Central or localised procurement? How to capitalise on both.
Whether your organisation operates centralised or localised procurement or does something in-between, the choice between making procurement decisions on a global or divisional level continues to be a hot topic for many enterprises.
Centralised procurement has been a core development in government in recent years, with the way that IT suppliers tender for public sector business changing with the arrival of digital marketplace G-Cloud. This legally compliant framework for procurement of IT services and solutions was reported to have awarded more than £1.3 billion worth of contracts by June 2016. Giving public sector agencies access to suppliers and services across a wide range of cloud service models, the system is one part of a wider move to a more streamlined purchasing infrastructure.
Whatever the preferred way of doing things, long-standing arguments for both centralised and localised approaches to procurement are likely to continue, whether these are the advantages of consolidating spend and de-duplicating resource or on the other hand of faster local decision making and greater agility.
The advantages of both may be why many businesses can end up operating a mix of the two and indeed it has been pointed out before now that there is usually no ‘one or the other’. Whether by gradual development, or a considered decision made through experience of both, the majority of purchasing arrangements can often be somewhere between the two approaches and designed to achieve the best of both worlds.
The point on the line between the two can often depend on the category of spend in question, the quality of communication between business units and what is considered to be accepted practice across the enterprise.
Past surveys have shown that 63% of purchasers prefer centralised buying for its ability to lower costs and leverage spend better. When a head office team or an individual have responsibility for the majority of spend, the advantages can include de-duplication of resources, greater efficiency in contracting and economies of scale for making volume purchases.
Centralised procurement can show its particular strength when working with suppliers of goods or services that are needed across the enterprise to perform much the same tasks across all divisions and locations. A central buyer can not only buy more cost effectively for the whole organisation but also achieve greater purchasing power by selecting one supplier for a particular set of products. This one supplier can then negotiate better terms and stronger relationships with its partners.
Savings that can be made by using central purchasing to consolidate suppliers are greater than simply the product cost. They can include less sales calls, less marketing, fewer invoices to process and of course, less resource needed to manage and monitor the supplier.
Whether it’s researching the potential benefits of consolidating supply or realising huge savings after changes are made, private and public sector organisations around the world are on the case. In the UK the Professional Golf Association recently announced plans to rationalise its print services base. The appointment of a head of procurement has led the organisation to centralise operations and it is looking to consolidate supply of an extensive range of official media guides, programmes, brochures, tickets, wristbands and vouchers.
Thousands of miles away, multi-million pound cost savings have been the result of a move to central procurement by the South African government. The creation of a central procurement office was reported in late 2015 to have made millions of rand worth of savings. This progress was made by reducing the cost of transacting for supplies, the creation of a central supplier database, a commerce centre and the implementation of an e-procurement system. The cost of a purchase order was reported to have reduced from the equivalent of just over £200 pounds to between £28 and £43 pounds. Instead of its auditor general auditing compliance in over one thousand procuring entities, the auditing of just one central database saved the state around £128 pounds per order in auditing costs alone.
Even if a centralised system is not as far-reaching as the above and every product is not bought by one person, the need for clear leadership in procurement is emphasised by many. In his interview with B Magazine, Simon Walsh, head of procurement at Central Manchester Hospitals NHS Trust, expressed the view that greater leadership would be a good move for public procurement if the most appropriate goods and services are to be specified and streamlined centrally.
All of this may lead to the view that centralised procurement is the future, but the possibility of reverting to just the opposite has not completely disappeared, in part as a result of the unknowns of Brexit.
The ‘Treuble and Strife’ report, written by the Chartered Institute of Public Finance and Accountancy before the EU Referendum in June, mentioned one of many possible impacts of Brexit could be authorities ultimately implementing their own localised procurement policies. This was suggested because, prior to EU rules, local authorities were able to follow their own internal procedures and financial regulations. It has to be said however that the most commonly accepted current belief is that EU procurement rules will be adopted by the UK, which would prevent this from happening.
Whatever the political climate, there is likely to be an argument for some continued tactical spending at local level when a division needs to procure quickly, or make a fast decision to deal with unexpected circumstances as successfully as possible. Empowering individuals to make these choices can improve motivation and morale, ensure operations run smoothly and deliver products speedily in exactly the quantities needed for that local unit at that time.
To avoid the risks of unacceptable cost increases, significant duplication of effort across the enterprise or an excessive number of items being procured locally, both training and communication need to be effective.
Whether buying practices have been implicitly or explicitly agreed, or just simply followed for a long time, ensuring that these are periodically reviewed and a formal procurement policy is communicated and regularly updated for the whole enterprise makes sense. A written document should cover the current and projected range of scenarios at local and global levels, but shouldn’t negate the need for face to face contact and discussion with individuals.
Where purchasing practice needs to change, even moderately, the more discussion and communication that takes place, the more likely it is that people will understand and work well within the guidelines of a new policy.
Achieving a balance between value and effectiveness is the holy grail of most organisational procurement and there is no ‘one size fits all’. Continuing to communicate with employees, partners and suppliers to improve practice and being open to ideas that could lead to the best value from centralised and de-centralised procurement is fundamental.
Banner is the largest supplier of workplace services and supplies to the public sector and many UK and Ireland based businesses. For more procurement insights please join us on Linkedin or follow us on Twitter.