Multi-Location Service Companies: There Is A Better Purchasing Organizational
Peter E. O'Reilly, C.P.M.
Peter E. O'Reilly, C.P.M., Assistant Vice-President, MetLife, New York, NY 10010, 212/578-2470.
80th Annual International Conference Proceedings - 1995 - Anaheim, California
Over the past fifty years much has been written about whether a company with offices across the country should have its purchasing function organized in a centralized or decentralized format. This polarization of purchasing organizations has given way to a compromise, team-oriented approach. Recent evidence has shown that most firms with multi-locations use a type of hybrid operation that utilizes aspects of both centralization and decentralization. All too often decisions on the type of purchasing organization are based on traditional production-based criteria. There is an inherent problem with that method, as these criteria are geared towards manufacturing facilities. The rapid growth of service companies requires a new look at how decisions are made in the selection of the organizational structure for a purchasing department. This paper will attempt to bring to light some new ideas on the subject.
Most literature on the organizational structures of purchasing departments tends to give readers the impression that there are only two choices available to them in the decision process, centralization or decentralization. In fact, most companies today use a mixture of centralized and decentralized purchasing functions.
In 1992 NAPM's CAPS (Center of Advanced Purchasing Studies) conducted a study of purchasing organizational structures. The study compared results obtained in both 1986 and 1992. In addition, participants in the 1992 study were asked for their input on how they thought the purchasing function would be organized in 2000. Below are the comparison figures for the three time periods and the different organizational structures:
A review of this statistical analysis shows the most popular form of purchasing structure to be the combined centralized/decentralized method. The reduction in users of this format, from 59% in 1986 to 47% in 1992, can be attributed to many companies fighting the "cost reduction war" by choosing to increase economies of scale through converting to a more centralized purchasing structure. According to the CAPS study, almost three-quarters of large companies prefer the mixed organizational structure.
It is interesting to note that the percentages for 2000 are identical to those for 1992 in all three organizational structure categories. An underlying premise of this paper is that more multi-location firms will move towards a centralized/decentralized organizational structure for their purchasing function by 2000.
THE TRADITIONAL SEPARATION OF DUTIES.
Most antagonists in the centralization vs. decentralization controversy can readily recite which duties lend themselves to each organizational structure. It is worth recapping some of these recommendations. According to the Purchasing Handbook, it is widely felt that centralized purchasing functions can best support the following activities:
- Contract Administration
- Strategic Planning
- Development and Implementation of Policies and Procedures
- Maximization of Buying Power
While this list is by no means all inclusive, it does represent what is often at the very core of a purchasing department's reason for existence. While most of the more significant purchasing responsibilities are in the centralization column, there are some important functions performed by decentralized entities. These include:
- Development of Regional and Local Supplier Sources
- Customer Service
As previously stated, most of the articles written on the centralization/decentralization issue tend to be heavily influenced by how manufacturing companies operate. Often the major criteria in deciding which organizational structure to use has been based on whether a firm's multi-locations produce the same type of product or not. Similar products would favor centralized buying, while dissimilar products suggest the need for decentralized purchasing.
A reoccurring problem with the entire decision-making process has been the one-direction flow of information. The separation of purchasing duties all too often creates turf battles. Self-contained spheres of influence are formed where information stays within each organizational structure, whether it be centralized or decentralized. Under such a climate cooperation among the various purchasing offices is minimized; thereby, seriously hindering a company's overall buying effectiveness.
GIVING SERVICE COMPANIES THEIR DUE.
The buying requirements of service firms are not generally the same as those of manufacturing businesses. There are usually markedly different "importance" factors associated with a service company's buying activity. The products purchased for multi-location service companies tend to be more administrative in nature than those bought by manufacturing concerns. This is based on the fact that a high percentage of buying within a service firm is for goods and services that are secondary or supportive. They are not an integral part of the firm's core competencies. In a manufacturing company, the bulk of the buying activity focuses on primary components necessary in the production of the firm's finished goods.
OVERCOMING A DILEMMA.
When an organization is contemplating the use of a centralized/decentralized structure, decisions are often based on who has the power within the company, the home office or the field. That is a contributing factor to much of the problems associated with distributing purchasing activities throughout a company.
Having too strong a centralized presence stifles many of the advantages offered by a shared organizational structure. Dispersed buying entities in such a climate lack creativity and a sense of corporate purpose. Such an approach forms an image of a benevolent despot: the home office knows what is good for the local purchasing offices in all cases.
On the other hand, there are concerns that have to be addressed when dispersed purchasing organizations have a lopsided amount of power. In such situations, a company will suffer from having scattered mini self-contained buying factions. Company-wide objectives are relegated to secondary status in favor of creating individual office power bases. When this occurs, purchasing units often find themselves at cross purposes with each other. Politics reigns supreme at the expense of team work and moving towards a common good.
FACTORS TO CONSIDER IN DECIDING ON AN ORGANIZATIONAL STRUCTURE.
Before dividing up the purchasing function pie between centralized and decentralized elements, it is important to consider some key factors that can diminish mistakes down the road.
These issues include:
- Scope of Buying Activity
- Profit Potential
- Corporate Culture
- Reporting Relationships
- Impact on Company's Strategic Objectives
- Long Term vs. Short Term Goals
- Customer Service
The first two factors are closely related. There should be significant enough buying activity to warrant a purchasing presence in multi-location sites. The expenditure associated with a combined organizational structure should offer the management of the purchasing operations an acceptable rate of return.
Another matter to consider is corporate culture. How well have other decentralization ventures fared in the company? What kind of resistance has occurred? Can these hurdles be overcome? These are just some of the questions a firm must ask itself should it contemplate moving away from a strictly centralized purchasing structure.
