Operations

DESIGNING THE
PERFECT PROCUREMENT
OPERATING MODEL
 DESIGNING THE PERFECT PROCUREMENT
OPERATING MODEL
When it comes to defining the most efficient and effective operating model for procurement
functions there are, unfortunately, no easy answers.

The operating model of a procurement function needs to be consistent with a company’s

overall strategy, global organization, and culture. It also needs to be aligned to its supplier
market. Balancing internal and external pressures is a difficult task – and the target is often a
moving one!

Indeed, procurement functions must adapt, perhaps more frequently than the rest of
the company, as they are impacted by changes such as new corporate strategy, evolving
manufacturing footprint, disruptive supplier innovations, changing supplier panels, and
higher savings objectives, all of which require increased flexibility.

In our conversations with CPOs, we often hear the same questions: should my organization
be centralized or more locally managed? The company is continuously evolving, how should
I adapt the procurement organization? What is the right sizing of my organization? Should I
consider outsourcing part of my organization?

LOCAL MANDATES VS. CENTRALIZED ORGANIZATIONS

There are three key structural dimensions that drive the thinking on designing the
procurement operating model: supplier market, user needs, and stakes. Each of them will
shape the operating model differently, for each procurement spend category:

Exhibit 1: Three dimensions to balance between local and central

Staffing and set-up will depend on

Supplier market •• Market structure: local, continental, or global structure
•• Relative weight of company to market (more centralized if larger)
Three pertinent elements:
•• Regularity of need (more centralized if more regular)
User needs
•• Customization required vs. market standards
•• Homogeneity of overall company needs per location
Highly strategic categories may best be managed closer to the business it impacts,
Company stakes whereas less strategic categories may be managed at corporate level to maximize
standardization of needs

1. Supplier market: on this dimension, you will be looking at two main things: how the
overall supplier market is structured and what the relative weight of the company is to
this market. A supplier market is typically local, continental or global, and the weight
of a company’s purchase ranges from insignificant to significant. Obviously, the level of
emphasis (staffing) and the set-up will depend on these factors. The more significant
the overall weight of a company’s spending and the more global the supplier market,
the more centralized the procurement organization. When the supplier market is very
fragmented and the spending is relatively small, local mandates are very relevant.

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 2. User needs: here, three elements are at play:
−− The regularity of the need: is it a yearly one-off that can be managed locally or does it
involve daily consumption that should be handled centrally?
−− The level of customization required against market standards: are you buying market
standards (centrally) or do you require a high degree of customization at site level?
−− The overall homogeneity of your needs: is it one-size-fits-all for the entire company
or does every site need custom specifications?

Answering these questions will allow you to decide if a category should be addressed locally
or dealt with at the corporate level.
3. Stakes: you need to assess what the actual stakes are for the company, for each
procurement category. If a category is highly strategic, you may consider managing it
close to the business it impacts, in a decentralized manner. On the contrary, categories
that are least strategic will often be managed at a corporate level to maximize
standardization and allow efficient demand management.

Many organizations tend to over-emphasize the importance of the first dimension and
attempt to perfectly “mirror” the supplier market. However, that often comes at the expense
of an increased integration with the rest of the company and limits the procurement
function’s ability to truly engage in advanced and collaborative levers (e.g. influencing
specifications and consumption, challenging needs, encouraging standardization).

In many ways, these three drivers may seem to call for conflicting decisions: consolidate and
disseminate, align to internal stakeholders as well as to suppliers.

In reality, no organization can strike a perfect balance along these three dimensions. A choice
must be made to focus on a given dimension depending on the company’s DNA, culture,
organizational model, and overall level of maturity.

PROCUREMENT ORGANIZATION MODELS AND CONTINUOUS

ADAPTATION TO THE COMPANY’S PROCUREMENT MATURITY
We have observed four main organizational models, depending on the level of centralization
of the function and the level of reporting of buyers to the Procurement organization (linear
or functional).

