In our last post, we reminded you that since the dangers of centralization in a de-centralized world not only eliminated centralization as a valid Procurement Operation Model, but also limited the effectiveness of center-led and center-of-excellence models in today’s global trade environment, the Procurement Operating Model for a global organization needs to evolve in order for a global organization to be efficient and effective in today’s global trade environment.

We started to discuss the required changes by referring back to the list of center-led procurement best practices we gave you twenty years ago, and describing how the center led model needs to evolve along those dimensions. However, those aren’t the only dimensions that need to be considered, so today we discuss the rest, some of which probably aren’t part of your current model.

In addition to the 7 points we discussed in Part 1, a centrally orchestrated procurement center of excellence organization (Orchestric CoE) also differs in the following ways:

8. Centralized Risk Modelling, Mitigation, and Management

The only constant in global supply chains today is disruption — a lot of which can be (partially) predicted by well defined risk management. An organization that tracks global geopolitical, economic, and trade (tariff/isolationism) risks as well as more localized geopolitical and civil risks, port closures and strike risks, natural disaster and climate risks, and so on. That takes all of these into account in the formulation of, and constant adjustment of, sourcing strategies that focus on friend-, near-, and home-shoring (and hence regionally focussed Procurement) as well as “safe” supply lanes.

9. Standardization, Localization, and Rationalization – Products and Services

We’ve argued against over-standardization to the point that only a few suppliers can meet your needs, but without standardization to a reasonable extent across your global supply chain, you’re not going to ever see any economies of scale, risk reduction, or overall improvement.

Standardization allows products to be sourced and sold across regions, economies of scale to be monopolized across the supply base, and easy product development in established categories.

However, there will be different requirements with respect to product (raw material) content, industry standards, safety factors, warranty, and repair that will need to be met. Sometimes it will be possible to create products that meet all the needs, sometimes now, so the Orchestral COE will be responsible for defining the base standard and regional variations where required, as well as any additional specific localizations required to increase utilization or sales.

10. Standardization, Localization, and Rationalization – Policies, Terms & Conditions

You also want to standardize organizational policies and terms and conditions for contracts and service agreements to the extent possible. It makes it a lot easier to define processes, starting contract clauses, and conditions for success. It also makes it easier to identify what needs to be localized or altered in different parts of the world, track those differences, and understand when changes need to occur how much of the supply base and operating base is affected.

11. Global Logistics Coordination

In an article on how there is no cost savings if it doesn’t hit the P&L, we noted that most consulting process changes and (sourcing and) procurement platforms don’t actually save anything, not even a single cent, because the cost reductions usually came at the expense of cost increases elsewhere, which often exceeded the cost savings in Procurement.

The first place this usually hits is logistics — because, classically, Procurement always sought the lowest cost and that always came from the furthest supplier, which lengthened the supply chain and greatly increased logistics costs, as well as stockout-related costs as stockouts became more likely and frequent on every disruption. Also, when multiple supplier tiers sourced from far away, you ended up with a product where some of the raw materials circumvented the globe multiple times — and that’s just not efficient or cost effective.

And even when similar regions were sourced from, it was often the case a supplier as far outside of the network in the region as possible would be selected, leading to the need for new routes that wouldn’t run full truckload on a regular basis, more cross-docking, and greater inventory costs. The Orchestric COE needs to work with Logistics and ensure that the global logistics network is taken into account during centrally orchestrated events, or, when the supply base needs to change, updated appropriately to keep overall costs and risks low.

12. Operational Impact Tracking and Management

Any time a major change is proposed in the product base, supply base, shipping network, or standard operational policy, it’s up to the COE to determine what organization wide impacts will result and what the costs will be. Since there’s no savings if it doesn’t hit the P&L, there’s no savings if the change will shoot up costs in another part of the organization more than the change saves. So its up to the Orchestric COE to work with the other units as part of its cross functional teams to determine potential impacts, potential up front and ongoing costs, and take that into its total cost of ownership models when sourcing and managing day-to-day procurement.

In other words, you can’t lead from the center with one playbook and expect results. You have to orchestrate from the center, ensure the knowledge flows across the supply chain graph, and adapt to the market for each category when it needs to be sourced and procured. And that requires a different operating philosophy than a classic center led / center of excellence model.

