Chapter 13 Organization and structure of purchasing

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Chapter 13Organization and structure of
purchasing
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Program

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

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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

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CPO reporting line
Organizational structure 2003 2003 1995 1995 1987 1987
Organizational structure Total Total Total Total Total Total
Organizational structure
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)
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Supply organizational structure
Organizational structure 2003 2003 1995 1995 1987 1987
Organizational structure Total Total Total Total Total Total
Organizational structure
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
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
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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
• Purchasings share in the end-products cost
  price
• Financial position of the company
• Extent to which the company is depending on the
  supply market

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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.

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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

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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
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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.

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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.
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Organizational structures within purchasing
Centralized purchasing organizational structure
(example)
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Organizational structures within purchasing
Decentralized purchasing organizational structure
(example)
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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

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Organizational structures within purchasing
Centralized/decentralized purchasing
organizational structure (example)
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Organizational structures within purchasing
Cross functional sourcing teams at IBM
Van Weele and Rozemeijer (1996)
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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 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
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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

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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.