Transitioning from Decentralized to Centralized Procurement: How to Make It Work

Procurement Executives and other C-levels across industries are familiar with the allure of centralized procurement. The promise of cost savings and streamlined processes can be highly appealing, especially when compared to the perceived “chaos” of decentralized purchasing.

However, many companies inherit decentralized structures, often through acquisitions or expansion, leaving them to seek the right moment to initiate change and streamline operations. But in practice, the shift to centralization can be a tricky endeavor, full of resistance and unforeseen pitfalls.

At Loidold & Partners we’ve worked with numerous organizations navigating this transition, and we’ve seen firsthand that while the rewards are clear, the journey isn’t always smooth sailing. To increase the odds of success, the following strategies are essential, as examples show.

Why Centralize?

The benefits of centralized procurement speak for themselves: It is not only bulk purchasing power and streamlined processes. A centralized structure is often perceived as the only way to generate enough insight into the own supplier base, to see clear enough for making all kinds of strategic decisions, that can influence the whole corporate strategy. We hear this topic often also in the context of company expansion.

When done right, centralization not only improves the bottom line but also enhances supplier relationships through consolidated negotiations, and allows to grow strategic alliances, formal and informal.

For instance, Anglo American, a global mining company, successfully transitioned to a centralized model, saving close to $1 billion annually . Their strategy? Strict leverage of global commodities, to simply negotiate better terms with suppliers, while still allowing individual business units to implement these strategies locally. By setting clear governance and fostering buy-in from local teams, Anglo American maintained flexibility while achieving significant savings.

However, as much as success stories like Anglo American's exist, there are equally cautionary tales of what happens when centralization is approached too hastily, or without proper change management.

Common Pitfalls

Consider the case of a European manufacturing company that tried to implement central procurement without securing sufficient executive backing . Local procurement teams, accustomed to autonomy, rebelled against the new centralized system. The absence of clear communication and (subjective) incentives left these teams feeling disenfranchised. As a result, instead of reducing costs, the company saw them increase. Due to worse communication, the supplier base became even more fractioned and the total spending even increased.

As strived, decentralized procurement models are usually inherited through company acquisitions and expansions. These complexities make it even more important to communicate the need for change.

The Key to Success: Backing by Senior Leadership

The first ingredient for a successful transition is strong leadership support. The CEO, CPO and the board must align on the vision and communicate it consistently across the organization. While the benefits of this change must be "advertised", it must be crystal-clear that this change is gonna happen. The classical models of change management apply .

Senior leadership must also (mentally) prepare for hiccups. After all, no transition is flawless, and there will be moments when things don’t go as planned, this is why the simple clarity is key, in communication and backing.

Talent is Key: Reviews Are Critical

A Talent Review is essential before embarking on a centralization journey, especially when a decentralized structure has been inherited. This review ensures that you’re working from a meritocratic foundation—a common ground on which all stakeholders can agree. Establishing this meritocracy paves the way for easier adoption of the changes that lie ahead. It is not only a side-effect that it shows you which exact talent you need to have acquired from the outside.

Does your organization have the right skills to manage large-scale procurement, or will external talent be required? Anglo American recognized this early on, focusing on developing their people rather than replacing them. They used a hands-on, action-based learning approach, allowing their employees to grow with the demands of the new system.

In other cases, the talent gap is too wide. A thorough review can reveal which competencies are lacking, allowing organizations to bring in external hires where needed. This ensures that the transition is built on a foundation of capable talent, not just wishful thinking. A meritocratic approach here creates a clear, unbiased path for talent identification and recruitment, which is essential for long-term success.

We experienced this some time ago with the example of a German industrial and technology group. Clear definition of the necessary talent and its transparent communication led to positive cooperation with the employee representatives. It also made it possible to realistically find the best talents on the market, who could also help in the right places.

Summary: Play it Smart - Manage Resistance with Strategic Engagement

Resistance to centralization is inevitable. Local teams often feel that they are losing control, which can lead to sabotage if not managed carefully. In the Anglo American example, they engaged their teams early in the process, allowing them to contribute and offer feedback. This approach diffused resistance and allowed for smoother adoption of centralized processes.

Contrast this with our European manufacturer, where a lack of engagement and communication led to failure. When local teams are not involved, they become defensive, leading to fragmented implementation and a collapse of the centralization effort.

?Curious about how centralization can benefit your organization, or in need to discuss your leadership decisions ahead? Contact us at Loidold & Partners!

About the article series: The Executive Advisor - Leadership Solutions Series, is a newsletter from Loidold & Partners. This series will deliver practical insights and solutions on leadership challenges, drawing from real-world examples and success stories we've encountered with our clients. Each article will tackle "moving topics" in leadership and management, offering actionable strategies to help businesses navigate their most pressing issues.

About the author: Matthias Loidold is an Executive Search & Leadership Advisory Consultant for 15 years. He is Managing Director and co-founder of Loidold & Partners, a leading boutique consulting firm with clients across the globe. His primary fields of activity are Executive Search, Leadership Advisory and Team Forming & Coaching.

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