The Right Procurement Model: A Comprehensive Guide

Choosing the right procurement model can help companies better manage their resources and make informed purchasing decisions. However, selecting the right model is easier said than done. This is because the choice involves evaluating various factors like company size, industry requirements, and available technology.

In this guide, we will look into what procurement models are, understand the five basic procurement models, and list some key factors to consider when selecting the right one for your organization.

What this blog will cover: ‍

• What Are Procurement Models?
• Understanding Procurement Types 
• 5 Basic Procurement Models
• Factors to Consider When Selecting a Procurement Model
• Frequently Asked Questions on the Right Procurement Model

What are Procurement Models?

Procurement models help businesses get the best price and quality when buying goods and services from suppliers. They define the activities, roles and responsibilities, and level of control procurement teams have over the procurement processes. The right procurement model improves efficiency and reduces risks.

There are various procurement models, each offering distinct benefits. The best model for your organization depends on factors such as your size, industry, regulatory environment, and procurement objectives. Whether you choose a centralized approach to consolidate spending or a decentralized model for flexibility, selecting the right procurement strategy is crucial for optimizing resources.

Understanding Procurement Types

Procurement types refer to the various categories of goods and services based on their specific needs and operational goals. Let’s explore the key procurement types of sourcing products and services.

Direct Purchases

Purchasing raw materials and components that are directly used in the making of the final product. This type of procurement typically comes with high costs and offers fewer opportunities for savings. 

Indirect Sourcing

Procuring items or services that support the business but are not part of the end product. They account for a large part of the company’s spending and can include items like office supplies and IT products and services. 

Physical Goods Acquisition

Involves a lengthy supply chain resulting in extra costs. Due to the material nature of this procurement, expenses are generally higher in this type of procurement. 

Service Contracts

Usually falls under indirect procurement. Whether for virtual or other services, the process may only need to be repeated if the service is needed again. Temporary agreements, like leasing services, are also common in this type of procurement.

5 Basic Procurement Models

When it comes to procurement, organizations can choose from a variety of models. Each model offers distinct advantages depending on factors such as cost, speed, and supplier relationships. Selecting the right procurement model can lead to better efficiency and savings. 

Here are five common types of procurement models that cater to different organizational needs:  

Local Procurement Model

Under the local procurement model, all procurement activities, decision making, and control are fully autonomous and handled locally by individual business units or departments. In this model, each local unit is responsible for managing its procurement process, including supplier selection, contract negotiations, and purchasing. This approach provides flexibility and allows the local teams to address specific needs quickly. 

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Example: A retail company with multiple stores across various regions may use a local procurement model to enable store managers to make purchasing decisions based on the specific needs and demands of their locations.  

Benefits of Local Procurement Model

The local procurement model offers autonomy to individual departments, allowing them to make decisions best suited to their specific needs.  

‍Quick decision-making: Since all decisions are made at the local level, departments can respond quickly to market changes or urgent needs without waiting for central approval. 

‍Tailored purchasing: Local teams can build relationships with regional suppliers and make purchases that are more aligned with their specific local needs and circumstances. 

‍Increased flexibility: Local procurement allows departments to adjust their purchasing strategies according to their immediate requirements, making the model ideal for businesses with varying regional needs. 

Centralized Procurement Model

The centralized procurement model consolidates all procurement activities and decision-making under a single, central team or department. This team manages all aspects of the procurement process, including supplier negotiations, contract management, and purchasing decisions. Centralized procurement offers greater control and consistency across the organization, ensuring that all purchases align with the company's overall objectives. 

Example: A global manufacturing company may use a centralized procurement model to standardize supplier contracts. This ensures consistent pricing and quality across all its factories and locations.

Benefits of Centralized Procurement Model:

Centralized procurement centralizes decision-making, offering significant advantages in terms of control and cost efficiency. 

Cost savings: By consolidating orders and purchasing in bulk, the central procurement team can negotiate better prices and secure volume discounts, resulting in significant cost savings. 

Consistency and standardization: Centralized procurement ensures that the company follows uniform processes, standards, and pricing across all business units, reducing discrepancies and improving overall efficiency.

Enhanced control: A central procurement team provides better oversight and ensures that all purchases are aligned with company policies, reducing the risk of unauthorized spending and improving compliance. 

Network Procurement Model

The network procurement model involves coordinating procurement activities across various local units, but decision-making is not fully independent. Instead, procurement is managed and controlled by different "nodes" in the network, which can be individual departments or regional offices. These nodes work together to ensure that procurement aligns with local and overall organizational needs. 

Example: A multinational tech company may use a network procurement model, where regional offices coordinate their purchasing efforts but still adhere to some central guidelines and standards set by the headquarters. 

Benefits of Network Procurement Model

The network procurement model fosters collaboration and shared decision-making across various units, enhancing both flexibility and coordination. 

Collaborative decision-making: The model encourages collaboration between business units, ensuring that procurement decisions reflect both local and global needs. 

Flexibility with oversight: While local teams have some control over procurement, the network model ensures that there is still a level of oversight and collaboration across units, preventing the fragmentation of purchasing efforts. 

Improved supplier relationships: With multiple units coordinating their activities, the organization can build stronger relationships with suppliers and negotiate better deals collectively. 

Federal Procurement Model

The federal procurement model is a hybrid approach that combines elements of both local and centralized models. In this model, certain procurement categories and decisions are handled locally, while others are controlled centrally. The level of autonomy at the local level may vary,  depending on the organization’s structure and needs. This model often operates under central governance, with local autonomy being either mandated or mutually agreed upon. 

