Ask Spend Matters – Centralized, Decentralized or Hybrid Sourcing Structure?

We mentioned here that our colleagues at Spend Matters US are running a new feature called “Ask Spend Matters” in which readers.. yes, you’ve guessed it, ask spend Matters questions that are interesting or bothering them.

The latest question got passed my way, as the Spend Matters individual with the longest service in line management procurement roles, including three CPO jobs in different sectors (showing differing levels of success too, I would admit!) This came from Piyush Shah, a PhD student of supply chain management at Arizona State University, who asked, “Centralized, decentralized or hybrid sourcing structure? How do we decide?”

So Shah, Sydney Lazarus from Spend Matters US and I spent a good half-hour on a conference call, which was largely me pontificating about my experience. And now Lazarus has produced a very good and informative article on the Spend Matters US site which includes background and some history to the topic, as well as some of my thoughts from our call. As she says:

This is a classic question and one that has sparked decades of passionate debate. Proponents of centralization point to the potential for higher savings. Defenders of decentralization argue that regional procurement teams can bring about better supplier relationships.

The easy answer is “It depends” or “A hybrid of the two.” But what does a hybrid structure look like? And how do factors like purchasing category, industry and stakeholders play into the assessment”?

The article includes input from others, such as Dr. Katri Kauppi, an Aalto University assistant professor of logistics whose dissertation had focused on public procurement centralization. “It is my understanding that centralization and hybrid are also very much still in use in the private sector,” she says. “Better e-procurement solutions and purchase-to-pay tracking solutions may enable more center-led and hybrid approaches to also offer efficiency that was previously mostly doable with centralization only.”

We won’t go through the whole article – you can read it yourself here. But this is another extract, quoting some of my views on the age-old argument!

“The vast majority of procurement organizations are somewhere in between completely centralized and completely decentralized, Smith says. Company size, location, expansion rate, purchasing category and industry are all factors that affect whether a more centralized or more decentralized structure is better.

For large, global companies, more decentralization is generally recommended. It is also a matter of practicality. If a company has offices all over the world, it is simply not realistic for purchases to go through a single central office.

Then there is the question of industry. “Once an industry gets more mature, there is more competition and pressure on margins,” Smith says, “Rightly or wrongly, procurement starts standardizing.” In industries like automotive or oil and gas, where products are more or less the same around the world, centralization is a better fit”.

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