Purchasing Organization

The structure of the purchasing department is especially important in external and internal networks. The organizational model must facilitate activities in different strategic levels as well as cope with changes in the external environment. By adjusting formalization and centralization levels, the organization can be positioned to best support the organization.

However, no universal solution exists, as the right structure is highly company specific and dynamic over time. Therefore, this is one of the major challenges that Purchasing Management confronts within business networks.

The requirements for purchasing organization

Every company can be identified by its goal and the policy for achieving this goal. The policy devises an organizational setup to facilitate the activities stated in the policy. Therefore every function that performs those activities runs under a specific organizational structure. Those structural arrangements influence the performance of the individuals in the organization as that is what determines the duties, responsibilities, and relations of the function. Thus, in business networks, interactions and processes among the actors are conditioned by the way companies, business units and departments are organized.

In order to maximize performance, a company needs to adjust its structure and management processes to the changes in the outside competitive environment and also to facilitate the necessary cooperation between various parts within the company. Therefore it has to meet both external as well as internal communication requirements. As purchasing is a part of a company that lies in the meeting point of those environments, the issue of structural design becomes especially relevant here.

The starting point for deciding upon appropriate organizational setup is to identify the requirements set for purchasing function by business strategy, external environment, and other factors. In addition, according to contingency theory, it is crucial to recognize ongoing trends and changes in supply processes in order to increase the coherence with the current business environment as well as prepare the organization for future.

Functions of purchasing management  

Purchasing needs to facilitate activities of three different characters - operational, tactical, and strategic. According to Gadde, et al. (2001), the purchasing profession today includes four sub-functions over those different levels: ordering, negotiating, sourcing, and supply chain management in terms of synchronizing material flows.

• Ordering includes mainly the administrative side of purchasing in the form of expediting orders. This is a purely operational activity.
• Negotiating deals with selecting the economically most feasible supplier(s) from the list of approved vendors; while
• Sourcing involves the purchasing function in procurement decisions prior to the decision of approved list. Purchasing is considered strategic from that point.
• Supply chain management broadens the scope of purchasing by taking responsibility for synchronizing inbound material flows with the rest of company's operations.

Quayle (2006) argues that those sub-functions should not be isolated from one another. For example, it might increase efficiency through specialization to allocate expediting and strategic issues to separate persons but also, having to do the operational work can lead the buyer to select more reliable suppliers. For similar reason of better decisions, it is common that purchasing strategic matters and sales operations are controlled by the same person. It allows better alignment of material and information flows throughout the entire organization. Further discussion on work allocation in purchasing structure will be addressed in later stages of this chapter.

Trends of purchasing management

It is also important to consider the dynamics of supply function when designing the structure. The trends detected in purchasing characteristics today have been previously described in Definition and trends within Purchasing Management. Conclusively they were:

• increasing strategic role of purchasing in corporate policy; and thus X shift towards more centralized control X decreasing number of suppliers X increasing number of long term contracts
• buying groups organized around end items rather than commodities

Therefore these are the ongoing changes and activities (the four sub-functions) that purchasing organization has to facilitate in modern business environment. Around that core the rest of the structure can be built.

Purchasing organization structure

Having identified the goals and requirements for the organization, the appropriate structure for the organization can be considered. Designing an organization refers to:

“the process of assessing and selecting the structure and formal system of communication, division of labor, coordination, control, authority and responsibility required to achieve an organization’s goals”. 

As goals are different, the actual balance between those factors is highly dependent on the specific company and its surrounding environment. However, despite of numerous possible solutions, only a discrete subset of different organizational configurations has been found to be adopted in practice.

The main attributes differentiating organization structures are considered to be centralization and formalization. In our case of purchasing organization, the first one implies whether the procurement activities of different business units of a company are handled by one central function (centralized) or is every single location/site responsible for its own purchasing decisions (decentralized).

Formalization of the organization expresses the extent to which the procedures, instructions, communication patterns, etc are documented in the company and how are they followed. “It is the existence and prevalence of written documentation”. Those two attributes are commonly chosen for adjustment for reasons that they are managerially easily applicable as well as they involve both the formal and informal structure of the company.

Centralization of purchasing management

A centralized purchasing organization can be found applicable in case of similarities between multiple company locations e.g. in used technology, market conditions, purchasing problems, item demand, etc. It is more common to occur in companies offering the same product or service in multiple locations. (Quayle, 2006) In addition, centralized control is found to be prevailing configuration also for single site and relatively small size company where there are no feasible criteria for division of control and thus decentralization would provide no benefits.

However, decentralized purchasing solution is seen beneficial when substantial differences exist between various sites of one company. In such case centralized control would be inefficient as each unit operates in its own area. Table 1 provides comparative overview of benefits and downsides of both described solutions.

Table 1 - Advantages and disadvantages of different centralization configurations

It can be noted that total centralization and total decentralization are both extreme values of centralization continuum. The majority of companies lie somewhere between these two extremes to utilise advantages of both configurations . In such hybrid structures responsibilities and control between head office and local organization are divided with accordance to business environment.

