There is a common procurement evolution among multi-plant manufacturers.
Initially, all plants perform their own procurement. At some point, some parts of procurement become centralized while other parts remain at the plant level.
The centralized procurement activities usually involve selecting, contracting with, and managing strategic suppliers. The decentralized procurement activities usually involve placing orders, expediting shipments, and communicating with supplier operational staff on day-to-day matters.
This common evolution has a common problem: the suppliers that centralized procurement selects fail to meet the expectations of one or more plants.
Suddenly, the plant buyers feel “stuck” with suppliers with whom they seemingly have lost all of their influence. Now, the plant buyers have to direct their complaints to an intermediary – the centralized procurement team. And those complaints often fall on deaf ears. Centralized procurement teams are enchanted with the thrill of chasing savings through sourcing, don’t see their role as one of providing service to the plants, and are ill-equipped to respond to problems. As such, the plant buyers complaints are ignored. The supplier problems continue unabated. And the business suffers.
So, what can a plant buyer do in this situation?
Well, complaining that his one or two emails to a centralized sourcing specialist have been ignored is not the right answer.
Instead, here’s what I recommend.
The plant buyer should put together a small team consisting of the plant buyer, the highest ranking procurement person at his plant, and the plant’s general manager. Then, that team should call a meeting with the highest ranking centralized procurement people and whomever they report to (usually the COO or CFO). A meeting – especially involving senior managers – will communicate the seriousness of the matter. Other methods of communication (like those one or two emails) can make major problems seem like minor inconveniences.
At that meeting, the plant team should come prepared with operational metrics, the financial consequences of poor supplier performance, and what is likely to happen if the problem is not solved. Data is key. It separates true business problems from mere complaints.
For example, operational metrics and financial consequences could include data that tells a story, like:
- The supplier’s on-time delivery has slipped from 95% in the first three quarters of 2017 to 60% in the last quarter of 2017
- The late supplier deliveries have caused the plant to miss delivery deadlines on 300 of 1,000 orders in the last three months
- Of those 300 late deliveries, 50 have resulted in customers canceling their orders, 20 have triggered customers to charge liquidated damages per the contracts with them, and 10 have resulted in a customer terminating a contract
- The canceled orders resulted in a $300,000 revenue loss and $60,000 gross profit loss
- The liquidated damages totaled $32,000
- The customer that was lost has spent $240,000 annually with the plant
While one would hope that this data would make the centralized procurement team wake up and do something about the poor performance of the supplier it selected, “hope” is not sufficient. The plant procurement team should prepare a recommendation for corrective actions that the centralized procurement team can take. The centralized procurement team can certainly apply their expertise towards crafting a plan, but a recommendation can reflect the seriousness of the matter and point the centralized team in the right direction.
While it may seem that a hybrid centralized-decentralized procurement structure is a bad idea, it is not inherently bad. But, for it to work, there has to be communication between the two constituencies.
Too often, the centralized procurement team sources a category then moves on to the next category without ensuring a smooth new supplier integration. Then, they leave the plant to clean up the mess in their wake.
That’s a mistake.
Centralized procurement groups must own their decisions. They should be responsible for ensuring that their supplier decisions work in the real world, not just on a spreadsheet or in an eSourcing system.
Ideally, the two constituencies should be part of the same team – not two different teams – right from the get-go. But, if it’s already past that point in the evolutionary process, the steps in this post can solve problems that arise. Additionally, they should be followed by efforts to unite the two constituencies as one team, facilitate effective communication and action between them, and constantly seek ways they can better collaborate for the greater good of the organization.