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Procurement Organizations Procurement Organization Evolving models Dr. Lydia Bals, Head of Procurement Solutions, Bayer CropScience AG Visiting Scholar, Copenhagen Business School Agenda Introduction to organizational models Development of models at Bayer Implementation at Bayer CropScience Evolution: where is it heading? Page 2 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Agenda Introduction to organizational models Development of models at Bayer Implementation at Bayer CropScience Evolution: where is it heading? Page 3 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Looking at Procurement Organization from a research angle Page 4 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Three questions need to be addressed by an organizational model Questions to be addressed by an organizational model 1 Which dimensions dominate the organizational set up? First priority focus Second priority focus 2 What is the degree of centralization? Decentralized Center-led Centralized low high Degree of centralization 3 Which “enablers” can support the strengths and compensate the shortcomings of the organizational set up? Enablers Also compare: Procurement Strategy Council Page 5 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Procurement functions face the challenge of satisfying four - increasingly demanding - organizational pulls 1 Customers The Pull: Internal clients expect more from Procurement. Getting Stronger: Along with greater savings expectations due to cash constraints, business partners increasingly look to Procurement to take on more complex tasks such as supply risk management. Categories Activities / Processes The Pull: Strategically manage The Pull: Increase productivity and individual spend categories. quality of Procurement work. Getting Stronger: After the initial Getting Stronger: Procurement has to round of sourcing a category, savings Procurement do more with less. Its budget declined drop by 43% the next time you go to 25% from 2007 to 2009, but its market. So, procurement must think workload continues to grow as savings more strategically about how to expectations increase and staff take on squeeze more value out of a category new tasks (e.g. more risk mgt.). as time goes on. Geographies The Pull: Satisfy regional requirements while seizing local opportunities. Getting Stronger: In 2008 foreign sales grew to 45% of revenue for S&P 500 companies, up from 39% five years earlier, and as major corporations expand their global footprint, Procurement must keep up. Source:PSC, Fit for Purpose: Designing the right structure and learning to live with it (2009) Page 6 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Generally, all of these “pulls” can be reflected in the organizational structure of procurement functions Dimensions of organizational structures (1/2) 1 A Categories Major focus of this type of organization is to – develop procurement expertise in all relevant categories CPO – be accepted as expert from the business partners CAT1 CAT2 … B Customers Major focus of this type of organization is to – respond to the (specific) demand of the individual business units in the best CPO possible way – to be involved in more complex tasks (e.g. BU1 BU2 … risk management) – to be involved into the process as early as possible Page 7 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Generally all of these “pulls” can be reflected in the organizational structure of procurement functions Dimensions of organizational structures (2/2) 1 C Activities / Processes Major focus of this organizational type is to – maximize the process efficiency and minimize process costs CPO – execute well established methodologies along the sourcing / purchasing process ACT1 ACT2 … – ensure an environment of clearly defined roles and responsibilities D Geographies Major focus of this organizational type is to – respond to the (specific) demand of different regions in the best possible way CPO GEO1 GEO2 … Page 8 • Dr. Lydia Bals, Bayer CropScience • November, 2012 The Categories-Customers-Model combines category expertise and closeness to the business Details: Categories - Customers (tiered) 1 Organizational Model Main Characteristics Procurement expertise in each spend category and CPO underline of importance of category specific strategies Good responsiveness to shifting business needs and CAT1 CAT2 … early involvement by business units Tiered structure clearly states the hierarchy of consistent category strategies vs. special business demand BU1 BU2 … Good control over spend (including leverage of spend across different business units) No special focus on regional/local needs No special focus on processes, methodologies and split of activities Page 9 • Dr. Lydia Bals, Bayer CropScience • November, 2012 