3.8End-of-Topic Case: Using Sourcing as a Competitive Lever: To CentralizeOr Not?

Laurel Leverage, Director of Purchasing at Regenesis Biotech, stared intently out her office window. It was a crisp Friday afternoon in the middle of February, and Laurel knew it was crunch time. The Sourcing Reconfiguration Task Force, which Laurel led, had completed an arduous 6-month review of ReBio's global sourcing organization. Next week, she would meet with ReBio's Strategic Planning Committee. What would she recommend?

At the review's outset, it was clear that ReBio's decentralized sourcing structure was obsoleteit simply was not lean enough to help ReBio compete in a consolidating industry. Senior management was convinced that centralizing sourcing would deliver much-needed cost reductions. But, centralization would require a radical change in sourcing philosophy and practice. The problem: Everyone knew ReBio's regional purchasing managers were hostile to the idea of centralization. They did not want to risk a loss of influence on key sourcing decisions. Laurel sensed that the task force could not reconfigure sourcing to obtain global efficiencies without losing key members of her global sourcing team.

The Mandate For Change

For as long as Laurel could remember, the pharmaceutical industry had been in a state of flux. Two issues drove the turmoil:

Patent Expiration

R&D Costs

Pharmaceutical companies had long made their profits from just a few blockbuster drugs.1 When patents on a blockbuster drug expired, profits vanished. Low-cost generics siphoned off as much as 90% of sales.2 The sales drop off was so precipitous that patent expiration had become known as the "patent cliff."

Worse, these profits subsidized risky R&D efforts. Nineteen of 20 drugs that reached clinical trial failedand most new drug concepts never made it to trial stage. The low hit rate meant that new blockbusters were hugely expensive. Estimates put the median price tag for a new drug at $1 to $5 billion.3

Responding to the industry's competitive and financial realities, pharmaceutical companies had been on a merger spree since the turn of the millennium.4 The goal: Increase market power and R&D effectiveness. Consolidation had created some massively powerful drug companies, leading critics to label the industry Big Pharma. Consolidation had also ratcheted up the competitive pressure felt by ReBio, causing Laurel some sleepless nights. To survive, ReBio had to free up resources to more aggressively pursue its biotech R&D strategy. Cutting the cost of sourced materials had become Laurel's top priority.

Company Background

Regenesis Biotech, headquartered in Rochester New York, had grown dramatically over the past 15 years. From a small start-up biotech company, ReBio had become a global operation with marketing, production, and R&D facilities around the world. Like other pharmaceutical companies, ReBio had grown organically as well as through its own mergers and acquisitions (M&A). Unlike some rivals, ReBio operated with a "be-a-good-citizen-everywhere" philosophy. For purchasing, this meant, "buy where we sell." As a result, ReBio had maintained autonomous purchasing groups in seven locations in Asia, Europe, Latin America, and the United States.

The Sourcing Reconfiguration Task Force was created with a clear mandatereconfigure ReBio's purchasing organization to obtain efficiencies and support ReBio's competitive strategy. Although she had only joined ReBio two years earlier, Laurel was widely liked and respected among ReBio's senior management. Laurel's clout made her the right person to lead the task force.

Laurel, however, was not altogether pleased with that fact. Like other task force members, she knew that when the C-suite spoke about sourcing efficiencies, they meant "cut costs now." To free up capital and improve ReBio's cost competitiveness, a drastic and painful overhaul was needed. Few managers made friends during such a politically charged transformation.

Task Force Findings

The Task Force's first step was to discern why ReBio had maintained a decentralized purchasing structure over the years. Beyond corporate philosophy, decentralization was an artifact of ReBio's M&A activity. Further, the task force discovered that key influencers liked decentralization. Internal and external customers demanded high levels of responsiveness from purchasing. The key performance metrics had been as follows.

Short fulfillment lead times

Knowledge of local needs and marketplace

Flexibility to meet the individual division's needs

Good relationships with the local supply base

Laurel's team also discovered that purchasers throughout ReBio's decentralized organization took pride in the technical expertise they had developed to meet the needs of the local operations. They also claimed unbeatable rapid-response capability.

