This analysis is based on the KPMG and Procurement Leaders research study: High Impact Procurement Operating Models – A Survey of Global CPOs. Readers can download the full analysis (warning: it is dense!) by clicking the previous link.
Recapping one point in our last analysis, KPMG found in its research with Procurement Leaders that centralization within procurement tends to correlate with higher level reporting relationships for the function (i.e., to the CEO). But this finding begs the question: what came first and why? As the authors observe, “the establishment of central structures formalizes the importance of the function to meet business need. The issue for many to consider is whether it is the direct reporting line that delivers these centralized structures, or whether greater centralization requires more CEO oversight.”
Another key observation is that form tends to follow function (our words). For example, within manufacturing where direct procurement is often a main focus of the purchasing and supply chain functions, centralization is more common. Given the importance of a variety of factors in purchasing decisions for direct materials beyond just price (e.g., quality, on-time performance, supplier risk, supply chain visibility, inventory, lead times), it is not surprising that more centralized approaches, which can help more consistently manage risk and outcomes for the overall business, are more common.
Companies do not necessarily start with centralization, however. They move through a lifecycle and even show some signs of retreating back to levels of decentralization as they become more advanced. The authors note, for example, that “after a period of full centralization, there is often a correction applied to the organizational structure, manifesting itself as a shift to a center-led structure.” Further, there is also “evidence that as organizations progress through these phases, the benefits of previous models are retained. The journey is not so much a cycle through alternative structures, but an accumulation of features and benefits.”
We can summarize a few takeaways from this (some called out in the paper explicitly, and others which are less defined):
- Reporting models tend to be self reinforcing (e.g., a CEO could never oversee a diversified structure, but a central procurement executive overseeing a centralized group makes it possible to have direct reporting ties)
- Procurement operating models represent a journey that is always in evolution (i.e., there is no end point)
- Procurement operating models tend to follow a common model of progression starting first with decentralization
- Operating models reflect business needs (e.g., industry requirements) and certain vertical sectors tend to greater levels of centralization (i.e., sophistication), perhaps given the relative importance placed on procurement for longer periods of time
Stay tuned as our coverage of this report continues.