Centralize Direct Procurement for Best Results

If you want a faster, more efficient, and more productive procurement function, you should centralize direct procurement to the extent that you can.

Of the organizations that participated in APQC’s Open Standards Benchmarking research for procurement, those with centralized direct procurement have lower costs, require fewer full-time equivalent employees (FTEs), and achieve faster cycle times than those with decentralized direct procurement. Few choices in business or in life are this clear-cut: All signs point to centralization as the better choice.

Advantages of centralizing direct procurement

Direct procurement involves sourcing and purchasing goods, materials, and services that are directly related to the products you produce and/or the services your business offers. Centralization in this context means concentrating procurement into one grouping of staff that specialize in this function (typically in a single location), rather than carrying out procurement within multiple business units or locations (i.e., decentralization). 

There are numerous advantages to centralizing direct procurement. By concentrating decision making authority in a single place, an organization can make faster procurement decisions and more easily align its procurement strategy with business strategy. Centralization also drives faster and more accurate reporting, since there is typically no need to stitch together procurement data from disparate systems across an enterprise. Benefits like these, in turn, enable procurement to react more quickly to disruptions or changes when they occur.

Beyond these benefits, centralization leads to demonstrably better outcomes for cost, staffing, cycle times, and productivity in procurement. 

Lower costs for procurement. Organizations with centralized direct procurement spend $4.92 per $1,000 revenue on procurement as a whole, while their decentralized peers spend $6.10. For an organization with $2 billion in total annual revenue, this difference represents potential savings of over $2.3 million annually for centralized direct procurement organizations.

APQC

Lower process costs. Procurement is not a single process, but a process group that includes four processes:

»      Provide sourcing governance and perform category management

»       Select suppliers and develop/maintain contracts

»       Order materials and services

»       Manage suppliers

Breaking down costs at the process level allows us to see where organizations are getting the most savings from centralization. Of the four processes that make up procurement, “order materials and services” is the costliest to execute. It also represents the biggest spending gap between centralized and decentralized procurement functions. Organizations with centralized procurement spend $2.07 per $1,000 revenue on this process, while those without centralization spend $2.45 per $1,000 revenue.

Automating this process to the extent that you can is an effective way to lower procurement costs overall. In addition to reducing labor cost, automation helps to drive better visibility for spend analysis, which can reveal further opportunities for improvement and savings. Centralizing procurement is a prerequisite for pursuing these strategies effectively.

APQC

Fewer FTEs. Organizations that centralize direct procurement have 11.3 fewer FTEs for the procurement process group as a whole. They also use fewer FTEs for each individual process. For example, organizations with centralized procurement use 5.7 FTEs to manage suppliers, while those with a decentralized process use 7.5. Labor is often a significant driver of process costs, so these differences can add up quickly.

Faster cycle times. Strong supplier relationships are critical to ensure a reliable, uninterrupted supply of materials for production and flow of services. Organizations with centralized procurement are able to establish these relationships and source materials more quickly than their decentralized peers. For example, compared with organizations that do not centralize direct procurement, centralized organizations can:

»       Set up suppliers two days faster

»       Establish a contract with a supplier three days faster

»       Carry out sourcing events for the procurement process group three-and-a-half days faster

»       Execute the procure-to-pay process seven-and-a-half days faster for goods and five days faster for services

Faster cycle times typically mean lower costs and more time for higher-value work, like collaborating and innovating with suppliers.

Greater efficiency and productivity. In addition to costs, staffing, and cycle times, we found that organizations with centralized direct procurement also have better performance on key productivity and efficiency measures. For example, centralized procurement organizations:

»       Process a higher number of purchase orders per FTE that carries out the process “order materials and services”

»       Approve a larger percentage of purchase orders electronically

»       Have a lower manual transmission rate for direct materials and services purchase orders

»       Have a lower percentage of total purchases procured via maverick buying

Take action

Organizations with centralized direct procurement are faster, more efficient, and more productive than those with decentralized direct procurement. It’s also clear that the centralized procurement functions in our research aren’t just spending and staffing their way to better results—they actually use fewer FTEs and carry out processes at lower cost. Given the substantial benefits and advantages of centralized direct procurement compared to decentralization, there’s no question which of the two models is better.

Recommendations:

»       Centralize all direct procurement processes. If this is not possible, at least try to centralize ordering materials and services.

»       If you can’t centralize at all, at least standardize processes, systems, and activities across the enterprise.

»       Practice good data management and governance. Poor data quality and a lack of systems integration can easily slow down cycle times and increase the need for manual interventions, which drive costs higher.