Even though the exact division is highly individual among companies, the tasks often allocated to head office can include:

• development of purchasing strategies, policies and standards
• negotiations for common, widely used items
• stock management between sites
• purchase of plant equipment and other strategic items
• training
• legal matters
• research and information service

The responsibility for local purchasing organizations would thus be:

• placing orders for common items
• negotiating and contracting locally used items

Formalization in purchasing organizations

The issue of formalization in purchasing organizations is not much addressed in prevailing literature which implies its relatively small effect on supply performance of companies. However, its combinations with centralization decision help to describe four essentially different organization types which are also suitable for defining different purchasing function's characteristics. Those include machine bureaucracy-, entrepreneurial-, professional, and adhocracy types.

Figure 3 - Different organizational configurations. Based on Mintzberg (1989)

Machine bureaucracy type organizations contain both high levels of formality as well as centralization. This results in an organisation with many formal rules, regulations, and controls where a large part of communication existing in written form. To be able to control that regulations are followed, the decision-making is centralized with very clear and hierarchical division of power . Large multisite manufacturing firms that drive for efficiency can be good representatives of such supply organization type.

In the entrepreneurial organization little of its activities are formalized. Control as well as decisionmaking is agglomerated to the manager which leaves little or no reasons why to formalize the operational communication too much . An example of purchasing organization like this can be single site manufacturing company with centralized control and relatively simple procedures. The configuration can also be applied by more complex companies with a small number of central suppliers where local units are responsible only for call-offs from those contracts which require no extensive formalities.

Professional organization type contains high level of formalization with the purpose of facilitating complex procedures that need certain level of formalized control. However, as the formalization is designed to achieve the desired outcome from its members, all professionals share decision-making authority in this configuration. In general, it is considered to be suitable setting for hospitals and universities.

In our case of purchasing organization, it fits to a development intense multi site MTO type of company with heterogeneous supply demand where contracts are done autonomously at different locations due to different or changing characters of the product. Also, such configuration is suitable to describe the head office layer of centralized or hybrid supply organization - corporate buyers with high specialization and autonomous decision-making power .

Adhocracy structure is low in formalization and with decentralized decision-making. As all previous types, there are environments where such design can be considered an appropriate solution. It facilitates fast response and flexibility in the processes. However, it is rather difficult state to control due to tendency for anarchy and poor coordination. It might be suitable for R&D intense development organizations where purchasing activities can be complex and unconventional.

This clustering allows general positioning of the organization. As also hinted in the description of professional organization type, different types can be exist in different levels of centralized or hybrid purchase organizations i.e. head office and local units. Such classification might not be particularly useful to know for buying company itself as more important is the actual alignment with the rest of organization and not which cluster it falls in. On the other hand, it might prove to be great value for selling companies where such grouping can give useful insight how decision-making and power is divided in purchasing function and thus allows “to push the right buttons” by focusing sales effort to right positions .

There is no checklist available concerning decisions for designing most appropriate purchasing organization i.e. in which square to be on that graph. The solution is highly context dependent and the context is highly volatile which leads to continuous need to monitor and configure the organizational structure.

Dynamics of organizational structure

An organizational structure must be able to change in order to cope with outside pressures. However, there are several views on the dynamics of organizational structure. It is suggested as being progressive with different organizational types evolving over time. Also cyclical and oscillating patterns between discrete numbers of configurations have been described.

But the bottom line of all of those views is that managers reform the organization in order to enhance the performance and despite the fact whether such configuration has been used before. According to Johnson, et al. (2001) and Wood (2005), it is not proven that CPOs restructure or design the organization driven by and based on an analysis of available alternative. Such reforms are initiated by pressures created by changes in external environment which influence corporate strategy. That in turn necessitates adjustments in corporate structure which inevitably brings along changes in supply organization to maintain coherence throughout the entire company.

Such hierarchy of events leads to two important considerations regarding the design of purchase organization. First, as adjustments to organizational issues are done with the purpose of improving cost structure, even when changing back to setting that has been previously used. That means no perfect organizational design exists but the usefulness is determined by external conditions. Second, as changes are not triggered by managers, but rather external pressures, internal problems, or combination of the two, there is a certain lifetime for one organizational structure (Johnson, et al., 2001). It is just a matter of time before the current configuration is outdated again.

Coming back to the model of four organization types, those two conclusions imply that companies are not determined to be in the matching “square” for eternity. The position changes over time. As companies grow, they can, for example, move from entrepreneurial towards machine bureaucracy due to simple increase in people and volumes. By changing strategy or developing supplier relations, companies can become more development centred with professional-type structure or even downgrade to adhocracy type.

Companies can apply several models in different layers of their supply organizations enabling even more directions for a change. The movements in the graph don't necessarily have to cross category borders but also shifts towards certain direction can indicate an important change for the company.

Expressing the ongoing trends of increasing centralization and reducing the number of suppliers in the light of this matrix, the shift to right side of the graph - towards centralization - could probably be detected in all clusters. The change in terms of formality is probably multifold, especially in hybrid structures, and shifts in graph would express various directions depending on business environment making it difficult to detect any clear pattern except for the fact of change itself.

