Choosing a Procurement Model
Centralised, decentralised or outsourced – how to find what best suits your business
Many SME do not have a dedicated purchasing/procurement department, preferring to decentralise purchases to heads of different services, sometimes with a limited purchasing authority of several thousand euros, rather than remunerating a specifically dedicated person.
The advantage of decentralising purchases to each department is a more flexible approach to time-sensitive needs and often, minimal red tape and closer matching of supplies or services, as well as putting each manager in control.
However, the decentralisation of procurement means losing the benefits of bigger contracts and scale savings, as well as long-term negotiations with suppliers. This approach also tends to multiply the number of suppliers, delivery costs, packaging waste, risk of duplication, stock etc.
Even if individual managers are very careful and consult with several suppliers for every significant purchase, they lose on the opportunity to buy in bulk as well as on time spent with tenders.
Centralising purchases is more time- and cost-effective and is the model adopted by many private or public businesses. It helps standardise processes within the company (including quality criteria, packaging, order and frequency of delivery...) regroup the purchasing needs of multiple departments or multiple locations to leverage purchasing power, negotiate better prices, better terms of payment and better service. Centralised purchasing is often part of the company´s strategy and allows better control of inventories, prices and performance. However all SME do not have the necessary budget to invest in the necessary human resources and try to manage with a hybrid approach to purchasing, using a central system and a decentralised process. There may though be corporate guidelines and a list of approved suppliers.
The efficient alternative to these two procurement models is to outsource the function to consultants with a proven experience of procurement and cost reduction – and the relevant references to support this.
That approach may have the added benefit of an unbiased attitude towards the service/product and suppliers, the necessary back step to take in the global picture with the company´s strategy, requests and criteria (such as quality, time, specifications...) in mind; this involvement of a third party will enable the business to benefit straightaway from support and expertise in procurement actions such as lower prices, contract management, suppliers selection without hindering in-house resources and having to invest in the creation of a new team and in the time needed by that new team to structure itself and apply their own processes. The outsourced procurement team will rapidly provide benefits such as group buying, negotiated prices and advanced planning resulting in reduced costs and increased profitability whilst maintaining the same level of service.
There are many consultancy practices offering procurement services. Choosing the right one for your needs is crucial; the expertise and breadth of knowledge of the consultants is an obvious criterion, taking into account what cost categories you need analysed.
How much involvement the outsourced party will offer is the second request; SME do not benefit much from recommendations they have to implement and monitor themselves, mobilising the very resources they wanted to spare. Long-term involvement, including the analysis, recommendation, implementation and monitoring is a must.
The third point is the mode of remuneration for procurement service providers: an upfront or fixed remuneration is not much attractive to SMEs looking to reduce their overhead expenses – and it does not guarantee any savings either.
The most reassuring mode is the “no generated savings, no fees” remuneration model that will ensure an in-depth involvement and collaboration between the SME and the partner towards the common goal of long-term cost savings, a win-win situation for both parties.
Many SME do not have a dedicated purchasing/procurement department, preferring to decentralise purchases to heads of different services, sometimes with a limited purchasing authority of several thousand euros, rather than remunerating a specifically dedicated person.
The advantage of decentralising purchases to each department is a more flexible approach to time-sensitive needs and often, minimal red tape and closer matching of supplies or services, as well as putting each manager in control.
However, the decentralisation of procurement means losing the benefits of bigger contracts and scale savings, as well as long-term negotiations with suppliers. This approach also tends to multiply the number of suppliers, delivery costs, packaging waste, risk of duplication, stock etc.
Even if individual managers are very careful and consult with several suppliers for every significant purchase, they lose on the opportunity to buy in bulk as well as on time spent with tenders.
Centralising purchases is more time- and cost-effective and is the model adopted by many private or public businesses. It helps standardise processes within the company (including quality criteria, packaging, order and frequency of delivery...) regroup the purchasing needs of multiple departments or multiple locations to leverage purchasing power, negotiate better prices, better terms of payment and better service. Centralised purchasing is often part of the company´s strategy and allows better control of inventories, prices and performance. However all SME do not have the necessary budget to invest in the necessary human resources and try to manage with a hybrid approach to purchasing, using a central system and a decentralised process. There may though be corporate guidelines and a list of approved suppliers.
The efficient alternative to these two procurement models is to outsource the function to consultants with a proven experience of procurement and cost reduction – and the relevant references to support this.
That approach may have the added benefit of an unbiased attitude towards the service/product and suppliers, the necessary back step to take in the global picture with the company´s strategy, requests and criteria (such as quality, time, specifications...) in mind; this involvement of a third party will enable the business to benefit straightaway from support and expertise in procurement actions such as lower prices, contract management, suppliers selection without hindering in-house resources and having to invest in the creation of a new team and in the time needed by that new team to structure itself and apply their own processes. The outsourced procurement team will rapidly provide benefits such as group buying, negotiated prices and advanced planning resulting in reduced costs and increased profitability whilst maintaining the same level of service.
There are many consultancy practices offering procurement services. Choosing the right one for your needs is crucial; the expertise and breadth of knowledge of the consultants is an obvious criterion, taking into account what cost categories you need analysed.
How much involvement the outsourced party will offer is the second request; SME do not benefit much from recommendations they have to implement and monitor themselves, mobilising the very resources they wanted to spare. Long-term involvement, including the analysis, recommendation, implementation and monitoring is a must.
The third point is the mode of remuneration for procurement service providers: an upfront or fixed remuneration is not much attractive to SMEs looking to reduce their overhead expenses – and it does not guarantee any savings either.
The most reassuring mode is the “no generated savings, no fees” remuneration model that will ensure an in-depth involvement and collaboration between the SME and the partner towards the common goal of long-term cost savings, a win-win situation for both parties.
Analyst Summary
Med over 750 eksperter i mere end 30 lande er Expense Reduction Analysts en af verdens førende leverandører af konsulentbistand inden for omkostningsstyring. Vi er specialister i at finde besparelser for organisationer over hele verden gennem en vel afprøvet omkostningsstyringsproces. Siden 1992 har vi hjulpet tusindvis af organisationer med at forbedre deres bundlinje og frigøre værdifulde midler til at finansiere deres udvikling. Vores kunder spænder lige fra små og mellemstore virksomheder til offentlige og velgørende organisationer samt globale aktører som Volkswagen, IKEA og Ernst & Young.
