The Purchasing Organization

The Purchasing Organization, A strong corporate purchasing team buys everything needed by all levels of the company using global or large regional sup

According to Yogi Berra, the great professional baseball player, "If you don't know where you are going, "you might wind up somewhere else." His point is that in order to get where you want to be you really need to be organized towards that goal. Just like you and me, purchasing needs to be properly organized for success. And to be successful you should properly align the purchasing function with the company's overall business strategy. How does a company control their cost? What is their position on risk? Are they growing globally, or are they more of a local company? These corporate strategies define the structure and strategy of the purchasing function, and structure further defines how purchasing decisions are made and the scope of each job within the purchasing department. There are three types of purchasing structures.

First, there is centralized purchasing. As the name implies, most, if not all decisions, are made at the corporate level. A strong corporate purchasing team buys everything needed by all levels of the company using global or large regional suppliers. Decentralized purchasing is just the opposite. Each division or factory or office is responsible for buying what they need within the budget constraint provided by corporate headquarters. Each purchasing department selects their own suppliers, often focusing on local companies. As you can imagine, most companies do not operate at either one of these extremes. Your company, like most corporations, probably has a hybrid purchasing organization.

A hybrid approach has the benefits of both centralized and decentralized purchasing practices. You can take advantage of quantity discounts by centralizing the purchase of high volume items, and expensive capital equipment. This also allows corporate personnel to become experts in specific categories of spend. You can also reduce administrative costs and processing time significantly. General Mills provides a good example of this. Corporate headquarters buys flour and places one large purchase order with a supplier. When a factory in the U.S. needs flour throughout the year they simply request a release against that purchase order for the required amount. The flour is delivered quickly and efficiently and only as it is needed.

You can reduce inventory costs and receive better on-time delivery by using local suppliers for routine factory and office items. This enables all the benefits of a just-in-time approach to routine replenishment. By decentralizing these particular purchases the division or factory builds a specialized expertise in the capabilities of local suppliers, and really, who knows the factories needs better than the local buyer? Structure also defines the types of purchasing jobs. Companies usually organize the purchasing department into two distinct groups. The first group is strategic sourcing, which involves teams of experts who manage critical items. Wheat and flour are good examples of critical purchases for General Mills. These teams manage long-term relationships with key suppliers, analyze risk, and develop purchasing systems and methodologies.

These are the people who would place company-wide centralized purchase orders, for example. And many of these experts have specialized knowledge. The second group is operational purchasing, which involves buying less critical items, managing those suppliers, and solving local purchasing problems. These are the people doing the more tactical and routine purchasing for day-to-day needs. When you take a look at how purchasing is organized at your company recognize that where you are on the hybrid continuum is usually only temporary. As customers, markets, technologies, and corporate strategies change your purchasing organization must change with them. You must shift as conditions change towards more centralized buying or less. An effective purchasing professional recognizes the changing business environment and reacts accordingly.