Supply Chain Management Review

Robert A. Rudzki

The Organization Chart Diversion – Part 3
November 14, 2007

I distinctly remember attending a CPO peer group meeting a few years ago, when the discussion turned to organizational challenges. One of the CPOs present offered this solution to the challenges being listed by the audience: "Procurement should be centralized and all other functions should also report into procurement.”

As you can imagine, that idea drew quite a round of laughter, even though it’s likely that some of the CPOs present would have liked to give it a try.

Can a centralized procurement function work well in a decentralized corporate culture? Can a decentralized procurement function hope to be effective? Who should procurement report to in the corporate hierarchy? All good questions.

I’m sure many of you have lived with corporate pendulum swings on numerous topics, including organization design. I’ve been through more than my fair share. That’s an unfortunate reality of corporate life. Nevertheless, my contention is straightforward: supply management needs to be effective no matter what is happening in the corporate environment.

As mentioned in prior columns, that effectiveness starts with the right role, objectives, leadership and best practices in place (or, at least, planned). If you’ve focused first on these core transformation elements, you’ll have a foundation that can weather the inevitable changes that buffet most corporations on a regular basis. You can also have a more productive discussion about the organization design that would be supportive of what you’re trying to achieve in strategic supply management, a design that would also be compatible with your corporate culture.

There are fundamental options for organization design: centralized, hybrid (strong or weak), and decentralized. A description of each, along with the distinguishing features, appear in the Figure below (which is excerpted with permission from the book Straight to the Bottom Line®). 

In general, a truly decentralized supply management organization has a difficult time delivering world-class results in an efficient manner. That’s the reality. Believe it or not, some companies may not care: I’ve talked with CPOs of several companies that are making a lot of money right now. Their executive teams aren’t showing much interest in optimizing the performance of their supply management organizations. Eventually, of course, they will, as business conditions change.

A fully centralized supply management organization can have some challenges, depending on internal corporate culture. Even if the overall corporate structure favors centralized functions, a centralized supply management function needs to be responsive to the needs of the individual businesses. Being centralized is no excuse for being dogmatic or arbitrary (or sitting in an ivory tower). Client satisfaction is paramount, regardless of the structure selected.

One of the reasons that hybrid structures are popular is that they allow you to build and coordinate synergies across the company, while being sensitive to each business unit’s unique needs. This is often accomplished by co-locating procurement personnel both at corporate HQ and at the business operations, sometimes with dual reporting to the local operations or finance head, and to the corporate CPO.

As I’ve suggested earlier, selecting and implementing the right organization design is not a casual exercise.

More on this topic in the next posting.

Posted by Robert A. Rudzki on November 14, 2007 | Comments (2)