PURCHASING STRUCTURE AND DESIGN Organization structure and control systems used in a firm and adopted for functions

ns or groups of activities within the firm depend on the external environment in which the firm operates. Burns and Stalker identified two types of organization structures: Mechanistic structure authority is centralized at the summit of the managerial hierarchy and vertical authority is used to control material and human resources. They operate effectively in stable environment. Organic structure authority is decentralized, employees are empowered to respond effectively to the unexpected and departments are encouraged to share information and other resources. They operate effectively in conditions of uncertainty and turbulence. Major changes in purchasing structures are beyond the control of the purchasing function.

BUSINESS ENVIRONMENTAL FACTORS AND PURCHASING STRUCTURES Five factors that affect the business environment include: 1. Downsizing 2. E-commerce 3. Global sourcing 4. Partnering 5. Outsourcing Downsizing The aim of downsizing is to create leaner and more responsive organizations as a result of the planned elimination of positions and jobs. It affects purchasing structures in such ways as fewer staff, flatter structure redesigning jobs, merging activities, empowering lower level employees, forming self-managed work teams and changing performance criteria. Downsizing involves elimination of non-value adding activities, reduction in overhead costs, introduction of labour saving technology, global competition and recession. E Commerce Facilitates communication between suppliers and customers and makes possible streamlining of purchasing operational and management processes. In this regard, integrated transaction processing, electronic data interchange (EDI), real time systems online decision support replace paper-based systems, bureaucratic authorization and multilayered decision structures. E-commerce supports networking and reduces non-value adding activities; impacts payment processes and requires fewer accounting staff. Global Sourcing When contract values are high or relationships long-term, sourcing may be decentralized by employing an agent or having an office in the suppliers country. Global sourcing often involves the coordination of a complicated network of actors and relationships relating to the exchange of products, expertise, technology and finance across boundaries. Partnering Partnership arrangements involve a great deal of interfirm interaction between many functional areas. Coordination is required to keep the relationship operating with minimum friction. Outsourcing Used to effect downsizing. Outsourcing has led to replacement of vertical, self-sufficient enterprises with horizontal organizations. The result is fewer employees and elimination of departments or functions providing support services. Other consequences of outsourcing include: Transfer of non-core manufacturing activities to specialists contract manufacturing. Transfer of non-service activities such as catering or training to specialists providers. Removal from corporate balance sheets of manufacturing assets such as tool and equipment. Reduced payroll by eliminating non-core employees.

 Ability to combine the power of several highly specialized contributions into a single, flexible, valueadding entity. Opportunity for purchasing to create better leverage of procured parts, products and services. Purchasing as a functional department has the following characteristics: Work is divided into functions, then departments, then tasks. The primary building block of performance is the individual and his or her job. The chain of command goes up the functional ladder. The managers job is to match the right people to the right tasks and then measure, evaluate and reward their performance (vertical or mechanistic organizations, as stated earlier, are associated with environmental stability) The guiding principle of functional departmentalization is that all people contributing to the same functional are need to be physically located together in departments. Advantages Of Functional Departments Availability of specialists personnel to the whole organization. High morale among departmental staff arising from the fact that people appear to enjoy working with their own kind. Ease of supervision and control. Simplification of training Operational efficiency. Disadvantages of Functional Departments Ofstroff and Smith point out that, while the crucial advantage of vertical organizations is functional excellence, their central defect is coordination across functions, departments and tasks. This lack of integration results in silo mindsets. Spanyi has identified the following characteristics of a traditional functional thinker. More concerned about reporting relationships and authority than on the flow of work to create value for customers. Closely guards his or her big picture view Takes pride in his or her grasp of department-specific issues and solutions and pleads ignorance of other areas of knowledge. Send subordinates to cross-group meetings with orders to protect our interests. Clearly prefers one-on-one problem-solving sessions Focuses mainly on actual-to-budget metrics to assess progress. Insists that even minor cross-departmental issues be elevated for his or her review. When confronted with problems not directly within his or her control, the reply is, not my problem. Perceives goal-setting to be a top-down, unidirectional activity. Is visibly uncomfortable in meetings with a broad cross-departmental representation. The disadvantages of silo mindsets associated with departmentalization include:

Coordination among related functional areas is more difficult, hence the move to supply chain and crossfunctional approaches. Departmentalization can foster a parochial emphasis on functional objectives with a minimum appreciation of or concern for overall organizational goals Employees identification with a specialist group or function can make it difficult to implement change. Training of managers with broad perspectives and wide understanding of business may be inhibited. Interdepartmental rivalry and conflict may be encouraged. Where purchasing staff lack technical knowledge, time is often saved if design or user departments deal directly with suppliers. User departments will resort to informal procedures if formal purchasing procedures are too slow, unreliable or otherwise unsatisfactory.