However, it is important to differentiate between the essential drivers behind the shift towards another configuration. As described previously, it can be the result of already changed external factors. In that case, the management of purchasing organization deals with consequences by just trying to avoid further damages with fast reacting. It resembles driving a car through the rear window where upcoming curves on the road are recognized when the ride is already very bumpy.

In our view it would be highly welcomed if the dynamics of the organization could be more controlled in terms timing and planning the change according to future forecasts. In that way minor adjustments in organizational design can keep the processes well on track and can avoid costly restructurings of the entire organization. Despite the seeming lack of research on that topic, the issues seems to come in focus of practitioners as stated by the study of Johnson (2004) that coping and prospering despite and, perhaps, because of change, may be the CPO’s ultimate test. As change management regarding external and internal factors becomes recognized part of Purchasing Management, the improvements towards controlled dynamics may be underway.

Other organizational factors

Once the organization's structural model has been decided, the frame for working conditions and formal communication has been set. It defines the shape and orientation of the function but not what's inside. Therefore the next step in organizational design is “filling” the structure, which also adds few critical decisions to the overall design process.

Previously outlined trends in purchasing practice indicate the increasing strategic role in corporate policy. Along with that comes the need for higher alignment in corporate hierarchy which in turn results in higher reporting level of the CPO. This trend needs to be taken into consideration when designing a structure. Studies by Johnson, et al. (1998) and Johnson, et al. (2004) note that in order to achieve the capabilities of strategic planning and responsibility, an organization must have some kind of centralized control over its processes and prove that purchasing organizations classified as centralized, and also hybrid, have higher rate of participation in major corporate activities than decentralized supply departments. Thus the seemingly external factor of purchasing positioning inside the company correlates to structural design decisions in a very good way - increased centralization facilitates the higher reporting level of a CPO.

The same study indicates another factor which, in terms of organizational structure, might seem irrelevant at first glance - the background and characteristics of the CPO. Managers with higher corporate positions and those with relevant work experience demonstrated wider use of various purchasing techniques, e.g. cross-functional teams, supplier and customer involvement teams, colocation of buyers with other functions. Those methods can significantly determine the actual formal as well as informal communication structure in the purchasing organization along with division of labour and control. Therefore the question how managing positions in purchasing function are staffed must also be considered in the design process.

Among other decisions affecting the way in which a purchasing organization works is the question of division of work. As outlined in the beginning of this chapter, the ongoing trend is formalising buying groups around end items rather than commodities. However, the bottom line is that this division should be done on logical bases, whether it is based on commodities, geographical location, or other factors (Quayle, 2006). As specialization on one category alters the efficiency of the others, the division should be made with considerations to:

• practical and technical feasibility of dividing the line of work;
• sub-tasks should not seriously impact the values of other sub-tasks.

In purchasing organization that can be interpreted as, for example, grouping around end items should be easily supported by the organizational structure. The benefits of such a configuration should overweight the negative impact of changes in commodity and geographical level, i.e. it does not alter functionality of supplying.

Table 2 - Buyer profiles and division of responsibilities

As for the organizational structure, it is difficult to state the correct division. It can vary through different strategic levels of the organization (de Boer, et al., 2003)or be uniform for the entire department. The overall principle is that the solution must provide satisfactory profit and align with corporate values and policy.

The literature has also implied the increasing level of integration of purchasing function to external as well as internal environment, i.e. to suppliers and customers, and other departments of the company, accordingly (Trent, 2004). Common methods of facilitating such interaction are cross-functional teams including various counterparts related to end product, co-location of buyers and other specialists (engineering and manufacturing), supply councils, etc.

The study by Johnson, et al. (1998) also indicates the influence of centralization decisions on the use of those tools. Their conclusion is that in centralized and hybrid structures the implementation of those methods is more common than in decentralized organizations. However, the connection between organizational structure and the tactics of carrying out the tasks exists.

Summary

The idea described in this chapter about organizational configuration of supply function is simple - structural design affects the performance of purchasing to substantial extent and should be paid consideration by decision-makers in the company. It must have a good fit to the rest of the company structure and facilitate the activities necessary for competitive purchasing. More important, the changing character of the “best fit” necessitates the understanding and consideration of ongoing trends in supply function.

However, the solution in this matter is not simple. One can, and should, consider, among other factors, attributes like centralization, work division, or formalization to achieve better alignment with surrounding environment. Nevertheless, as repeatedly stated in the text, there is no uniform configuration or checklist available to download and implement in all situations. The organization must be continuously adjusted in accordance with external forces and corporate policy.

As purchasing has gained strategic value rather recently, the management still seems to be seeing business dynamics through sort of a back window, reacting only when the changes has already occurred and coping with consequences. In terms of organizational design there seems to be a long way to go to “control” the surrounding environment as being able to predict the dynamics, prepare the structure and processes in the organization, and synchronize the changes in organization with changes in external environment.

However, as the studies have revealed the understanding of the importance of change management in business practice and along with increasingly strategic role and closer collaboration with suppliers, we can hope to see improvements in that front in sooner future.