Spend Control Models: The Pros & Cons

Charlotte Sutton
Charlotte Sutton,
For organisations with multiple locations or business units, there are three basic models for Spend Control: the decentralised model, the centralised model, and the centre-led model. In this article PROACTIS discusses the pros and cons:
Decentralised Model
A classic decentralised model of Spend Control, where each business, functional, or geographic unit is responsible for its own purchases, has a number of advantages. It empowers individual business units with autonomy and control over their process and design decisions and improves their overall satisfaction. It allows for a quick sourcing process and speedy issue resolution and allows the organisation to take advantage of expertise in the local market.

However, this model has a number of significant disadvantages. It does not allow the full corporate spend to be leveraged or business unit objectives to be aligned with the goals of the organisation as a whole. There is usually little co-ordination or information sharing between divisions, best practices are generally not propagated, and supply costs and performance are uneven across the organisation. Furthermore, operating costs are often quite high in the decentralised model due to extensive duplication of effort and resources in the Procurement and Accounts Payable functions.

Centralised Model
The centralised model of Spend Control, where all procurement and invoice processing goes through a single, central team, has many advantages. First of all, unlike the decentralised model, it allows corporate spend to be fully leveraged across the organisation and it assists in the institution of standardised sourcing, purchase request, authorisation, ordering, and settlement processes. Inherent economies of scale allow the organisation to wield the full power of its combined spend, enhance operational efficiencies, and improve knowledge sharing and best practice execution.

However, this model, too, has disadvantages. The extensive knowledge of the individual in local supply markets, consumption patterns, customs, and regulatory requirements is lost, which often results in sub-optimal buys and operational problems for many regions. The risk of maverick buying increases when geographically dispersed site managers do not agree with centrally mandated decisions and this impacts local supply, quality, or reaction times. Forcing centralised buys of commodity or service categories not suited for centralised buying can actually increase cost or decrease service quality.

Centre-Led Model
Many financial and procurement executives believe that the third model – often called the centre-led model – provides the best of both worlds, offering all of the advantages of the centralised and decentralised models with minimal disadvantages. In the centre-led model:
  • A procurement centre of excellence (COE) focuses on corporate supply chain strategies, strategic commodities, and best practices for sourcing, supplier management, and contract management, while leaving much of the operational execution to the individual locations or business units.
  • Corporate financial management focuses on establishing consistent authorisation policies, efficient invoice processing, and standard reporting.
  • Finance and Procurement work together to enable employees throughout the organisation to purchase the goods and services they need in an efficient, consistent, and policy-compliant manner using the right mix of locally and centrally sourced suppliers. They also work together to co-ordinate all aspects of supplier engagement across both Procurement and Accounts Payable.
The centre-led model is typically built around cross-functional teams that represent all of the key regions and business units. This allows for the creation of flexible supply chain processes and commodity strategies that can be tailored at the local level when necessary to adhere to local regulations or take advantage of local markets or tax breaks. Corporate spend can be fully leveraged on strategic commodity categories well suited for centralised sourcing while categories not suited to centralised sourcing can be handled by the individual business units.

Operational efficiencies are increased and overall operational costs are decreased in many different ways. For instance, standardised purchase-to-pay processes position the organisation to methodically move suppliers to appropriate forms of electronic invoice submission and facilitate the move of Accounts Payable to a more efficient shared service approach if desired. The organisation maintains the ability to react quickly to unexpected changes in supply or demand, or in cash management requirements. Best practices can be shared easily throughout the organisation, maverick buying significantly reduced, and performance maintained at a consistent level.

Multiple studies have demonstrated that organisations with centre-led Spend Control considerably outperform their non-centre-led counterparts in both spend under management and supply cost reductions achieved. Centre-led organisations have reported more than twice as much spend under management than organisations with a decentralised structure and nearly 20% more spend under management than organisations with a centralised structure. Moreover, centre-led organisations report 5% to 20% cost savings for each new pound of spend brought under management.

To learn more about Spend Control for the multi-location, multi-business unit organisation download the PROACTIS white paper.
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