Chapter 13 Organization 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 # % 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% 18.56% President/CEO 41 14.44% 15.76% 16.15% COO 7.39% - VP Administration 7.39 % 26 8.55% 40 13.75% VP Manufacturing/Production/operations 19 6.69 % 15.79% 71 24.40% Other 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% 1.37% 284 100.00% 304 291 Johnson and Leenders (2004)

Supply organizational structure 2003 1995 1987 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% 284 100.00% 302 296 Johnson and Leenders (2004) These figures show that over the past decades purchasing has become much more visible a the top floor of large corporations

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

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 Managerial level Top management Logistics manager Purchasing manager. Senior buyer Buying assistant Strategic level X X X Tactical level X X X Operational level X X

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.

Organizational structures within purchasing Centralized purchasing organizational structure (example)

Organizational structures within purchasing Decentralized purchasing organizational structure (example)

Organizational structures within purchasing Advantages and disadvantages of decentralised 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

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 professionals Function 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 Broad business orientation Category buyer New materials and components New suppliers All-round technical background Medium planning horizon 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 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.