In May 2006, IBM announced that its chief procurement officer (CPO) was moving from Somers, New York, to Shenzhen, China. IBM indicated that its goals for this move were to distribute IBM executives more globally, to improve procurement capabilities and skills in a region where IBM has a significant number of suppliers, and to better support one of IBM's strategic growth areas.
This announcement is a wake-up call for companies that conduct global business. What does this move mean for your procurement organization? Should you think differently about where to physically
put your people to optimize procurement? What technology considerations should you account for to ensure your staff members are supported, no matter where they're located?
One way to think about procurement is through the organizational model that best describes your corporate structure, be it divisional (decentralized), corporate (centralized), or based on shared services (see sidebar below). Determining the model that best suits your procurement organization is an important first step, but perhaps even more important is determining the physical location of your staff within that structure. Forward-thinking procurement organizations can do themselves a huge service — and develop better-run global organizations — by thinking strategically about how to best locate their people around the globe.
How Is Your Sourcing Organization Set Up?
Consider Your Staff's Physical Location, No Matter Which Model You Use
In a recent report,2 AMR Research defined three organizational procurement structures:
- The divisional or decentralized model aligns the request-to-cash process by division; sourcing control and procurement execution are exercised at the divisional level
- The corporate or centralized model consolidates processes in one place across divisions to aggregate spend
- The shared services model performs both sourcing and procurement centrally while costs flow back to individual divisions based on either centralized, intra-company invoicing or invoicing by one division to others
According to AMR, large organizations today are migrating to the shared services model, while midmarket companies (ones with less than $1 billion in revenue) are moving toward centralized, corporate control.
Regardless of the model your company uses, or if your organization draws on a combination of these models, it's important to consider the physical location of your staff to optimally run procurement according to your business model.
|Regardless of the
organizational model your company uses,
or if your business draws on a combination of these models, it's important to consider the physical location
of your staff in order
to run procurement optimally.
Use a Strategic Approach to Define Your Global Procurement Organization
Taking a more strategic approach to procurement staffing does not necessarily involve moving staff to a new location or hiring new employees at an offshore site. But when formulating your global procurement strategy, before you make any move, I strongly recommend that you consider how your staffing decision will affect your company on three levels: an enterprise level, a departmental level, and an individual level (see Figure 1). After thoroughly evaluating these considerations — taking into account your organization's overall corporate strategy and other issues, including potential tariffs and language differences — you can be more confident in your structural staffing decisions and ensure a more strategic sourcing approach.
Consider three levels of alignment when developing your global procurement staffing strategy
The order in which you address these enterprise, departmental, and individual considerations doesn't matter — just make sure you think about all of them.
Enterprise-Level Considerations: How Will Staff Relocations Affect the Organization as a Whole?
Though procurement teams are learning to become more strategic,3 other groups within an organization often still view procurement as a function that values cost savings more than broader business concerns. Whenever procurement can elevate its standing and help contribute more strategically to the overall organization, it's a huge opportunity. There are several factors you should consider when rethinking procurement's global staffing strategy in a way that will raise procurement's stature within its own enterprise.
First, global organizations' corporate strategies commonly involve driving revenue through new market entry, or identifying and capitalizing on increased savings opportunities, which for many organizations means expanding its supply base into lower-cost countries. For a manufacturing firm concerned about driving revenue in a new market, for example, placing procurement staff in this region, near its suppliers, would be a good first step. This strategy calls for developing the support infrastructure before expanding the sales infrastructure. Clarence Kwan, national managing partner of Deloitte & Touche USA LLP's Chinese Services Group, says, "The most common ways to derive value from China are to source from third parties in China, to shift some of their own manufacturing capacity there, and to sell to a relatively open market. This market, potentially the world's largest, also includes a middle class approximately 175 million to 200 million strong and growing fast. Coming up with a comprehensive China strategy is really about sequencing these activities."4
The image your company would like to portray to customers is another consideration. If you are truly global, how can you demonstrate it? An organization headquartered in the United States that wants to be perceived as global might take a dramatic step, like IBM did, and move its CPO to a country where the company sees significant opportunity. A media or advertising firm based in the US that sees an expansion opportunity in Western Europe might relocate procurement to Spain to make a statement that the market there is important to the company. Moving individuals to support a certain corporate image has the added benefit of allowing your company to develop more insight into how other cultures operate.
Yet another factor is the industry in which you operate, and whether it's important for procurement to be physically located near suppliers for reasons specific to that industry. Such is the case with a large technology company that outsources development work to India. It would be advantageous to staff a small procurement team locally in India to strengthen this strategic supplier relationship. Interaction with the supplier would also help ensure quality and timely software delivery.
Finally, regulations and tariffs are factors you must consider when determining where to place procurement staff. Dell Computer, for example, added manufacturing capabilities in Brazil to avoid significant tariffs in the US. Locating in Brazil was essential for Dell to be able to sell in that market and compete effectively on price.5
Departmental-Level Considerations: Will Your Staffing Decisions Change the Structure of Your Procurement Team?
Within a particular area or category of an organization, sourcing can be a key part of the business — so key, in fact, that you might even consider moving the entire procurement department closer to important customers and suppliers. So what factors should you carefully review on the departmental level as you structure your procurement team?
