program provided.
My discussion with the duo covered a bunch of topics but ultimately reverted to one – how can different business units within the enterprise (that have distinct procurement groups, processes and systems) and more specifically, how can distinct procurement teams better organize themselves to push best practices across the entire enterprise? Rather than organize by region, this enterprise has structured its business units by business function and customer market (the functions and customers are quite complex) with distinct procurement, finance, hr, sales, etc. departments that operate with complete independence (as do the business units themselves). The rotational program exposes the participants to many of the business units but also different supply management functions within them. For example, a participant could work in the procurement contracts area for one procurement group then to supplier relationship management in other, etc., etc.
As part of the program, the grads are encouraged to find opportunities to drive improvement and bring them to the fore. In their relatively brief tenures, the two I spoke with on Monday each had a laundry list of opportunities that started with the opportunity for the different groups to collaborate and leverage spend on supplier negotiations and contracts (they do not do this currently) to areas where one or more of the groups either far outpaced or far out-lagged the other groups to significant result. Their initial thought to take a top-down approach and centralize the procurement groups, placing them under a single leader (a queen bee, if you will) made sense on many levels, but are most likely in direct conflict with any number of the company’s core beliefs and practices. Had I been speaking to the CFO or those with the ear of the CFO, pursuing a top-down strategy, while extraordinarily difficult, would warrant greater consideration. But as it was, that path did not seem feasible, at least in this first conversation (anyone care to weigh on that?).
My suggestions were for the pair to build consensus with the other member of the rotational program on the top 2 or 3 process improvement areas that would have the greatest impact (and ease in achieving) by being applied across different units – a bottom’s up approach looking at low-hanging fruit – and for this team (of worker bees) to design and introduce a program that would cross-pollinate best practices from one group to another (Root Cause analysis or Value Stream Mapping could be used). One prominent idea was the approach to contracts where one group had a fully-automated contract authoring and repository process while others were all paper, all the time. Then build upon those successes and broaden the scope and ambition of what to tackle next.
I know that the grads were a little disappointed with my suggestion, but given the scope of what a true transformation would involve, each could have reasonably graduated out of the program before movement on a top-down approach, if any were to occur, started. It’s no secret that flowers, honey, and of course, oxygen all result from the life and work of bees.
Was I pessimistic or practical? Something in between? What do you think? How would you approach this case? How did your procurement department evolve into its current structure? Stories and examples wanted!
(Sidebar: I also believe that spend aggregation and coordinated sourcing is worth pursuing, possessing a difficulty level between the top-down and bottom’s up approaches just described)
Wow. Andrew, you just spun my brain into warp drive. It would seem that an incredible opportunity for savings exists at this company, but the cultural bias against centralized procurement will make that opportunity almost impossible to fully realize.
BUT —
It’s not impossible, IMHO. I worked at a much smaller organization, and there was some degree of buy-in to centralization, but there were many challenges, not the least of which was “home rule”. No one wanted to give up their vendor relationships (hey, who wants to forego a free lunch every now and then?) and control (real or perceived) over performance, etc. I had a good degree of success in getting everyone on board by convening a group of mid-level managers from around the network and brainstorming best practices for procurement with the primary intent being cost savings. We came to the conclusion as a group that more centralization was a good thing, and I just nurtured that success into a wider scope over time. But I always let the people in the field have some input to major decisions and strategies, and let them do as much actual purchasing as they wanted so they could maintain ownership and some degree of control. Centralized Procurement with localized Provisioning, in other words. I also looked for the things they didn’t want to deal with and tried to take as much of that on as possible so I was actually helping them. That made me a few friends too. And I got creative. For example, when I wanted to establish one provider for IT asset recycling, I got a lot of push back. But there were a whole slew of reasons why we needed to formalize the process, not the least of which were to ensure data destruction and for liability purposes. So I established a single source and took on all the costs associated with recycling technology across the entire enterprise. This way no one could say “I can do it cheaper on my own”, since their budgets saw zero cost. Of course, SOX helped me a lot too, but the budget issue was paramount. Over time the program became so ingrained that former detractors ended up advocating for it (arguing the merits with newcomers!) This all speaks to your “bottom up” approach. There’s a lot to be said for grass roots participation.