In our last post, we noted that, since the dangers of centralization in a de-centralized world not only eliminated centralization as a valid Procurement Operation Model, but also limited the effectiveness of center-led and center-of-excellence models in today’s global trade environment, the Procurement Operationg Model for a global organization needs to evolve in order for a global organization to be efficient and effective in today’s global trade environment.

We said that model was a Center-Orchestrated Procurement model where we modified a hybrid center-led procurement model based on a center of excellence to one that orchestrated global Procurement versus one that did the global sourcing events and handed off the daily Procurement pulls to a local organization with junior buyers only. Orchestration of regional and local Procurements against a global need or category strategy as well as localized day-to-day Procurement, systems selection and implementation, analysis, and best practice development.

But what does that look like? And how does it differ from center-led?

Not much from the outside looking in, but quite a bit from the inside looking out. To try and explain the subtle differences, we’re going to go back and compare it to the list of center-led procurement best practices we gave you twenty years ago, with a few additional notes to help you transition into a next generation, adaptive, Procurement Operation Model that will allow you to survive the tumultuous world of global trade we currently have to deal with.

1. A Chief Purchasing Officer (CPO) on the Executive Team leads the COE

This stays the same. A strong CPO has to lead the Central Procurement Office. She’s the one who ensures that the right plans, processes, and platforms are selected to meet Procurement’s goals and align with the business objectives, divert resistance, and bring various business divisions and units onboard when needed.

2. Cross Functional Teams

Cross functional teams also stay in place, except you need them at both the global level — where Procurement aligns with global product focus, marketing, and supply chain efforts — and also at the regional/local level where they exist to support the relevant categories that are sourced regionally and locally.

3. Multi-Year Supply Plans

This is where center-orchestrated differs from center-led. It’s not multi-year supply plans, it’s appropriately windowed supply strategies with regular review according to the category under consideration. Categories with stable global dynamics and long-term predictable demand or where scarce supply needs to be locked up should be multi-year, but categories where demand is unpredictable and supply is typically not a problem should be shorter, especially when market dynamics don’t favour locking in long term contracts.

Moreover, if the category is one that needs to be sourced regionally, or locally, the windows should be adjusted to the regional economics of the time, because if costs in one region happen to be spiking or at a floor, the plan and contract length (for a contracted category) should be adjusted accordingly.

Moreover, to be more precise, it’s appropriately windowed supply strategies with regular review based on Busch-Lamoureux Exact Purchasing where the organization adopts a next-generation supply management methodology that overcomes the weaknesses of the Kraljic Matrix and every other 2*2 methodology based on it which all refuse to acknowledge that risk, complexity, and impact are completely independent directions. Using this methodology, each category can be appropriately classified into the right octant of the pocket-cube, where the organization can identify the right default strategy for categories in that octant as well as conditions under which the correct strategy would vary and how it would vary.

4. Coordinated Metrics and Incentives

In order to properly analyze regional Procurement, every division has to be analyzed off of the same set of metrics. However, for that to be fair, they need to understand what those metrics are up front and the metrics need to make sense. This means they need to be designed and coordinated by an expert center of excellence that knows how to design metrics for execution and orchestration, not just reporting.

In addition, there must be well defined and aligned incentives that will convince each unit to work towards common objectives and goals and follow the best practice advice departed by the central office.

5. Web-Based Automation and Decision Support Tools

This is still required, but it’s not the core. The core is standardized data model and [analytics] platform and foundational global sourcing, procurement, and supplier management platform. And, today, a well-defined automation and AI strategy that indicates what can be used by who, where, when, why, and how. No generics, detailed specifics!

Centralized and center-guided Procurements need to be on the same platform for multiple reasons. This allows the COE to define a standard strategy and process that can be rolled out and setup for each region, and in the case where some regions can share suppliers (where the supplier would be primary in one region and secondary in another), a model can be setup where each region could define their own requirements and preferences and a bi-regional or global optimization model could be developed to define a global allocation where local suppliers to a region are given the preference defined by the region and regional needs are all met.

Moreover, where a platform doesn’t support, or can’t easily be rolled into a region, the region knows what processes its local platform need to support, what data it needs to collect, and how it needs to integrate to the global organization.

6. Ongoing Education

Education is still critical, but it’s not top-down inside-out education, it’s bi-directional knowledge transfer, capture, and education. The reality is that best-practices tend to be time-based and regional. What works for one region might not work for another, and what works for one set of market conditions might not work for another. Only by enabling, capturing, and applying bi-directional knowledge transfer can the organization come up with good standard processes and platforms as well as modifications and exceptions with respect to different regional requirements and market conditions.