Procurement departments in services firms tend to align more closely with their internal customers than with suppliers, and thus tend to be physically located near those customers. A large financial services firm that sells consulting expertise, for example, requires the procurement department and its people to be available to support locations where most business is conducted, such as New York City or London. The financial services firm might also ask suppliers to co-locate with them to provide better customer service.
Close alignment with suppliers is seen more frequently with a product or manufacturing company. Consider a gaming software company that performs some design work internally, but outsources other design elements and most development work. For this company, it is advantageous to physically locate procurement staff near the key supplier market or markets. Another option might be to temporarily locate procurement staff near a supplier when a supplier is new or if you've previously had any performance issues with that supplier. The more critical or strategic suppliers are to your business, the more you should consider placing procurement staff nearby.
|The more critical
or strategic suppliers are to your business, the more you should consider placing procurement staff nearby.
The degree to which the organization supports sourcing mandates is another factor for determining procurement staff locations. An organization that mandates its business units to use procurement's defined processes might function well following a centralized procurement model — that is, with all staff in the same location at corporate headquarters. But an organization that is highly decentralized, meaning that each business unit has significant autonomy, might call for procurement to be physically located closer to those business units to foster closer interpersonal relationships.6
Individual-Level Considerations: How Will Your Employees React to Global Change?
Another important angle to consider is the individual one. How will your organizational staffing decisions affect an employee doing day-to-day business? It's important to think about how the individuals within your organization will react to everyday differences — including cultural and time zone adjustments — as the result of a location change.
When thinking about culture, remember that the greater the cultural differences between where procurement staff and key suppliers are located, the more important it is to consider moving staff near suppliers. For an organization based in Eastern Europe that works with suppliers in China, for example, hiring new staff in China could be critical since doing business in China is highly complex, based on interpersonal relationships, and culturally diverse. To develop strong supplier relationships, it may be essential to have procurement staff located near the suppliers.7
The labor market is another factor to remember when considering procurement staff locations. If you've determined that you need to have staff located near suppliers, but the labor market for procurement professionals is poor in that area, you could temporarily relocate current staff, or hire local individuals with market expertise that could be trained in your procurement processes.
Time zones are yet another factor to consider. A company that has a shared services procurement model and staff located around the globe can more easily support both Asia and the Americas with a staff located in Europe. Many organizations find it infeasible to support Asia with a staff working typical office hours in the Americas because there is no overlap in the business day.
Language is another consideration for companies as they seek to expand business to countries where their language is not the primary one. For example, a US organization that seeks low-cost suppliers in rural China may find it nearly impossible to do business with suppliers that do not speak English. It is worth considering the costs of developing some sort of procurement infrastructure in that area versus the cost savings of using these suppliers.
More Than On-Site SRM
SAP Expands Its Sourcing Solutions to Include On-Demand and Hosted Options
Traditionally SAP has been known for the strength of its on-premise mySAP Supplier Relationship Management (mySAP SRM) solution. SAP, however, also affords customers the opportunity to use an on-demand or hosted e-sourcing solution. Just like SAP's on-premise solution, the on-demand and hosted solutions easily integrate with a customer's backend SAP solutions and are flexible, quick-to-deploy, and scalable — so organizations can start small and add users and functionality over time.
Don't Forget the Technology: Can Your
IT Infrastructure Support Your Global Procurement Organization?
Underlying these enterprise, departmental, and
individual concerns is the technology that supports your procurement staff — wherever they may be. Accordingly, I'd like to suggest a fourth category to consider when determining the physical location of your staff. You need to ensure that the type of sourcing solution you implement, particularly its delivery model — whether it is on-demand, hosted, or on-premise — and its level of integration to the enterprise resource planning (ERP) platform (see sidebar above) are scalable and can support collaboration.
An on-demand or hosted model is generally quicker and easier for remote employees to access than an on-premise application, which allows for more flexibility in your staffing model. Tighter integration between your sourcing application and ERP platform also offers more flexibility in your staffing model because data is fresher and employees — whether they are centrally or remotely located — can resolve issues more quickly.
The bottom line is that you don't want any technology system that you purchase or use to disturb your procurement staffing plan. Regardless of where your people are located, you want to ensure that their supporting systems and technology tools let them collaborate easily.
|The bottom line is
that you don't want
any technology system that you purchase or use to disturb your procurement staffing plan. Regardless of where your people
are located, you want
to ensure that their supporting systems
and technology tools let them collaborate easily.
Choosing where to locate your procurement staff is an important consideration in this increasingly global economy as you work to continuously evolve procurement to meet your business needs. If you consider physical location across three dimensions — enterprise, departmental, and individual — you will be well on your way to creating a procurement department that supports the overall organization in the best way possible. And don't forget the technology dimension; your SRM solutions shouldn't get in the way of your staffing plan — they should enable it.
Debbie Umbach is a member
of SAP's Solution Marketing
organization, focusing on supplier relationship management. She has more than 12 years of experience in software and technology solutions and has focused specifically on SRM solutions for the past two years. Debbie holds an MBA from Harvard Business School and a bachelor's degree in systems
engineering from the University
of Virginia. She can be reached