3.5 Organizing to Leverage Resources

Visibility powers the centralized sourcing structure. Because everything happens in one central location, you know what your spend looks like. For example, how many distinctive items (stock keeping units or SKUs) are you buying? What are the volumes and values for each SKU? How well are specific suppliers performing? Knowing these facts helps you make better decisions for the overall organization. Consider the following benefits:

1. StandardizationThe process of looking for different SKUs that are used for essentially the same purpose. The question is, “Can you replace multiple SKUs with just a single SKU?”. You may discover that over time, engineering has designed eight unique fasteners that, for all practical purposes, do the same thing. Clearly, you don't need all eight. Maybe two would get the job done. By standardizing, you can save real money in ordering, inventory, and transaction costs.

2. AggregationThe process of looking for common buys so that you can combine volumes and improve your negotiation leverage—and your supplier’s production efficiencies.. Maybe three different plants use the same commodity, say, lithium ion batteries. If each plant bought batteries separately, your purchase volumes would be lower, reducing your bargaining leverage—and supplier efficiencies. The result: You leave money on the table!

3. More Effective Supply Strategy. If each plant buys batteries independently, each buyer might select a different supplier. Transaction costs go up. More importantly, the different suppliers might perform at different levels. With centralized sourcing, you can better compare performance and move larger volumes to the best suppliers. As you aggregate spend, you also find instances where a closer relationship with a supplier might yield collaborative benefits. You might even decide to invest in developing that supplier's capabilities.

4. Reduced Duplication. By centralizing, you no longer have to do the same thing—e.g., place purchase orders for "malic acid"—at different locations. Reducing duplication lowers administrative costs.

5. Talent Development. As you reduce duplication and focus on your most important SKUs and suppliers, you can specialize; that is, individual buyers can become category experts. They can also develop more effective relationships with key suppliers. Not only will performance improve but the job will also become more fulfilling and empowering.

The bottom line: Centralization delivers powerful benefits. Visibility enables you to see the total spend and leverage that spend across fewer suppliers, reducing administrative and materials costs. However, centralization tends to increase bureaucracy, reduce flexibility, and instill a "silo" mindset. Perhaps the biggest downside is the distance centralization creates between you and the people you work with. You can easily lose touch with internal customers at different plants/business units as well as the local suppliers that support those operations.

Proximity powers the decentralized sourcing structure. Because decisions are made where the work is done, you can respond more quickly and effectively to local needs, unique requirements in a region, and unforeseen events. You also have the opportunity to build closer relationships with your internal customers—the people who use what you buy. Better relationships should lead to better communication—and a much better understanding of how value-added processes work. This intimate knowledge can help you make better suggestions regarding new technologies or substitute parts. Because colleagues like and respect you, your influence goes up. The power of better relationships and understanding does not end at your firms' four walls. Being on site, you get to know the local supply base—including unique capabilities and challenges. You also are better positioned to earn suppliers' trust. When you need to expedite a delivery, you can rely on both the business case and the personal relationship to get things done fast.

Of course, decentralized structures have drawbacks. If you have common requirements, buyers located at each facility or business unit end up doing the same thing; that is, you duplicate efforts, which wastes money. More problematic, as you buy for each location, you tend to buy in much lower volumes. You lose negotiating leverage—and the opportunity to help suppliers reduce their own costs by producing in larger quantities. We will talk more about this in a minute when we discuss economies of scale and learning effects. In other words, you pay for greater responsiveness with higher administrative and materials costs. Your job is to know when the extra costs are worth it; that is, when they enable higher levels of value creation needed to justify the higher costs.

Today, competitive dynamics prioritize cost savings. Agility, however, is also highly prized. Managers naturally want the best of both worlds. The good news: Technology—in the form of better connectivity and more powerful database management tools—can enable effective center-led, decentralized buying. How do these structures work? Supply managers at dispersed buying locations communicate detailed spend information to a centralized purchasing group, typically located at corporate headquarters. The center group analyzes the cumulative spend, looking for standardization and aggregation opportunities. Where cost savings can be found, the center group leads the buying process. Local purchasing teams manage all other buys. You may wonder, "This seems to make sense. Why doesn't everyone do it?" Many companies are trying to implement hybrid structures. However, as the end-of-chapter case illustrates, technology is not the barrier to making a center-led structure work. Human behavior is!