7. Speak to the Supplier Community with a Central Voice

More precisely, speak to each supplier with a common central voice, where that voice might be central, regional, or local. Also, define standards for supplier onboarding, communication, management, development, correction, measurement, and performance management.

The supplier master and management solution needs to be centralized, as does the general supplier management philosophy.

But these are not the only requirements, and differences, that need to be addressed in a modern center-orchestrated procurement model.

In a recent piece on the dangers of centralization in a de-centralized world we noted that not only was it time to bury anything that remained of centralized Procurement, but also classical centre-led Procurement. While centre-led Procurement worked great for about two decades, we saw it crash and burn during the COVID pandemic and any signs of recovery cease once global trade was again interrupted on a regular basis thanks to geopolitical conflicts, sanctions, seaway closings, tariffs, natural disasters, and economic instability, among other things.

As a result, the model needs to evolve for global multi-nationals looking for a way to standardize their Procurement without creating as many problems or costs as they solve or remove. The answer is centralized orchestration through a centre of excellence designed to support, but not lead, since, with the exception of any materials, components, parts, or products that can only come from a handful of suppliers in a few locations and, thus, truly need to be sourced globally, Procurement should be a mix of regional and local activities.

The need for friend-shoring, near-shoring, and home-shoring has hit an all time high, which means that Procurement has to be a lot more localized than it has been in leading multi-nationals for the past two decades. That means it needs to be done locally, with local expertise, to ensure the right suppliers and right products are selected for the local (market) needs.

But you can’t revert to decentralized Procurement because that will essentially bring back all of the original problems it came with. Some may present different, but you will have a lack of standardization where it is needed, a loss of economies of scale, duplicate effort in Procurement process and best-practice creation, multiple platforms where you should have a single platform, and so on.

Even though Procurement needs to be more localized than it has been in decades, it still needs some standardization, economies of scale, single platforms, and efforts that generate value versus duplicate, wasted, efforts. So a Center of Excellence is needed now more than ever, but we’ve repeatedly seen that a pull-based center of excellence never gets used. Procurement pros are so overworked and constantly bombarded that they don’t have time to even think about consulting a center of excellence, especially one in a totally different time zone.

That means, for it to work, there has to be a push element as well … but no one likes processes, platforms, prognostications, or prescriptions being forced upon them.

That’s why we need to step up from center-led procurement to centralized orchestration, not led, orchestration — because good orchestration understands the process, defines the workflows, and, most importantly, knows where the source and lead systems, processes, and people are. It knows when a sourcing event should be fully centralized, fully decentralized, and, more importantly, split … broken into a number of regional buys with appropriate splits, selections that could serve other regions in a pinch, and standardized processes. It knows how to coordinate, when it needs to push events, and when it needs to pull information and awards to better coordinate globally. It doesn’t lead, it orchestrates. It’s a subtle difference, but an important one.

For years, centralization (and then center-led) was promoted as the best Procurement organization methodology because it would deliver many benefits including, but not limited to:

• economies of scale
• purchasing expertise
• administrative efficiencies
• specialization
• volume discounts
• optimal resource allocation

However, while it often delivered economies of scale, volume discounts, and specialization, it never increased purchasing expertise, just shifted administrative efficiencies and only optimized the resource allocation in the center … the rest of the business (and affected personnel) didn’t benefit at all.

Furthermore, these benefits were only delivered in times of free global trade, low/no inflation, and stable economies. Take any of these requirements away, and the discounts and/or economies of scale might disappear overnight and the specialization that was so highly sought might also disappear as well.

The reality is that the right model is really a center-of-excellence which helps to orchestrate best practice procurement across the multi-national/global organization, but, except in a few rare cases, doesn’t really carry out the day-to-day Procurement function. The reason for this is that centralized (and even center-led) suffers from all of the following drawbacks, which are only heightened in today’s global economic landscape.

Missed Local Opportunities

Most manufacturers and distributors aren’t truly global, and when you try to centralize on just a few suppliers, while it will keep costs down for some of your markets, it will increase them greatly in others because the manufacturer and/or distributor just doesn’t have the economy of scale or knowledge in those regions.

