Procurement strategy development and its execution in category level must be also discussed related to the structure of how procurement is organised in a company. Different business units inside a corporation can either develop the category strategies on their own, or alternatively Rozemeijer (2000) sees coordinated strategies among business units as one form of creating purchasing synergy that can lead to significant benefits. However, creating purchasing synergies often requires more central coordination efforts (Faes et al., 2000), which again emphasises the discussion about the purchasing organisation’s degree of centralisation that will be reflected next in this chapter. In addition, cross-functional category teams will be presented as a possible option when balancing between the pros and cons of centralisation in the category-level strategy development.
2.3.1 The continuum of centralisation: centralised vs. decentralised
One of the most common discussions regarding the organisation of procurement function relates to the degree of centralisation (Glock & Hochrein, 2011). Typically, the discussion considers the trade-off between centralised and decentralised structure, which refers to balancing between the purchasing synergy benefits from central coordination and the local responsiveness of the decentralised approach (Englyst et al., 2008). Clearly, the current highly competitive business environment with its demands for significant cost and cycle time reductions, quality and delivery improvements as well as increased responsiveness for the customer demands would call for utilising the purchasing synergies through a global-level coordination for purchasing activities (Trent & Monczka, 2003a; Trent & Monczka, 2003b).
However, despite the evident scale-related benefits, companies must weigh between those benefits and the flexibility that more decentralised structure would provide (Glock &
Hochrein, 2011) as the decentralisation significantly improves the close co-operation with local businesses and suppliers and reduces the need for bureaucracy and coordination (Iloranta
& Pajunen-Muhonen, 2008).
Hence, in order to gain the maximum benefits, it is crucial to evaluate the context and determine the appropriate level of centralisation. As a rule of thumb, centralised structure is more suitable when separate geographical units of an organisation buy similar product or service categories, whereas decentralised structure serves better the situation where the needs or markets of the unis differ significantly (Trautmann et al, 2009). Overall, when deciding between centralised and decentralised structure, van Weele (2014) suggests considering the commonality of purchasing requirements between the divisions or business units, geographic locations, supply market structure, the potential for savings, the expertise required, the sensitivity for price fluctuations and customer demands. Table 1 provides a closer look on how the differences in the above-mentioned factors concretely affect the selection between centralised and decentralised structure of procurement. In addition, Johnson et al. (2014) indicate that the financial performance of a company affects the changes in procurement organisation structure since well-performing companies typically move towards more decentralised structures, whereas those with financial difficulties seem to favour centralisation efforts.
Table 1. Factors influencing the degree of centralisation (based on van Weele, 2014 and Iloranta & Pajunen-Muhonen, 2008)
Centralised structure Factor Decentralised structure
Business units or divisions have several common requirements in purchased products and services
Commonality of requirements The requirements of business units or divisions differ significantly Units or divisions are located close
to each other and connected with good transportation infrastructure
Geographic locations Units or divisions are located in different continents
Savings potential The effect from volumes or scale of economies is not significant
Procurement requires a significant
amount of specific expertise Expertise required Procurement tasks are simple Prices are sensitive to economic or
political conditions, which creates high price fluctuations
Price fluctuation Price fluctuations and price sensitivity are relative stable Customer demands do not affect
significantly procurement Customer demands Customer has a significant impact on the purchasing decisions
A third alternative, hybrid structure that can be considered as a combination of centralised and decentralised structures (van Weele, 2014) is typically used to capture the benefits of both organisation structures and compromise between them (Monczka et al., 2009; Lintukangas et al., 2009). The hybrid structure has been identified various times as a most common purchasing organisation structure (Johnson et al., 1998; Johnson & Leenders, 2006; Johnson et al., 2006; Johnson et al., 2014), and seems that several companies move from fully centralised or decentralised structures towards hybrid approaches (Johnson et al., 2014). However, it is worth noticing that in practice the hybrid structure involves significant variations of structures such as lead division buying, regional buying groups, global buying committees, corporate purchasing councils or corporate steering committees (Monczka et al., 2009), and also the pooling efforts can be seen in many forms such as voluntary coordination, lead buyer role or lead design concept (van Weele, 2014). Trautmann et al. (2009) also remind that the key in hybrid structures is to differentiate between the categories as some have more potential for common coordination than others. Hence, the hybrid structure involves several opportunities for the companies to balance between centralisation and decentralisation and gain the maximum benefits also in the category level.
2.3.2 Category teams – hybrid structure for category-level strategy development
As one solution regarding the balance between centralised and decentralised way of organising procurement and still ensuring the benefits of purchasing synergies, companies can adopt centrally-led category teams that are responsible for the company-wide development and implementation of category-level strategies (Englyst et al., 2008) including also finding,
selecting and managing the suppliers of the respective category (Driedonks et al., 2010). The teams are usually utilised to ensure that the requirements across worldwide business units are integrated, and common purchases, processes, technologies and suppliers identified and coordinated (Bozarth et al., 1998). Thus, category teams provide an effective hybrid structure to secure the benefits of both centralised integration and decentralised responsiveness (Lintukangas et al., 2009).
The cross-functional category teams typically consist of employees from different business units, but also with different functional backgrounds (Driedonks et al., 2010), which makes them usually both cross-organisational and cross-functional (Trent, 2004). Typically the teams are at least partially virtual in their nature due to the multiple worldwide locations of the members (van Weele, 2014), and also the participation is typically only part-time as the members conduct the team assignment next to their regular duties in local business units (Englyst et al., 2008). O’Brien (2015) highlights especially the cross-functional nature of the teams as the implementation of category strategies typically requires a significant change, which makes the cross-business participation crucial for the success. When it comes to the applicability of the category teams and so-called centre-led purchasing in general, the business units or divisions of a company should share a high level of homogeneity regarding the purchased goods and services, but simultaneously also have highly matured decentralised purchasing organisations in place in the business units in order to guarantee the success of the teams (Rozemeijer, 2000).
In addition, effectiveness and performance of category teams has been also considered in the current academic literature (e.g. Englyst et al., 2008; Driedonks et al., 2010; Driedonks et al.
2014). Even though the purpose of the teams is to ensure and enforce synergies across the business units (Bozarth et al., 1998), it still seems that the motivation to perform as a team does not have an effect on the team performance (Englyst et al., 2008). However, instead Driedonks et al. (2014) state that autonomy and transformational leadership positively contribute to all dimensions of team effectiveness, which implies a need for authority to act in terms of developing and executing the category strategies. On the other hand, also formalisation has an important role as it enforces two effectiveness dimensions, namely
general sourcing team effectiveness and external co-operation effectiveness (Driedonks et al., 2014). Hence, the situation is twofold since there is a clear need to initiate structures and have well-defined processes (Driedonks et al., 2010), but still the teams need to have a so-called licence to act (Driedonks et al., 2014). When it comes to rewarding, team-based rewards does not seem to have an effect on the effectiveness of the teams (Driedonks et al., 2014), whereas individual rewards can have an influence on the effectiveness when designed correctly (Englyst et al, 2008; Driedonks et al., 2014). Finally, regarding the functional diversity of the teams, the findings are contradictory as cross-functional composition seems to enhance supply base management effectiveness, but have a negative effect on external co-operation effectiveness (Driedonks et al., 2014).