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 Exhibit 2: Procurement organizational models
CENTRALIZED MODEL MATRIX MODEL

BU 1 BU 2 BU 1 BU 2
Group Group
CPO CPO

BU1 BU2
CPO CPO

Buyers Buyers Buyers Buyers

• Buyers report to Group Procurement Dept., which • All buyers report to Group, which co-arbitrates
makes decisions over all Procurement strategy with BUs
• Some buyers are hosted by BUs; some
are transversal

COORDINATED MODEL DECENTRALIZED MODEL

BU 1 BU 2 BU 1 BU 2
Group
CPO

BU1 BU2 BU1 BU2

CPO CPO CPO CPO

Buyers Buyers Buyers Buyers

• Buyers report into BU Procurement structures • Buyers report to BUs

• Group Procurement provides (no Group Procurement Dept.)
coordination, guidance • Coordinated initiatives may exist between the BUs

Again, the best organization will be the one that is adapted to your company’s DNA and
strikes a balance between the constraints of the supplier market and the organization of key
internal stakeholders.

But, the really important piece is evolution, as the models are in flux – a sort of “balancing
act” is underway between centralization and decentralization as Procurement continues
to mature.

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 We distinguish three different stages of maturity: the emergent phase, the consolidation
phase, and the balance phase.

Exhibit 3: Procurement organizations are observed to mature in three major stages enabling
levers of increasing complexity
LEVEL OF CENTRALIZATION SOPHISTICATION OF PURCHASING LEVER

2 3

3 2

1
1

Optimizing costs
MATURITY Buy Spend Spend Risk Contributing
cheaper better less mgmt to growth
Emergence Consolidation Equilibrium TYPE OF PURCHASING LEVER

1. The first phase is the emergent phase: At first, users are acting as buyers and are,
by essence, largely scattered across the organization, with no real involvement of
professional buyers. Then, top management becomes aware of the potential and
decides to professionalize and formalize the procurement function. The underlying idea
is that a new role – the professional buyer – must emerge to challenge line managers
in their often historical relationships with suppliers. This is a phase that typically sees
Procurement organizations start as a “coordinated model”: relatively small teams and
still somewhat decentralized. At this stage, the focus is mostly on trying to influence
internal stakeholders and progressively expand scope, as well as quick wins. During
the emergence phase, the nascent Procurement function is focusing on a limited scope
while there exist many “acting-as” buyers in the business. Sizing of the Procurement
function and need for a CPO is a key topic.

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 Exhibit 4: Key sizing issues to consider

1 The business sector

Mix of Procurement categories, level of centralization
of Operations

The size of the company

Which has a strong influence on the leverage of
Procurement teams 2
3 The company’s footprint
Which is a major complexity driver
(countries, subsidiaries, sites…)

The typology of the Procurement concerned

Production spend, core business indirect, overhead,
commodity services… 4
5 The pocket of expertise already existing in the business
…and the ability of a Procurement function to leverage it

2. The second phase is the consolidation of the new procurement organization:

The procurement function is now given ambitious economic objectives based not
only on price levers, but also on the mandate to challenge needs. This ramp-up of
procurement is often a source of friction, but forces the emergence of collaborative
work with line managers and helps demonstrate the value in upstream decision-making
processes. It embeds the “buyer-user” tandem in the DNA of an organization. During
the consolidation phase, increasing coverage rate is a priority for CPOs. Coverage rate,
however, is soon not enough as the most mature companies begin focusing on the
effectiveness of their coverage.

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 Exhibit 5: Focus on coverage rate

INCREASING COVERAGE RATE

CPOs tend to build an operating model with the “coverage Best-in-class companies see >90% coverage with
rate” in mind – and rightfully so, to a degree, as CPOs now Procurement involvement as natural
have the mandate and they need to deliver and expand
their scope
TWO MAIN LEVERS TO INCREASE COVERAGE RATE: THERE ARE THREE KEY INDICATORS TO TRACK:

Procurement is involved once

Major efforts to promote
1 Early
involvement
users and influencers first
1 New mandates on
spend categories
Procurement internally can
help convince the entire
express needs

organization of its value

Procurement is involved in
2 Short-list short-listing suppliers after
needs are expressed
For successful global
Increased
2 geographical
expansion, key local
constraints must be identified Procurement helps to select
prerogatives
& understood 3 Downstream suppliers and to negotiate/
draft agreements

3. Then comes the equilibrium phase: after consolidating procurement activities,

recognizing the central role of the function and formalizing essential operational
processes, most mature companies tend to re-distribute parts of strategic sourcing
directly into their business units. The procurement function then morphs from a central
organization to a fully integrated and embedded function, closer to business units and
stakeholders. More complex collaborative levers are used at the level most appropriate;
Procurement is not only involved in optimizing cost, but also in managing risks and
contributing to growth.

