Leveraging Centralized Purchasing for Customer Benefits
In today’s world customers are spread out and operate from diverse geographies and markets. Each purchasing organization of the customer adopts its own purchasing strategies, processes and systems leading to unnecessary procurement and inventory management at a local level.
One of the core beliefs of purchasing is that “Centralization provides Leverage”. To get a grip on this thought, a centralized driver is required, which can percolate thoughts to the bottom-line.
To begin with, a common commodity as per the required standards needs to be structured and managed under one umbrella. Based on the industry and the material requirement analysis, different material councils are formed - to develop strategies, manage suppliers and leverage spends among different geographies.
The centralized driver needs to list down the concern areas that need to be addressed. Typically these areas would include :-
Organization structure: Basic organization structure for procurement needs to be changed, to address the general procurement or procurement engineering functions. Major organizations do not have vertical integration.
Cost innovation: Decentralized purchasing leads to very high material costs due to low level of competitive bidding and excessive single sourcing. Without procurement engineering in place, there is no one to recommend changes in materials, suppliers, processes or design, which in turn can reduce cost.
Purchasing activity: Activity-based costing analysis can reveal that most resources were applied to administrative and not strategic tasks. It also reveals that Administrative work is not automated enough and is cost intensive.
Procurement systems: Decentralized purchasing leads to many procurement systems which fail to have any strategic goals and have heavy maintenance cost and unaligned business process.
Business Controls: Decentralized purchasing have unaligned business controls required for the system which leads to violations of business processes.
In the next blog we will discuss on a case study of a customer on how he addressed these concern areas and gained momentum in procurement activities through Centralized purchasing.