Departmentalization tends to look inwards whereas, in todays competitive environment, the emphasis is on the customers and how the enterprise can respond quickly to their requirements. Departmentalization can result in many activities that involve expenditure and time without adding value.

Silo mindsets are incompatible with turbulent environments, lean and agile philosophies, complicated, highly interdependent technologies and the communication and information-sharing possibilities of IT, all of which require organic structures and horizontal-type organizations. HORIZONTAL ORGANIZATIONS Are not completely flat but have fewer layers than vertical organizations. Horizontal Organizations Principles and Characteristics

Organize around the process not the task. Flatten hierarchy by minimizing the subdivision of work flows and non-value adding activities. Assign ownership of processes and process performance. Link performance objectives and evaluation to customer satisfaction. Make teams, not individuals, the principal building blocks of the organisations performance and design. Combine managerial and non-managerial activities as often as possible. Treat multiple competences as the rule, not the exception. Inform and train people on a just-in-time to perform basis, not on a need to know basis. Maximize supplier and customer contact. Reward individual skill development and team performance, not just skilled performance.

DIFFERENCES BETWEEN VERTICAL AND HORIZONTAL ORGANIZATIONS. ASPECT Performance objective Focus of effort Business structure Basis of organization Management and managerial activities Expertise Information Supplier/customer contact Rewards nonVERTICAL/FUNCTIONAL ORGANISATION Profitability, shareholder value, financial results Functional specific improvement Linking together business units, functions, departments and tasks Individuals, positions and tasks Separate Emphasize task specialization in the service of functional excellence Used for decision making and managerial control Often at arms length Individual performance, promotion HORIZONTAL/PROCESS ORGANISATION Customer satisfaction Company-wide processes customer satisfaction Linking together work flows linked to

Teams Combined so far as possible- emphasis on empowerment Emphasize the importance of multiple competences Provided directly to users on a just-intime basis. Encouraged as a means of ascertaining customers; needs, encouraging improvement and participation Wider roles within the team and core processes

Horizontal organizations are concerned with core processes and teams both of which have implications for purchasing structures. Core Processes

Kaplan and Murdoch define a core process as: A set of interrelated activities, decisions and informational material flows which together determine the competitive success of the company. Core processes have the following important characteristics. An enterprise will generally have no more than three or four core processes that are critical to the achievement of its strategic objectives, core competences and core products. Each core process is comprised of a number of key activities. With core processes work flows, decision making organization and information systems are redesigned in a parallel, integrated fashion rather than sequentially or independently. Core processes therefore cut across the functional, geographic and even company boundaries that apply in a typical value chain or business framework which views a company as a sequence of functional activities each pursuing its own frequently conflicting objectives. Core processes may extend beyond organizational boundaries. This occurs when new product innovation involves suppliers and, possibly, suppliers suppliers. TEAMS Teams are groups of people working together to achieve a common objective, such as customer satisfaction. Teams are best suited to: Integrate tasks Integrate information Maximize competence Manage performance Manage resources Promote employee satisfaction and reduce stress Implement quality management and improvement The team concept also has implications for purchasing structures. If the purchasing department is headed by a team leader, he/she is likely to have the following qualities: vision, innovation and adaptability, which will transform him into a purchasing strategist. CROSS-FUNCTIONAL PURCHASING Definition Cross-functional teams are groups of individuals from various organizational functions who are brought together for achieving clear, worthwhile and compelling goals that could not be reached without a team. Teaming leverages organizational resources while utilizing the expertise of team members. Purchasers typically participate in teams dealing with sourcing, commodities, quality, and new product/service development. Reasons for Formation of Cross-Functional Teams The involvement of purchasing in multiskilled teams drawn from several functions is attributable to at least six factors: The involvement of purchasing in strategic procurement decisions. The concept of the supply chain. Which emphasizes the need to deal with the work flow in an integrated way by means of materials management and logistics approaches Teams may make better use of the vastly increased information availability and ability to communicate effectively provided by IT and ICT The development of such approaches as ERP, MRP and JIT, together with single and partnership sourcing and outsourcing. The recognition that, because of such developments as global purchasing, more complicated price and cost analyses, the need to integrate purchasing processes with those of manufacturing and the enhanced importance of quality, purchasing often needs expert advice and support in decision making. The recognition based on research findings, that Teams out-perform individuals acting alone or in a large organization groupings, especially when performance requires multiskills judgments and experience.

