In our last post, we noted that, since the dangers of centralization in a de-centralized world not only eliminated centralization as a valid Procurement Operation Model, but also limited the effectiveness of center-led and center-of-excellence models in today’s global trade environment, the Procurement Operationg Model for a global organization needs to evolve in order for a global organization to be efficient and effective in today’s global trade environment.
We said that model was a Center-Orchestrated Procurement model where we modified a hybrid center-led procurement model based on a center of excellence to one that orchestrated global Procurement versus one that did the global sourcing events and handed off the daily Procurement pulls to a local organization with junior buyers only. Orchestration of regional and local Procurements against a global need or category strategy as well as localized day-to-day Procurement, systems selection and implementation, analysis, and best practice development.
But what does that look like? And how does it differ from center-led?
Not much from the outside looking in, but quite a bit from the inside looking out. To try and explain the subtle differences, we’re going to go back and compare it to the list of center-led procurement best practices we gave you twenty years ago, with a few additional notes to help you transition into a next generation, adaptive, Procurement Operation Model that will allow you to survive the tumultuous world of global trade we currently have to deal with.
1. A Chief Purchasing Officer (CPO) on the Executive Team leads the COE
This stays the same. A strong CPO has to lead the Central Procurement Office. She’s the one who ensures that the right plans, processes, and platforms are selected to meet Procurement’s goals and align with the business objectives, divert resistance, and bring various business divisions and units onboard when needed.
2. Cross Functional Teams
Cross functional teams also stay in place, except you need them at both the global level — where Procurement aligns with global product focus, marketing, and supply chain efforts — and also at the regional/local level where they exist to support the relevant categories that are sourced regionally and locally.
3. Multi-Year Supply Plans
This is where center-orchestrated differs from center-led. It’s not multi-year supply plans, it’s appropriately windowed supply strategies with regular review according to the category under consideration. Categories with stable global dynamics and long-term predictable demand or where scarce supply needs to be locked up should be multi-year, but categories where demand is unpredictable and supply is typically not a problem should be shorter, especially when market dynamics don’t favour locking in long term contracts.
Moreover, if the category is one that needs to be sourced regionally, or locally, the windows should be adjusted to the regional economics of the time, because if costs in one region happen to be spiking or at a floor, the plan and contract length (for a contracted category) should be adjusted accordingly.
Moreover, to be more precise, it’s appropriately windowed supply strategies with regular review based on Busch-Lamoureux Exact Purchasing where the organization adopts a next-generation supply management methodology that overcomes the weaknesses of the Kraljic Matrix and every other 2*2 methodology based on it which all refuse to acknowledge that risk, complexity, and impact are completely independent directions. Using this methodology, each category can be appropriately classified into the right octant of the pocket-cube, where the organization can identify the right default strategy for categories in that octant as well as conditions under which the correct strategy would vary and how it would vary.
4. Coordinated Metrics and Incentives
In order to properly analyze regional Procurement, every division has to be analyzed off of the same set of metrics. However, for that to be fair, they need to understand what those metrics are up front and the metrics need to make sense. This means they need to be designed and coordinated by an expert center of excellence that knows how to design metrics for execution and orchestration, not just reporting.
In addition, there must be well defined and aligned incentives that will convince each unit to work towards common objectives and goals and follow the best practice advice departed by the central office.
5. Web-Based Automation and Decision Support Tools
This is still required, but it’s not the core. The core is standardized data model and [analytics] platform and foundational global sourcing, procurement, and supplier management platform. And, today, a well-defined automation and AI strategy that indicates what can be used by who, where, when, why, and how. No generics, detailed specifics!
Centralized and center-guided Procurements need to be on the same platform for multiple reasons. This allows the COE to define a standard strategy and process that can be rolled out and setup for each region, and in the case where some regions can share suppliers (where the supplier would be primary in one region and secondary in another), a model can be setup where each region could define their own requirements and preferences and a bi-regional or global optimization model could be developed to define a global allocation where local suppliers to a region are given the preference defined by the region and regional needs are all met.
Moreover, where a platform doesn’t support, or can’t easily be rolled into a region, the region knows what processes its local platform need to support, what data it needs to collect, and how it needs to integrate to the global organization.
6. Ongoing Education
Education is still critical, but it’s not top-down inside-out education, it’s bi-directional knowledge transfer, capture, and education. The reality is that best-practices tend to be time-based and regional. What works for one region might not work for another, and what works for one set of market conditions might not work for another. Only by enabling, capturing, and applying bi-directional knowledge transfer can the organization come up with good standard processes and platforms as well as modifications and exceptions with respect to different regional requirements and market conditions.
7. Speak to the Supplier Community with a Central Voice
More precisely, speak to each supplier with a common central voice, where that voice might be central, regional, or local. Also, define standards for supplier onboarding, communication, management, development, correction, measurement, and performance management.
The supplier master and management solution needs to be centralized, as does the general supplier management philosophy.
But these are not the only requirements, and differences, that need to be addressed in a modern center-orchestrated procurement model.
