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The question of whether to centralise or decentralise has been a big question playing on the minds of many FMCG companies for a number of years. Procurement is no longer regarded as an add-on service. Its importance in generating savings and profitability for corporations is increasingly recognised. Currently, the numbers of centralised procurement hubs in Europe are growing as many of the well-known big players in FMCG are shifting their functions. But with supply chain disruption lingering as one of the top 10 biggest perceived threats to businesses globally in 2016, what does it mean for businesses?
As with everything, there are benefits and challenges to centralising procurement. These will change depending on the details of the company, its structure, its products, its culture.
The main benefit surrounding centralisation is increased control. More control over suppliers, more control over contracts. It also means capability can be developed more easily, performance measured more easily and aggregate spend more easily. Centralisation can also lead to improved non-price factors such as more ethical supply chain decisions, more diverse suppliers and better CSR (Corporate Social Responsibility) initiatives.
Further benefits include more successful supplier risk management, and the increased ease at which to keep company and brand messages constant. It is estimated that around 80% of improvements can be seen in the first 2 years of the changes, thus offering quick returns in terms of efficiency, cost etc.
The negatives really boil down to integration with the rest of the business and how the function is perceived. The centralised hub can be seen as a major cost centre both externally and internally, hence can be an easy target for cost reduction. By moving from a local function to a single global or regional function, it can make it difficult to embed itself properly in a business, running the risk of isolating itself by figuratively building its own walls.
Centralised procurement can also be swamped by data and multiple priorities, leading to the business focus getting lost. Not having local procurement can lead to needs being misunderstood, or not delivering what was actually wanted. This can be particularly more prominent with large, highly complex companies, and is much more difficult to implement and deliver change.
However, change is never just this black and white. And no corporation is wholly centralised or decentralised. A more hybrid structure can be implemented, one that can be tailored to the organisation and one that gets the best of both worlds.
There has been a huge growth of centralisation in recent years and many companies are trying to keep one with one another, cut costs and improve efficiency. The growing size of many companies means that some have chosen to centralise or regionalise with a central European hub. With the world seemingly decreasing in size every day and with developments in technology it makes it much easier to have a central function. It is more simple and faster to communicate, solve issues, and assess need.
Heinz was off the mark in 2011 and decided to move their procurement to a new hub in the Netherlands, becoming their European supply chain hub. This cost them around $40 million, and was designed to increase innovation and quality in its supply chain and lead to an increase in buying roles. The location was picked due to its close proximity to the company’s European ketchup factory and research centre. By adding several global sourcing roles to the mix they leveraged their global buying power. Since, Heinz has become to be thought of as global leaders in procurement thinking.
Danone has also followed suit. In 2014 Danone Trading Company (DanTrade) was set up to be the new global corporate entity of the dairy division of Danone. This specialised division is globally responsible for all strategic sourcing supplier development activities for the division and stands as a centre of excellence and innovation. Again, this procurement hub is in the Netherlands. This move to centralisation has facilitated the growth of Danone’s worldwide size, and built a more sustainable and competitive advantage. This organisational change, and with their finance department also being centralised, has helped to simplify and accelerate decision-making, and very importantly reduce exposure to dairy price volatility.
Nestle and Reckitt Benckiser have also moved their procurement to hubs in Europe. Nestle has taken special steps to implement a procurement team that employs a specialist group of buyers to ensure that purchasing plans are aligned with the business. RB has adopted a globally standardised process and their purchasing hub is seen as a site of advanced tools and forward thinking.
These changes have a drastic effect on employees. With change comes new jobs, job losses and movement both physically and organisationally. It can prove quite unsettling, especially as many senior levels positions can look threatened, duties shared or changed, affecting the retention of talent. This however, means that there is both talent on the market and vacancies that need filling with strong-value adding people. CSG understands that brilliant, skilled people are what make organisational changes effective. We have an extensive network across Europe and further, and offer a variety of in-depth consultative services, so if you would like to have an expert discussion about your requirements do not hesitate to contact us on + 44 (0) 333 323 2000.