The use of a centralized/decentralized purchasing format must have clearly defined roles and responsibilities. How well the various purchasing units interact is very important to achieving success. The "heavy-handed" approach from the home office and the "power to the locals" approach from the regional sites should be avoided at all costs.
Generally, the impact of a service company's purchasing function on its strategic objectives is not as great as that found in manufacturing businesses. However, every effort should be made to ascertain how a purchasing function's organizational structure can maximize its impact on the company's bottom line. The Purchasing Handbook strongly suggests that firms look at the ultimate (long term) benefits offered by a multi-structure purchasing organization and not at the temporary (short term) benefits. Such a view can reduce costly mistakes.
The last factor to consider centers on customer service. It is interesting to note that most literature on the subject ignores this vital component. Customer input should go a long way in determining how to organize a purchasing function. Without the customer, no purchasing function would exist.
REGIONALIZATION- BREAKING DOWN THE BARRIERS.
The regionalization concept of organizational structure for a multi-location purchasing entity consists of an active role for both the home office and dispersed (regional) offices. The corporate unit acts as the core or hub for the purchasing function. The regional offices are outer rings, connected to the center (or the home office) by spokes, like a bicycle tire. The spokes are the various buying activities.
The key element introduced in this approach is the participative nature of the relationship between corporate and the regions. There needs to be two-way communications between both factions. While some activities will clearly be controlled by either the home office or the regional purchasing units, there must be input from both parties. Such an exchange can be very beneficial in achieving optimal effectiveness for the purchasing function in general.
Good communications go a long way in overcoming any problems in reporting relationships. In some companies, the regional buyers report directly to the corporate purchasing executives. In other situations, there is a dotted-line reporting relationship. Success should be based on team work and openness, and not necessarily on specific reporting relationships.
USING A SBU TO IMPLEMENT REGIONALIZATION.
Reporting relationships are usually the most difficult initial problem a company faces when considering implementing a regional purchasing structure. The home office staff will try to keep tight control on all purchasing activities, while the regional buying units will fight vigorously to build a strong independent organization. To minimize these concerns, a number of service companies have created strategic business units (SBU) as a proactive response to many of the management reporting issues.
Under a SBU, a home office executive, such as the vice-president for procurement, has overall responsibility for the purchasing function. The regional buyers, while not reporting directly to this person, are considered part of the executive's scope of responsibilities. The SBU method attempts to foster a spirit of team work through strategic objectives that are the same for home office and regional buying personnel. The participative approach found within the SBU should generate much interaction among the buying personnel in the multi-locations in regards to the various buying activities.
REGIONALIZATON- A SAMPLING.
It may be helpful to the reader in better understanding regionalization to see how it can be put into effect within a service company. Several key buying activities performed by the purchasing units (both in the home office and the regions) will be used in this demonstration. These buying activities will include:
- Policies and Procedures
- Training and Self-Development
- Strategic Planning
- Supplier Programs
- Large-Scale Projects
Most companies try to achieve a good part of their buying through some type of contract. In regionalization, the home office would have a contract administration staff that would coordinate all contract-related activities. While most of these contracts would tend to be national, there could be a number of regional contracts as well. The corporate contract personnel would assist the regional buyers move more of their buying to contracts. Corporate also would make sure that all contracts are uniformed and reviewed by the Law Department.
More and more buying activities are performed through some type of electronic system. A home office buying staff would develop and maintain purchasing-related systems. The regional buyers would be expected to provide valuable input on operational issues.
A problem with a heavily decentralized purchasing presence occurs when each unit uses different methods to process work. It is essential that all buyers, regardless of location, operate on the "same page" when it comes to policies and procedures. To ensure that this happens, the corporate buying unit would be responsible for issuing all policies and procedures. The regional buyers would be consulted for comments and feedback on such points as clarity and substance.
The home office buying staff would also conduct all training programs such as reviewing new policies and procedures or introducing new system enhancements. The most important aspect of any buying unit is the people performing the function. The corporate purchasing unit would encourage active self-development programs such as NAPM seminars and the C.P.M. designation.
An increasing number of purchasing organizations are focusing a good deal of attention on aspects related to strategic planning. For too long only input from corporate purchasing personnel was welcomed for this activity. That philosophy is too short-sighted for today's complex purchasing function. Regional buyers are major participants in all aspects of strategic planning, especially those associated with customers. Their views greatly enhance the planning process. Periodic planning sessions should be held in which both home office and regional buying personnel develop agenda topics.
Both corporate and regional purchasing personnel contribute to the company's supplier program. Supplier selection and performance evaluation are two areas that are aided by input from both entities. Sometimes a corporate purchasing unit does not see a vendor in the same light as do regional buyers.
For the most part, the regional buyers spend a good deal of their time in buying-related activities and servicing the needs of their customers. This leaves little time for large scale projects such as, developing an expanded line of standards or certifying alternative suppliers. A home office buying unit probably has a larger staff and could provide these functions for the regional buyers.
Regionalization is meant to place corporate and regional buyers in a situation where they both complement and supplement each other. While one entity may be responsible for a particular buying activity; that entity does not operate in a vacuum. The assistance of its partner units is not only welcomed but actively sought.
The use of regionalization as an organizational structure through a SBU will not fit into every company's way of performing its purchasing function. It requires some sacrifice and much cooperation. Everyone has to realize that a team approach is more effective than a power struggle method. By allowing all buying units to participate in purchasing activities, a climate is created that sees company objectives as a common cause, and one that comes before any turf issues. Regionalization of the purchasing function allows for all parties in a multi-location service company to contribute to their fullest potential.