Once the Procurement function is mature, CPOs often consider opportunities offered
by outsourcing, which can cover many different patterns of tasks. Deciding whether to
outsource is analyzed per category at sub-process level and important questions to consider
include: When do I outsource? How do I outsource? What do I outsource?

Copyright © 2017 Oliver Wyman 7

 Exhibit 6: Processes & tasks eligible to Procurement Outsourcing

Define Manage Manage

1 purchasing
strategy
2 Source &
negotiate 3 Manage
Contract 4 supplier
performance
5 system
performance

Sourcing Measure &

1.1 Spend data 2.1 event 3.1 Contract 4.1 Supplier 5.1 assess system
management repository enablement
management performance

Construct &
1.2 Demand 2.2 Proposal 3.2 Contract 4.2 Supplier 5.2 monitor
improvement
management evaluation administration help desk
plans

External Contract Supplier Define

1.3 market place 2.3 Negotiation 3.3 template 4.3 accreditation 5.3 purchasing
analysis management management strategy

1.4 Sourcing 2.4 Implementation 4.4 SLA

strategy monitoring

Pattern 1 Pattern 3 Pattern 5 Vendor

4.5 relationship
Pattern 2 Pattern 4 Pattern 6 management

KEY TAKEAWAYS
The ideal operating model for Procurement is never a one-size-fits-all solution, and is
a moving target. There are three key structural dimensions that drive the thinking on
designing the Procurement operating model: supplier market, user needs, and stakes.

We have observed four main organizational models, depending on the level of centralization
of the function and the level of reporting of buyers to the Procurement organization (linear
or functional).

However, the really important piece is evolution, as the models are in flux. Typically,
Procurement organizations go through multiple phases, from increasingly centralized before
reaching a more sophisticated equilibrium.

We find that most advanced Procurement functions reconsider their organization every two
years, as their overall companies evolve, supplier market change and performance levers
become increasingly sophisticated. This effort usually starts by a thorough review of the
current organization and a mapping of the potential gaps. The outcome is not necessarily a
major change but can also be targeted improvements.

Copyright © 2017 Oliver Wyman 8

Oliver Wyman is a global leader in management consulting that combines deep industry knowledge with specialized
expertise in strategy, operations, risk management, and organization transformation.
Oliver Wyman’s global Operations Practice specializes in end-to-end operations transformation capabilities to address
costs, risks, efficiency and effectiveness. Our global team offers a comprehensive and expert set of functional capabilities
and high-impact solutions to address the key issues faced by Chief Operating Officers and Chief Procurement Officers
across industries.

AUTHORS
Gregory Kochersperger, Europe, Middle East, and Asia Head of Operations
Xavier Nouguès, Head of Value Sourcing
Damien Calderini, Partner
Laurent Guerry, Partner
Stephan Picard, Principal

CONTACTS
Lars Stolz Michael Lierow
Global Head of Operations Head of Supply Chain
lars.stolz@oliverwyman.com michael.lierow@oliverwyman.com

Greg Kochersperger Brian Prentice

Europe, Middle East, and Asia Head of Operations Head of Manufacturing and Process Operations
gregory.kochersperger@oliverwyman.com brian.prentice@oliverwyman.com

John Seeliger Alex Lyall

Americas Head of Operations Head of Digital Operations
john.seeliger@oliverwyman.com alex.lyall@oliverwyman.com

Xavier Nouguès
Head of Value Sourcing
xavier.nougues@oliverwyman.com

www.oliverwyman.com

Copyright © 2017 Oliver Wyman

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