To centralize or not . . . that is the question
William Atkinson -- Purchasing, 9/2/2004 2:00:00 AM
One of the most often debated issues in procurement is whether to centralize the procurement function or locate it near or at the manufacturing site. Sheila Johnson, manager of strategic sourcing for Atlanta-based Turner Broadcasting System, can see the benefits of both and prefers a strategic combination that takes advantage of the strengths of each, which she calls "flexible purchasing."
"When I was in purchasing for a manufacturing company, everything was very centralized," Johnson recalls, saying all purchasing came through one department, which made sense in that environment. In fact, according to Johnson, if anyone bought anything outside of the purchasing department, they could potentially be held personally responsible for paying the invoice. "As such, we obviously had a very high rate of compliance," she says. But upon arriving at Turner, though, Johnson found the company and industry to be quite different. "Turner is a completely different industry and environment, with a vast number of divisions and departments," she says.
Turner is part of Time Warner media conglomerate and Johnson says her arrival at the company was an eye-opener after her years in a manufacturing environment. "Not only was everyone doing their own thing in terms of purchasing in Turner, but also within the Time-Warner parent company and more recently within AOL," she adds.
Johnson felt that Turner could benefit from centralizing its procurement into a single corporate environment. "However, I was quickly told, and quickly learned, that it wouldn't work here for a few reasons," she says. First, compliance within the company would be virtually impossible, given the company's history in decentralized procurement. Second, the corporation was so big, it would be extremely difficult to find suppliers large enough in each commodity area to meet all of the company's needs. Third, since the corporation was so diverse, there were some purchases that simply didn't make sense to centralize.
Realizing that traditional centralization would not be feasible, but also understanding that the strategy could have some inherent benefits at Turner, Johnson set out to create a hybrid structure that would reap the benefits of centralization and decentralization, using each where it made sense and even using elements of both in certain individual situations.
The key element of the initiative, called "preferred programs," was rolled out in early 2003 and involves selecting preferred suppliers for the corporation's various divisions and departments. It uses a combination of centralized and decentralized purchasing, but still leverages volumes in both situations and provides buying flexibility to the various departments and divisions.
"We don't do a lot of purchasing directly on our own," explains Johnson. "We do negotiate a lot of contracts."
One commodity that is partially centralized under this strategy is office supplies. The company now has only two preferred suppliers, and a majority of the buying is done in a centralized manner. Printing, though, is very decentralized, with about 100 preferred suppliers.
"We don't do any of the print buying centrally," Johnson explains. "Each department does its own print purchasing." Whenever possible, Turner likes to work with its preferred suppliers online, making it easier for departments to place orders directly.
The guiding light for the flexible purchasing program is the Time Warner Procurement Council, composed of purchasing professionals from the various divisions of the company. Johnson says any spend of $2 million or more among all of the divisions is considered for a sourcing initiative by the council. "We try to create a formal strategy for a certain area that will be in place for the whole corporation."
The workhorse of the initiative is the Procurement Services Office (PSO), which is a corporate entity that works with all of the divisions and their departments to find new commodities and sourcing initiatives on which they can cooperate. "By working with the divisions, we are often able to create new national programs," Johnson says.
During the major merger of AOL and Time-Warner, for example, Johnson found that AOL and Time-Warner Cable already had some excellent contracts in place, which could be shared with other divisions post-merger. However, because not all of the divisions were aware of the contracts, they didn't take advantage of them. Johnson says even as recently as a year ago, few people in the corporation even knew about the PSO.
"As a result of the PSO, though, we have much greater communication among all of the divisions, and they are more aware of the various contracts that are available," continues Johnson.
In addition, the company has an internal Website devoted to sourcing initiatives: updating buyers on what has been accomplished and what is upcoming. This is not only useful to the company's existing divisions, but when it acquires a new division, this division can quickly get on board and take advantage of the pricing from day one.
"Now, employees contact us or go to the Website to find out what contracts are available. We have a very large, comprehensive contract database on the Web site." Divisions and departments also contact the PSO to suggest new areas for strategic purchasing consideration.
Johnson is not at liberty to share actual dollar savings. However, she does report that the company is now able to quantify savings, something it had not been able to do before. "We use a Dun & Bradstreet Optimizer system that shows us what we are spending corporate-wide on each commodity item," she says.
This has three benefits. First, it helps the company get a handle on what the various divisions are spending in combination, so that the Procurement Council can make better sourcing decisions and also decide which direction to head next. Second, it helps the company negotiate better deals with suppliers, since it now knows the volumes that are involved corporate-wide. "Third, we can show this quantifiable data to the controllers in the different divisions, which gets them more interested in working with us," she adds.
In fact, one of the keys to the success of the initiative has been that the vice president of the PSO has a financial background and strong relationships with the controllers of all the divisions. "There is more fiscal accountability now, and everyone is more focused on cost savings," Johnson says. "It's rewarding to see that what we do can have such a far-reaching impact, given the size of our company."
Johnson and her colleagues are still focusing their efforts on trying to capture the huge amounts of spend in the major commodities. "Eventually, we will begin to focus on some of the other commodity groups," she notes. For example, capital equipment purchases are still very decentralized. They are handled divisionally and even departmentally. The PSO has not looked at this area yet. Because of the nature of the business, though, these purchases may need to stay decentralized.
"One way some procurement departments go wrong is in trying to create the same strategy for all commodity items," Johnson points out. "We don't adopt the same strategy for all commodities."
Flexibility also applies to how things are purchased. Turner uses online auctions for some commodities, such as office supplies and office equipment, but not other spend areas. "When I first heard about online auctions, I was completely opposed to them," Johnson says. "However, since I've seen the benefits, I have become a convert. I still don't think they're useful for all commodities, of course, but they definitely are for some."
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