Of note, ReBio's purchasing managers were familiar with the cost arguments behind centralization, but they were highly skeptical that greater centralization could really meet ReBio's purchasing needsespecially across global operating divisions. "We're different" were two words the Task Force had heard many times over the past six months. The bottom line: The regional purchasing managers were firmly committed to retaining a decentralized structure.

Given ReBio's regional manager's "discounted" centralization's potential cost savings, the Task Force performed a simple spend analysis on ReBio's Top 20 purchased items (by dollar value) to quantify the benefits. They identified numerous opportunities to reduce administrative duplication and to leverage ReBio's global purchasing volume. A comparison of the different divisions' purchase requirements revealed that almost 60% of all purchased items were common to two or more locations. In close to 20% of the cases, all seven purchasing groups bought the same or an equivalent item.

The Task Force's benchmarking also identified several companies that had recently shifted from decentralized to centralized purchasing with dramatic cost savings. A consulting study commissioned by ReBio revealed that a centralized organization would reduce ReBio's purchasing costs by 7-10%. The study identified five areas where centralization would reduce costs:

Increased buying volume and leverage

Reduced administrative duplication

Standardization of products

Greater supplier cooperation and coordination

Enhanced control over purchase commitments

Based on its analysis, the Task Force concluded that the decentralized structure had become a threat to ReBio's long-term competitiveness. The benefits of centralized purchasing seemed undeniable.

Laurel's Dilemma

However, as the Task Force had begun to develop an implementation plan, it discovered that it would be next to impossible to fully centralize purchasing. Not only did ReBio's purchasing professionals complain vigorously but various internal customers also voiced serious concerns, arguing that the lost flexibility would more than offset the cost savings.

The Task Force found itself in a delicate situationcost savings had to be obtained, but centralization was not politically viable. As the Task Force reexamined key findings, two points stood out.

Everyone agreed that as a company that competed against global powerhouses with lower cost structures, ReBio needed to achieve the cost benefits of centralization.

Advocates for decentralization used responsiveness as the rallying cry to thwart centralization.

The Task Force had begun to look for a way to get the best of both worlds.

A Hybrid Structure

Laurel glanced at her watch. It was getting late. She looked back at the PowerPoint deck she was designing. The Task Force had agreed that a hybrid organization needed to do the following:

facilitate component/commodity standardization

allow aggregation of common requirements

provide divisional managers maximum autonomy

enable the use of the best suppliers worldwide

take transportation and other costs into account

be hassle free; i.e., easy to set up and manage over time

The Task force knew that IT could enable the accurate and timely spend analysis needed to coordinate global spend. But, that was the easy part. It was a pronounced lack of commitment to role realignment that made everyone nervous. If they wanted to, regional managers could easily undermine a hybrid structure. They simply needed to "misplace" key spend information or persuade suppliers to put up "roadblocks" to change.

A Time for PI?

Laurel glanced at her watchagain! It was way past late. Quickly, she tucked her laptop into her satchel. As she walked out the door, she swore, "The business case is obvious. Why the hell don't these buyers see it?" Catching herself before going too negative, she took a deep breath and wondered, "What can we do to get key thought leaders to buy-in? If they commit, we can make a hybrid structure work and bring real savings to ReBio."

Questions

How could you use the steps involved in gathering and analyzing psychological intelligence to help Laurel reduce regional buyers' resistance to a reconfigured sourcing structure?

What would an ideal hybrid sourcing policy look like? How about appropriate performance measures?

1)Is there a theme that you can weave into your presentation to tell a compelling story?

2)Are your assumptions clear?

3)Is your analysis clearly presented? Are the sources for your numbers appropriately identified?

4)Have you provided an implementation roadmapincluding a timeline where appropriate?

5)Does your implementation strategy consider the change process?

6)Are your exhibits clean, creative, and professional? Do they support your theme and your solution?

7)Have you anticipated potential questions and included "extra" information to answer them?

8)Where appropriate, have you covered all of the points on the judge's scoring sheet?