Procurement Operating Models: Which is the Best One?

What is the ideal procurement operating model? There have been countless studies done on the topic, and the answer isn’t clear cut. Each model offers its own pros and cons, and these must be weighed up against the needs of your business.

In this article, we cover each of the different models in depth, and what you need to consider when shifting how your organisation operates.

There are three dominant operating models for procurement: decentralised, centralised, and centre led.

A decentralised procurement model (sometimes called a local procurement model) is when individual stakeholders can make purchases for their department. This often happens with limited oversight. Let’s look at an example:

Abby is the Head of Marketing for a mid-sized organisation called Jeans Co. The department needs some new video creation software, so she asks her manager for permission. She’s given the thumbs up, so she just goes out and buys it using a company credit card and sends the invoice to Accounts.

Abby doesn’t examine any cheaper options. A month into using the software, she finds out that another department already has an existing license for the same product. The company is now paying for it twice.

When Abby engages in procurement and purchasing, everything happens fast. In a decentralised environment, it’s as simple as putting in a purchase order so her team can keep moving.

However, because things are decentralised, opportunities for cost savings are lost. In this scenario, if Abby had visibility on what other teams had purchased, she could have avoided putting in the same purchase request.

Consider this scenario – what if Abby had bought the software because she had shares in the company?

This would result in unethical procurement, because she would have a conflict of interest and be using her position for personal gain. Preventing this would require a control method. In this case, the supervisor was Abby’s direct manager, who may not have the time or knowledge of procurement best practice to prevent this risk.

A centralised procurement model is when a single department handles the purchasing of goods and services for a whole organisation. This is usually done from a central location, like a head office. Let’s look at another example.

George is the procurement manager for a large mining company and works out of the head office in Canada. However, many of the mines are located in remote regions in Australia. While the sites are managed by project managers, most of their procurement is handled by George’s team.

Because George has limited knowledge of the area, he has to constantly gather information from these project managers. This, on top of the distance, causes delays in delivery. It’s also hard for George to build up a relationship with local suppliers and get to know their capabilities.

This lack of regional knowledge eventually causes George to select the wrong supplier for a tender. The supplier fails to deliver on important equipment needed for operations, and this leads to costly delays.

In this example, George has complete oversight of any procurement event, and can make sure everything follows best practice. Because of this, he won’t fall into the same trap as Abby from earlier, who caused the same thing to be purchased twice. When this is running well, spend can be done under contract, and economies of scale are possible.

However, there’s an obvious delay caused by having to get procurement involved in the process. When you’re using a centralised procurement model, all purchases need to be done by a handful of people.

Naturally, staff get frustrated with this bottleneck in the purchasing process. There’s also an increased chance they’ll be unhappy with what they get because they’ve got to rely on someone understanding their needs well enough to purchase the right thing (and that person might fail, like with George).

This can happen for more reasons than a lack of local knowledge or subject matter expertise: the stakeholder might not articulate their needs well, their priorities might have changed since they were consulted, or the central team wanted to buy a “one-size-fits-all” solution to save money.

As a result, staff feel disempowered, and start to wonder why they just can’t do it themselves. And when they decide to do just that, the result is maverick spend: the bane of procurement professionals everywhere.

A centre led procurement model is when any department can purchase what they need, but they’re guided by the experts. Let’s look at a third example.

Bruce is the Procurement Manager for a large regional city. Any department can purchase something so long as they follow procurement guidelines and spend below a certain threshold.

Outside of handling strategic procurement, Bruce and his team are tasked with making sure all staff do the right thing. There have been a few corruption scandals in the past, and the council also needs to prove they are spending local to meet state-set benchmarks.

Unfortunately, the team have to field endless requests from staff about how to go about procurement properly. They find the policies confusing and hard to follow. Also, it’s hard for Bruce and his team to get visibility on what staff are doing – important correspondence is lost in people’s inboxes, meaning the city is far from audit-ready.

This is also called a “hybrid” approach, since it can deliver the best of both the centralised and decentralised models: staff should be able to buy what they want, while guided in a way to prevent noncompliance.

So, what’s going wrong in the above example? Bruce’s team is looking to “lead”, but they are lacking the means to do it. They’re also having trouble dealing with all the administrivia of making sure staff comply with proper policy.

What Bruce’s team is missing is procurement software to make this task easier. By making sure staff use a dedicated procurement solution to go to market, the central team can maintain oversight but only get involved when required. Everything can be captured in the system and made audit ready.

The trick is getting users to start using the system. After all, the software is only good if the business units adopt it. As many people know, user buy in can make or break a new process or system. This is why it’s vital to select a solution that supports compliance by default.

Since each model has a myriad of pros and cons, here’s an infographic that compares the main points of comparison between these models.

The bottom line is it depends on your needs. It’s hard to go wrong with a centre led model so long as you’ve got software to support it. This is why many organisations are gravitating towards this model in both the public and private sectors.

However, the other models are also viable. For example, if you’re running a small commercial organisation, it’s easy to keep an eye on what staff are doing. This makes the speed of the decentralised model or the price control of the centralised model much more viable and attractive.

Centralised purchasing can also work for large organisations so long as you’ve got a highly resourced and skilled procurement function, and don’t mind risking a bit of operational inefficiency in order to keep a tight rein on compliance.

You can also use software to reduce the risk of maverick spend and noncompliance in a decentralised model.

Looking for an easy-to-use procurement solution that gives you visibility on spending behaviour, makes sure staff comply with policy, and automates all your trivial tasks? VendorPanel is a source-to-pay solution built to support centre led and decentralised procurement - it can guide buyers through the entire procurement cycle according to your organisation's preferred process.

To learn more about our offerings, contact us today. Alternatively, read some of our customer stories and why we’re the solution of choice for Melbourne Airport, BGIS, Ambulance Victoria, and several Whole of Government arrangements.