Chapter 13Organization and structure of purchasing

Program

Purchasing organization structure Influencing factors of position of purchasing Levels of tasks, responsibilities and authority Organizational structures within purchasing Purchasing job profiles

Purchasing organization structure

Strongly depends on business characteristics and situational factors

Level of centralized or decentralized structure Centralized Centralized hybrid Hybrid Decentralized hybrid Decentralized

Usually a mixed organizational form is chosen

CPO reporting line

Organizational structure 2003 1995 1987

Total Total Total

# % # % # %

Senior VP/Group VP 48 16.90 % 54 18.75% 6 2.06%

VP financial/CFO 46 16.20% 34 11.18% 21 7.22%

Executive VP 43 15.14% 47 15.46% 54 18.56%

President/CEO 41 14.44% 48 15.76% 47 16.15%

COO 21 7.39% - - - -

VP Administration 21 7.39 % 26 8.55% 40 13.75%

VP Manufacturing/Production/operations 19 6.69 % 48 15.79% 71 24.40%

Other 19 6.69 % 18 5.92% 23 7.90%

VP Corporate/shared Services VP 17 5.99% 2 0.66% - -

VP Materials/Logistics 5 1.76% 22 7.24% 25 8.59%

VP Engineering 4 1.41% 2 0.66% 4 1.37%

Total 284 100.00% 304 100.00% 291 100.00%

Johnson and Leenders (2004)

Supply organizational structureOrganizational structure 2003 1995 1987

Total Total Total

# % # % # %

Centralized 72 25.35 % 69 22.85% 83 28.04%

Centralized Hybrid 116 40.85 % - - - -

Hybrid 28 9.86 % 196 64.90% 175 59.12%

Decentralized Hybrid 46 16.20 % - - - -

Decentralized 22 7.75 % 37 12.25% 38 12.84%

Total 284 100.00% 302 100.00% 296 100.00%

These figures show that over the past decades purchasing has become much more visible a the top floor of large corporations

Johnson and Leenders (2004)

Factors influencing location of purchasing

The organizational location of purchasing is very much dependent on the view management holds towards the purchasing function.

Management view is related to the following factors: Purchasing’s share in the end-

product’s cost price Financial position of the company Extent to which the company is

depending on the supply market

Purchasing reports to

General management

Production management

Logistics management

Financial management

Purchasing turnover ratio High Low

x

x

x

x

Technical complexity High Low

x

x

x

x

Logistics complexity High Low

x

x

x

x

Strategic impact High Low

x

x

x

x

Tasks, responsibilities and authorities

Strategic purchasing decisions (long term impact) Development and issuing operational guidelines, procedures and task

descriptions, which provide authority to the purchasing department Development and implementation of auditing and review programs Outsourcing of activities and/or functions Establishing long term contracts with preferred suppliers Adopting a supplier strategy based on multi- versus single sourcing Major investments Deciding on financial participation in suppliers (backward integration) Formulating policies concerning transfer pricing and intercompany

supplies Formulating policies on reciprocal arrangements, countertrade, etc.

Tasks, responsibilities and authorities

Tactical purchasing decisions (medium term impact) Agreement on corporate and/or annual supplier agreements Preparing and developing value analysis programs Adopting and conducting quality certification programs for suppliers Selection and contracting of suppliers in general Programs aimed at supply-base reduction

Operational purchasing decisions (short term impact) Ordering process Expediting activities related to released orders Invoice verification and payment Troubleshooting Monitoring and evaluation of supplier performance

Tasks, responsibilities and authorities

Relationship between the three managerial levels and some management positions

Strategic level X X X

Tactical level X X X

Operational level X X

Topmanagement

Logisticsmanager

Purchasingmanager.

Seniorbuyer

Buyingassistant

Managerial level

Organizational structures within purchasing

Structures for multi-unit companies Decentralized purchasing: BU purchasing is responsible for all

purchasing decisions Centralized purchasing: central purchasing department is

responsible for all strategic and tactical purchasing decisions Line/staff organization: both corporate purchasing and BU

purchasing exist next to each other and divide responsibilities and activities

Hybrid structure: combination of the previous three structures aimed at combining common requirements across operating units. There are different forms of pooling: Voluntary coordination, Lead buyership and Lead design concept.

Cross-functional sourcing teams: contracting is done centrally by a commodity team. However, all operational purchasing activities are decentralized.

Organizational structures within purchasing

Centralized versus decentralized purchasing: some criteria

to consider: Commonality of purchasing requirements Geographic location Supply market structure Savings potential Expertise required Price fluctuations Customer demands

In practice these considerations appear to be decisive when deciding on buying products centrally or otherwise.

In practice these considerations appear to be decisive when deciding on buying products centrally or otherwise.

Organizational structures within purchasing

Centralized purchasing organizational structure (example)

Organizational structures within purchasing

Decentralized purchasing organizational structure (example)

Organizational structures within purchasing

Advantages Direct responsibility of operating

companies Stronger customer orientation

towards internal user Less bureaucratic purchasing

procedures/higher operational flexibility

Less friction costs due to coordination

Direct communication with suppliers

Disadvantages Dispersed purchasing power,

lack of economies of scale No uniform way of handling

towards suppliers Scattered supply market

research Limited possibilities for building

up specific expertise on purchasing, supply markets and components

Different commercial purchasing conditions among different operating companies

Advantages and disadvantages of decentralised purchasing

Organizational structures within purchasing

Centralized/decentralized purchasing organizational structure (example)

Organizational structures within purchasing

Cross functional sourcing teams at IBM

Van Weele and Rozemeijer (1996)

Consequences for purchasing professionalsFunction Responsibilities Skills required

Chief Procurement Officer (CPO)

Developing corporate sourcing strategies, systems and reporting

General management skills

Leadership

Communication skills

Corporate buyer Strategic commodities Commercial skills

Long term planning horizon

Communication skills

Broad business orientation

Category buyer New materials and components

New suppliers

All-round technical background

Medium planning horizon

Commercial skills

Communication skills

Project buyer Investment goods and maintenance goods and services

Project management skills

Technical education

NPR-Buyer General and facility goods and services Generalist

Business administration

Commercial skills

Materials planner Materials planning

Order handling

troubleshooting

Vendor rating

All round

Pragmatic

Customer driven

Stress resistant

Consequences for purchasing professionals

Compared with ten years ago, purchasing professionals are: Higher educated (business degree, MBA) Responsible for more dollars More likely to be a women Negotiating more long term agreements Involved in outsourcing decisions Looking out on a global market shape Reducing costs and the number of suppliers

Conclusions

Purchasing structures appear to vary to a great extent among companies. This is due to the different views which top-managers hold towards purchasing and supply.

When analysing the scope, tasks, responsibilities and authority of the purchasing function, we differentiated between the strategic level, the tactical level and the operational level.

Purchasing structures appear to be highly volatile: a period of centralized purchasing is often followed by a change to the other way around.