The bottom line is that the best way to have a wide and deep cost impact is to leverage your spend, and the best way to do that is to centralize the procurement, but there are also value propositions that must be considered. No one really has the time and resources to fully evaluate every buying opportunity to qualify how best to meet it, so you simply have to find the best middle ground and try to be open to concerns and input from the field. It doesn’t really matter if you do it as a “Corporate Directive” with sticks — or even carrots — attached, or if you do it as an evolutionary, cultural change driven from the bottom. The latter can be much slower, but it will also be much stronger in the long run. No one likes to have things shoved down their throat, right? So get your worker bees to help out by offering them some honey, and you’ll end up with a sweeter result! (Sorry, I couldn’t resist!)
Dan –
Sweet post (get it? heh-heh)! Seriously, I love it, great first hand account – just brimming with top ideas – Try to change the dialogue, take on the tough projects, leverage outside factors (SOX in your case, recession/new normal for those today), build consensus, play for the long term. Love to see more of this on these pages – keep it coming – Thanks!
Andrew,
You touched on many different obstacles that many both large and medium size organizations are going through. I work with companies around the world and a true believer that most organizations leave a boat-load of money on the table when it comes to sourcing (I was at one time a global sourcing manager). Here are a few thoughts. First, if possible conduct an assessment or audit for best practices throughout the organization. Develop an audit tool to flush out the ones that are doing “world-class” processes. From this assessment the best practices can be shared rather than redesigning the wheel everytime. Second, Data scrubbing goes a very long way in achieving the ultimate goal of strategic sourcing. I worked with a client that has 27 facilities around North America. I ran point for the project and visted each site to run a series of reports (i.e. part number, standarized part descriptions, unit of measure, category, etc). A team came in after me and scrubbed the data to standardize across the company. From this activity we could place all items in neat little buckets and track spending patterns, usage, and part standardization. The bottom line – This company reduced spending across the division $14.6 million in the first year. Every year since then has increased (or decreased depending on your viewpoint).
These types of programs work but it takes effort.
Cheers!
Andy
Andrew, this is a great topic for discussion, and the subsequent comments have also been fantastic! Developing a truly centralized Procurement group across BU’s can be done, but I believe it is dependent on how diverse the BU’s are. A pharma company, for example, may be organized into BU’s based on product types. In this case most spend categories are similar across the BU’s, therefore a centralized function might make sense. On the other hand, a large conglomerate (United Technologies comes to mind), will most likely have vastly different categories making a central group less effective.
One idea would be to develop a hybrid approach where certain categories (office supplies, IT Hardware, etc) are centralized across the company, while others that are business specific stay decentralized. There would be challenges in setting this type of structure up, but may provide a “best of both worlds” solution.
Another idea for decentralized groups is to form a formal “Procurement Council” across BU’s. There has to be communication between these groups, and putting a formal structure around it will usually result in this communication. Large companies that have multiple Procurement groups are at risk of being taken advantage of by suppliers if there is poor internal communication.
Adam –
You’re right, a bunch of great comments, yours included! You hit on several interesting and progressive ideas, thank you. The one I’m most struck by is the hybrid approach which I think is a newer trend and something to be considered by groups after they’ve centralized (or shifted to center-led). I touched on it in one of my Aberdeen reports in ’09 after hearing several CPOs verbalize this goal or end-state but didn’t really have a name for it then. Your post has me thinking that maybe this could be called a ‘category-led’ strategy. I’ll start chewing on it for a future article and will definitely look for your (Andy’s and Dan’s) input here. Thanks to all of you for driving such a great discussion.
Andy – great post too. You’ve really gotten me thinking about how enterprises identify and leverage best practices across different groups, a topic we’ll certainly revisit soon. Thanks!
Andrew, Business Unit’s often feel their needs are unique and left unchallenged, those beliefs become more deeply rooted. I have three regional purchasing managers who support our different business units and one tactic I’ve used successfully is to have them be accountable for sourcing our collective ‘corporate’ needs in certain situations. One purchasing manager will have to coordinate the sourcing for all locations, following our corporate governance guidelines, which ensure policy and procedure are followed but allows for decentralized execution. This approach gives them the insights into their peer organizations needs, while also taking into account the service level requirements that may vary from plant to plant. I am a proponent of healthy competition and not opposed to parallel contracts, where one might be with a national supplier and another may be with a regional or local supplier. This gives the purchasing managers the opportunity to leverage their spend with the rest of the company, raise their level of awareness of the other sites/business units needs and provides a ‘choice’ of who they engage for their internal ‘end user’ customer needs. It also forces the dialogue between the peers and gives the company the cross pollination needed for continuous improvement in our sourcing efforts.