The advantages of cross-functional teams. Parker has listed six important competitive advantages that accrue to organizations that successfully implement cross-functional teams: Speed reduction in the time it takes to get things done, especially the product development process. Complexity improvement in the organizations ability to solve complicated problems Customer focusing the organizations resources on satisfying the customers needs. Creativity by bringing together people with a variety of experiences and backgrounds, cross-functional teams increase the creative capacity of the organization. Organizational learning members of cross-functional teams are more easily able to develop new technical//job skills, learn more about other disciplines and how to work with people who have different team player styles and cultural backgrounds. Single point of contact the promotion of more effective cross-functional teamwork by identifying one place to go for information and decisions about a project or customer. An increased understanding between functions of each others problems. Production and quality assurance may develop an enhanced appreciation of the difficulties of dealing with suppliers and purchasing an awareness of the problems faced by production and design. Some Problems of Cross-Functional Teams A number of problems have been reported in relation to cross-functional teams. 1. The depth of knowledge within functions has decreased because people are spending less time within their own functions. 2. Organizational learning across products has also dropped as people rapidly rotate through positions. 3. Standardization across products has suffered because product teams have become autonomous. 4. In organizations that combine functional and project-based structures, engineers are often torn between the orders of their functional bosses on the one hand and the demands of project leaders on the other. Other problems of cross-functional teams include: The need for a substantial investment in the training and retraining of team leaders in interpersonal skills and of team members in adopting a cross-functional, rather than a silo, orientation. Cross-functional teams require members to attend numerous meetings. Because of their expertise, some members are required to participate in several teams concurrently with a resultant competition for priorities. Note: while cross-functional sourcing may share responsibility for decision making, purchasing is not absolved from the duty of ensuring that the team has full information on potential suppliers and products and services that provide maximum value for money spent. CROSS-ORGANIZATIONAL TEAMS These are developments on cross-functional teams, involving the inclusion of suppliers or customers in teams. Such involvement can give organizations a greater understanding of common problems. Trent and Monczka state that on average, teams that include qualified suppliers as members demonstrate greater overall performance. Greater satisfaction concerning the quality of information exchange between the team and its key suppliers A greater reliance on suppliers to support directly the teams goals and objectives Greater supply base management effectiveness and Greater supplier contribution in a number of critical areas; one significant development is that of the Guest Engineer, in which a member of the suppliers staff is permanently located in the works of the purchaser. Divisional Purchasing Structure Divisionalisation is usually the pattern for large, highly diversified organizations that, often, operate in several countries or continents. Once established, each division is organized in a functional form with its own hierarchies

