Performance Enhancers behind Centralized Global Procurement Functions

June 16, 2010. Across many industries, procurement has gradually been re-centralized. The recent recession has accelerated the move back to centralized service centers, in order to cut international costs in contracting for upstream or downstream projects. Assessing the appropriate geographical point of sourcing and supplier management remains a central challenge, reinforcing the need for detailed assessment of internal organizational requirements and performance enhancers.

Centralized global sourcing teams today have to plan and implement strategies, and drive timely and superior performance across local, regional and global sectors, categories and supplier groups.

For centralized procurement to be of strategic value, it must first be closely integrated with critical business drivers; particularly those linked to growth, return on capital and margin management. This translates to objective metrics signaling significant savings, synergies and/or revenues that result from procurement activities.

For this to happen, senior global management must recognize and support strategic sourcing as part of its overall strategy to meet the company’s financial goals and maximize shareholder value. In addition, centralized strategic sourcing can also be recognized as helping to enhance cash flows and build customer, product, brand and reputational leadership.

The performance levers behind strategic sourcing

Successfully embedding a distinctive procurement competence however, requires a concerted focus over a considerable period of time, using six performance levers.

MI for SCM_Chart_Performance Enhancers behind Centralized Global Procurement Functions_20100618

Strategic alignment and integration. Sourcing is no longer seen as primarily about securing timely and cost-effective supply. There has to be a much closer value-chain connection with activities that ultimately work through to top-line revenue growth. Focus is shifted from price management and tactical cost reduction on to value creation.

Sponsorship and business engagement . Getting the business to be truly engaged with strategic sourcing involves allocating appropriate resources to participate in the sourcing process and recognizing the activity as a business process rather than a project or a bureaucratic cost center.

Organizational design and structure. Change management skills are critical in complex matrix management structures existing in multi-functional, multi-site and multi-location organizations. Organizational redesign and structural change is central to the accomplishment of high-performance strategic sourcing across sites, functions and countries.

Governance and program management. Knowledge management enablers such as procurement portals, e-sourcing and e-auctions have been introduced to secure process leverage through a harmonized, global approach. The risk inherent in this approach is that procurement professionals may become process bound and fail to drive analytical strategy into practical implementation. Governance, with senior management sponsorship, should use available tools and processes to measure-to-manage the processes, and enable the integration of functions and departments within the organization to participate and benefit from the process.

Leadership, people and behavior. Driving forward strategic sourcing, category management, outsourcing and key initiatives with major suppliers, calls for a sufficient mass of high-powered people who have a real understanding of business functions with great commercial breadth and a general management orientation.

Processes, technology and infrastructure. Procurement has to adopt an accelerated and leveraged approach built around e-sourcing in relevant categories, while applying the full discipline of strategic sourcing in areas where the supply market is demanding, where the business benefit is considerable and where the organizational challenge is complex.

Market Intelligence behind strategic sourcing

In developing their procurement competencies, companies need to ensure that market Intelligence is a core element of their centralized procurement and strategic sourcing functions. Market Intelligence tools and processes enable supply chain management professionals to be more engaged with strategy, rather than performing routine tactical or administrative tasks, as described in the M-Brain (formerly GIA) White Paper, Market Intelligence for Supply Chain Management.

For example, the delivery of, and action upon, continuous monitoring and deep-dive projects focusing on the competitive landscape, supply network and strategic developments within the market can help supply chain management (SCM) leaders make better informed sourcing decisions.

Organizing for strategic SCM or market intelligence generally follows the same structural and implementation patterns: market intelligence tools can be introduced to integrate with supply chain management functional processes, easing the transition from a tactical to a strategic focus and synergizing procurement efforts and results.

For example, continuous monitoring tools deliver daily updates regarding markets and market participants the firm is interested in. These updates, when compiled, provide the first round of research for strategic sourcing professionals when seeking out who to invite to their RFPs and when to review contract pricing for each commodity.

By offering the procurement team an understanding of the firm’s strategic position within the competitive supply network, and enabling an early vision of opportunities and threat-warnings, procurement levers can be adjusted proactively, and in unison. Specifically, Market Intelligence can synergize some SCM processes with governance and program management, directly integrating with e-sourcing, e-auctions, and procurement portals.

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