Example: A government agency may use the federal procurement model, where high-value contracts are managed centrally, while smaller purchases are handled by individual departments or regional offices.

Benefits of Federal Procurement Model

The federal procurement model combines the strengths of both centralized and local procurement, offering flexibility with centralized oversight. 

Balanced control: The federal model provides a balance between central oversight and local flexibility, allowing organizations to leverage the advantages of both centralized and decentralized procurement. 

Tailored procurement strategies: Local units can handle smaller, routine purchases that require a more tailored approach, while the central team manages larger contracts that require greater oversight. 

Cost control and flexibility: By centralizing large-scale purchasing decisions and allowing local units to manage smaller transactions, the organization can achieve cost savings while maintaining flexibility at the local level.

Centrally-Led Network Procurement Model

The centrally-led network procurement model is a coordinated approach where procurement activities are managed across all local units, but control remains centralized. The central procurement team serves as the primary node in the network, overseeing all procurement activities and ensuring consistency. Local units coordinate with the central team to execute purchases while adhering to central policies and standards.  

Example: A multinational corporation with many product lines may adopt the centrally-led network model to ensure that procurement decisions are aligned across various regions, while still allowing for regional differences in supplier selection and purchasing processes. 

Benefits of Central-Led Network Procurement Model

The centrally-led network model integrates centralized oversight with local coordination, ensuring efficiency and alignment across the organization. 

Consistent control: The central team ensures that procurement activities across all units are aligned with overall organizational goals, reducing the risk of misaligned purchasing efforts. 

Improved coordination: Local units collaborate with the central team to ensure that procurement processes are efficient and compliant with the company policies. 

Streamlined processes: The centrally led model allows the organization to streamline its procurement operations by combining local flexibility with central oversight, ensuring that all purchasing activities are efficient and cost-effective.  

Factors to Consider When Selecting a Procurement Model

Selecting the right procurement model involves evaluating business size, industry needs,  compliance, and technology. The model you choose will impact cost control, supplier relationships, and overall efficiency. The right procurement model optimizes purchasing processes and aligns well with organizational goals.

Here are the key factors to consider when choosing a procurement model:

Business Size and Structure

The size and structure of your organization will greatly influence your choice of procurement model. For example, large corporations with multiple locations might benefit from centralized procurement, whereas smaller businesses may need a decentralized approach for better agility and flexibility.

Industry-Specific Needs 

Different industries have unique procurement requirements. For example, manufacturing companies will need volume purchasing and service-oriented businesses will focus on supplier relationships. Make sure that the procurement model you choose supports the specific needs of your industry. 

Compliance and Regulatory Requirements 

Organizations operating in highly regulated industries like healthcare, finance, or defense, must adhere to strict regulatory standards. Choosing a procurement model that emphasizes compliance and provides strong audit trails is essential for avoiding legal and financial penalties. 

Supplier Relationships 

Building strong supplier relationships can lead to better pricing, improved quality, and more reliable service. While centralized procurement may help in leveraging long-term contracts with key suppliers, decentralized models foster better relationships with local vendors. 

Technology and Automation

As procurement processes become increasingly digital, the role of technology is critical. E-procurement systems and procurement software offer real-time tracking, automation, and analytics to enhance overall procurement efficiency. Companies looking to modernize their procurement should consider models that integrate with technology for better process management. 

Cost Control and Savings 

Procurement is a crucial area where organizations can achieve significant cost savings. Centralized procurement often results in bulk purchasing discounts, whereas decentralized models help in cost control by tailoring purchasing to local needs. 

Conclusion

Choosing the right procurement model is a strategic decision. It can drive efficiency, improve supplier relationships, and contribute to long-term cost savings. Choose the right model based on your business size, industry needs, compliance, and technology requirements. By carefully evaluating these factors, you can implement a procurement model that aligns with your overall objectives and maximize the value of your procurements. 

Frequently Asked Questions on the Right Procurement Model

What are the benefits of using a centralized procurement model?

Centralized procurement offers several advantages, such as cost savings from bulk purchasing, 

standardization across departments, and improved compliance. By centralizing procurement activities,  organizations can streamline processes, achieve better supplier relationships, and ensure that all purchases align with corporate objectives. 

How can procurement be automated?

Procurement automation can be achieved through e-procurement platforms that automate tasks like purchase orders, invoice matching, and approval workflows. These systems offer real-time visibility, reduce manual errors, and improve overall efficiency by streamlining processes and ensuring compliance with organizational policies. 

What factors should businesses consider when selecting a procurement model?

Businesses should consider factors such as organizational size, industry-specific requirements,

regulatory compliance, supplier relationships, and the role of technology.  These considerations help ensure that the chosen procurement model supports the company's operational efficiency, cost control, and compliance needs. 

How often should a company review its procurement model?

A company should review its procurement model regularly. They should do this at least once a year or whenever there are significant changes in the business environment or internal operations. This ensures that the procurement model remains aligned with the organization’s strategic objectives and adapts well to evolving market conditions. 

What challenges arise when dealing with hybrid procurement models?

Hybrid procurement models present challenges such as maintaining clear communication between central and decentralized teams. This is important to ensure consistency in purchasing decisions, and managing multiple supplier relationships. However, with proper management and clear policies, these challenges can be mitigated to ensure smooth procurement operations.

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