The Categories-Activities-Model aims to deliver category expertise to the business efficiently & effectively Details: Categories - Activities (tiered) 1 Organizational Model Main Characteristics Procurement expertise in each spend category and CPO underline of importance of category specific strategies Special focus on clearly defined roles & CAT1 CAT2 … responsibilities on activity level and stringent processes ensure an efficient and effective organization Tiered structure underlines the overall importance of ACT1 ACT2 … consistent category strategies No special focus on specific business or regional/local needs Page 10 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Lloyds TSB Bank employs a Categories - Activities - Model Example: Categories - Activities (siloed) 1 Lloyds TSB Bank PLC Comments Group Procurement Group Procurement Director Special focus on Procurement Group Outsourcing Smart Sourcing Core Procurement categories and Development Center activities (esp. Business strategic) Media and Print Development Interesting Strategy Monitoring Workforce and functions: and Reporting Human Resources – Group Best Practice Operations Support outsourcing center Process IT and – Procurement Development Telecommunications development Travel Organizational characteristics Number of FTEs: 70 Number of Distinct Business Units (BUs) Supported: 25 Number of Countries Supported: 1 Source:Procurement Strategy Council Page 11 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Two dimensional organizational models can be run effectively in three variants... Types of two-dimensional models 1 Tiered model Siloed model Matrixed model CPO CPO CPO CAT1 CAT2 BU1 BU2 CAT1 GEO1 CAT1 ACT1 ACT1 CAT1 CAT2 GEO2 ACT2 ACT2 Two dimensional models in three variants can be run effectively Page 12 • Dr. Lydia Bals, Bayer CropScience • November, 2012 ...but considering more than two dimensions adds enormous complexity to the organization Types of three-dimensional models 1 Tiered model Siloed model Matrixed model CPO CPO CPO CAT1 CAT2 CAT1 GEO1 ACT1 GEO1 GEO2 GEO3 ACT1 ACT1 ACT2 ACT1 ACT2 ACT2 ACT3 GEO1 GEO1 GEO1 GEO1 CAT2 GEO2 ACT2 CAT1 CAT2 CAT3 GEO2 GEO2 GEO2 GEO2 Models with more than two dimensions add enormous complexity to the organization Page 13 • Dr. Lydia Bals, Bayer CropScience • November, 2012 With these restrictions in mind theoretically 12 basic org. models in 36 different variants are possible 1 Choose dominant axis Choose subdominant axis Choose hierarchy Tiered Activities Siloed Categories Customers Matrix Geographies Categories Activities Customers Geographies Categories Customers Activities Geographies Categories Geographies Activities Customers 4 org. “backbones” 12 basic org. models 36 variants Page 14 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Exemplary variants of the four models preferred by the majority of companies* Derivation of exemplary models 1 27% 14% 14% 9% 8% 8% 8% 4% 2% 2% 2% 2% Dominant Categories Customers Activities Geographies Sub- dominant Customers Geographies Activities Categories Geographies Activities Customers Geographies Categories Customers Categories Activities * according to: PSC, Fit for Purpose: Designing the right structure and learning to live with it (2009), n= 54 CEB member companies Page 15 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Each organizational set up can be operated with a differing degree of centralization Degree of centralization 2 Decentralized Center-led Centralized low Degree of centralization high Advantages Better coordination Potentially combines Coordination/control of /communication with the advantages of policies & procedures individual BUs centralized and Strategic focus & decentralized Speed of response to expertise functions BU needs Proximity to major Knowledge of local decision makers suppliers Higher leverage/lower Spend penetration purchasing cost Disadvantages Operational vs. Complications may Organizational silo - strategic focus arise with regard to distance from users Lack of leverage and – Role definition Lack of recognition of standardization unique BU needs – Decision rights Lack of specialization / Less two-way – Coordination expertise knowledge sharing Higher cost of supply Source:Bayer Business Consulting; Procurement Strategy Council Page 16 • Dr. Lydia Bals, Bayer CropScience • November, 2012 All basic org. models respond to 2 out of 4 “pulls” - Enablers to compensate for the deprioritized “pulls” 3 Customers The Pull: Internal clients expect more from Procurement. Getting Stronger: Along with greater savings expectations due to cash constraints, business partners (at 80% of companies) increasingly The 2 prioritized organizational look to Procurement to take on more complex tasks such as supply risk management. “pulls”
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