The reality is that the best sourcing outcome is one that takes advantage of opportunities at the global, regional, and local level — especially when local opportunities far exceed the national or global ones. The best example here often comes from services. I remember the first time early sourcing optimization providers tackled services projects where an organization regularly outsourced a number of services roles. Due to the perceived complexity of dealing with multiple contractor, manpower, and service management firms, most organizations would try to find 2 or 3 national firms to handle their needs. As a result, even though they would save 10% or so using optimization-backed strategic sourcing, they’d still regularly overpay by 30% to 40%, especially when fully loaded costs were considered. Most IT support firms had their key talent localized in a few offices in big IT hubs (San Francisco, Chicago, New York, Atlanta, Houston, etc.) and for firms that had local offices across the mid-west, so when you want them at remote locations, not only are you paying big-city rates, but you are paying high fully burdened costs. Most states have at least one big city with a few consulting or manpower shops that have the same breadth of resources. They may not be the very best, or the top talent you’ll need if you have a highly specialized problem, but that’s not 90% of your needs. The local DBA trained and experienced in your database, the local fleet/aircraft mechanic with 20 years, and the local HR manager will generally be good enough and almost half the cost. That’s why most organizations who focussed just on national/global providers would, despite their attempt to optimize spend, would overpay by 30%.

Plus, when you are trying to ensure a product or service sells well in local markets, it’s the local expertise that makes the right selection, not a buyer from half a world away.

Loss of Key Market Knowledge

A buyer in the US has no clue what a customer in China wants (unless she just came from China, in which case she probably doesn’t really understand the market she is now based in), and a buyer in the UK won’t get the slight differences in the US market and have no clue about Latin America.

Also, a remote buyer doesn’t typically know who the regional and local manufacturers are or what they are capable of. This is key, even if you decide to go with a remote supplier as the primary supplier as the regional and local suppliers will be your backup when the remote supplier becomes temporarily, or permanently, unavailable.

Supply Base Degradation

Having fewer suppliers doesn’t strengthen your supply base. It just shrinks it to a size that you believe is more manageable. But a strong supply base isn’t a small supply base, it’s a supply base where you have strong supplier relationships, are in a position to help develop the suppliers, and can actively manage performance in near real-time.

They key to performance is detecting issues quickly — as soon as shipments are late, defect/damage rates rise in the warehouse, warranty claims rise, or service levels fall — and then quickly meeting with the supplier to deal with them. This requires being close to the supplier both to detect the issues quickly and resolve the issues quickly. Neither happens when all your suppliers are half a world away.

Ever Lengthening Supply Chains

When over-centralization occurs, most of your suppliers will be half-a-world away for at least half of your markets. When this propagates through the supply chain, you have suppliers at each level commonly sourcing from half a world away. By the time you get to the source, raw materials in your product could have circled the globe three times. How is that efficient? It’s not. And it’s part of the reason that supply chain fragility, and delays, keeps increasing.

Loss of Opportunities Due to Over-Standardization

Standardization is good as it decreases the total number of SKUs you need to track, products you need to buy, and suppliers you need to deal with. But if you standardized down to only a few options, and those suddenly became unavailable, then what do you do. You’ll be set back months to quarters, depending on how long it takes you to locate alternate options in the best case, and come up with new designs in the worst case.

Economies of Risk

The promise was economies of scale (which you hit as soon as you maximize a production line for as little a day, depending on how long retooling costs), but the realities are that what you got was economies of risk. Over centralization resulted in a single supplier failure, single border shut down, or single supply lane closure cutting off your entire supply chain. The more locations that depended on that supplier, border, or supply lane being available, the greater the impact will be.

Loss of Key Process Inefficiency

The promise was resource optimization and process efficiency, and while that was true for the centralized sourcing and procurement organization, the reality is that the efficiency didn’t extend beyond there. Moreover, it made remote operations, which are now fully dependent on a center office half a world away in a timezone where no part of the work day overlapped, less efficient. All requests have to go into a central message queue and, even in an emergency situation, it would be at least a day before a response, and possibly multiple.

This means that local procurement and inventory management teams can’t function efficiently. But the worst case scenario is when a disruption occurs and the local factories or warehouses can’t react and have to wait for days, or weeks, for guidance and possibly months for a new supply source to be identified. Without localized Procurement, process efficiency, especially during a disruption or disaster event, goes out the window.