and is self-contained and autonomous in terms of day to day operations. Divisionalised organizations exhibit superior profitability compared to centralized ones. Centralised Purchasing This implies that purchases are made either from company headquarters or some regional or divisional level. The advantages for concentrating purchasing in a strong central department responsible for coordinating and control of procurement activities. Economies of scale Centralized purchasing enables an organization to leverage its purchasing power to the best effect as: Forecasts can be prepared of the total quantities of items likely to be required by the whole organization for a specified period Such consolidation of quantities can form the basis for negotiating quantity discounts, rebates or learning curve reductions Suppliers dealing with a centralized purchasing department have an incentive to compete for preferred suppliers status or the whole or a substantial proportion of the undertakings requirements. Suppliers may be able to reduce prices by spreading overheads over longer production runs. The supplier base may be reduced by the award of preferred suppliers status to one or two providers. Centralization permits the employment of purchasing professional in a way that is not possible with diversified purchasing and who can become expert in the procurement of special classes of materials or products following market trends and the development of reliable and economic supply sources or of import and export procedures where there is substantial global sourcing. Coordination of activity Centralized purchasing tends to have a greater strategic focus than divisionalised purchasing due to proximity to major organizational decision makers. Uniform policies can be adopted, such as single sourcing. Competitive or maverick buying between functions is eliminated. DECENTRALISATION Traditionally, decentralization referred to purchasing done by plants or decisions. However, increasingly purchasing is delegated to actual users. Advantages and Disadvantages of Decentralised Purchasing ADVANTAGES Closer to users and better understanding of local needs Response time to divisional or plant needs may be rapid and of higher quality Possibly closer relationships with suppliers Local suppliers and consequent lower transportation costs Where plants are profit centres the view is expressed that if purchasing costs are a high percentage of total costs then each profit centre should make its own decisions regarding purchasing and suppliers Geographically, cultural, political, environmental, social, language and currency appropriateness DISADVANTAGES Reduced leverage that exists with consolidation of purchasers Focus on local rather than corporate and operational rather than strategic considerations Purchasing will tend to report a lower organizational level Limited expertise in requirements and few opportunities for cross-functional collaboration Possibly lack of standardization. Restricted career opportunities for local purchasing staff. Cost of purchasing relatively high

EVOLVING PURCHASING STRUCTURES Organizations are moving away from defined departments and issues such as centralization and decentralization, to whom purchasing should report, and the title of the most senior purchasing officer are of less consequence now than in the past: Suppliers are accessing the firm through links other than just the purchasing department. The firm is increasingly gaining entry into customer operations through channels other than sales and marketing. Cavinato identifies five other models of purchasing organization that have evolved and have significant implications both for purchasing and logistics. 1. The centralized coordinator model This is when decentralized purchasing reports to a plant or divisional general managers with a centralized coordinating purchasing group at corporate headquarters. The central group takes a macro view of purchasing and logistics issues concerning the entire organization and provides services and information to the individuals plants. This model has the advantage of scope and authority in dealing with suppliers without the full overhead cost often associated with fully centralized groups. 2. The area planner concept model A central procurement group handles the issues of vendor sourcing, selection and performance monitoring while users handle the processing of requisitions and day-to-day orders for inbound supplies. The area planner approach thus removes procurement from the transaction cycle. 3. The supply manager concept model One person has responsibility for the flow of a product or a few products from the supplier input, through production to delivery to the ultimate customer. Performance is based on a contribution margin computed from selling price less costs accumulated up to the packing end of the production line. A major problem with this arrangement is the difficulty of recruiting people with the wide range of skills required for each product. 4. Commodity teams This is a supply chain rather than primarily purchasing model. Logistics pipelines seek to enhance collaboration between purchasers and suppliers. With pipeline models, the supplier is undertaking many of the processes traditionally performed by purchasers. 5. The market segmentation model The market in this model comprises all the orders/contracts that the organization wishes to place. Each item purchased can be categorized according to four variables; Rapidity of technological change associated with the item Total volume of spend Number of orders placed annually Number of suppliers. The basis of such segmentation, interaction between purchasing and its internal customers can be related to the following three scenarios: Where the total value of expenditure is low, the internal customer should do the buying and the purchasing function should provide training in areas such as vendor appraisal, the legal significance of contract terms and conditions, tender/quotation evaluation, negotiation, contracts administration and dispute resolution. This arrangement has the advantages of eliminating requisitions, enhanced speeds and reduced costs. Where the total value of expenditure is high and there is also a high rate of technological change, internal customers/users should collaborate when procuring the organizations requirements. In this scenario, purchasing will again provide training in the areas listed above. When the total value of expenditure is high but the rate of technological change is low, procurement should be the responsibility of purchasing, which offers its internal customers added value, service and expertise. All the above five models have important structural and organizational implications for purchasing. Often they will change the responsibilities and reduce the size of the purchasing function and expedite the change from vertical to horizontal structures. In extreme cases, purchasing may become a virtual activity.