The Impact on Decision Making of Centralisation in a Multinational Manufacturing Company: The Materials Purchasing Function

The Impact on Decision Making of Centralisation in a Multinational Manufacturing Company: The Materials Purchasing Function

Fergal Carton (University of College Cork, Ireland)
Copyright: © 2008 |Pages: 12
DOI: 10.4018/978-1-59904-843-7.ch051
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Abstract

Multinational companies faced with an uncertain world are notorious for centralising control of their far flung empires to the extent that local decision making becomes a matter of managers merely executing orders rather than showing creativity or initiative in solving issues. Control can be best exerted by standardising processes and centralising responsibility for decision making. Enterprise resource planning (ERP) systems are a perfect vehicle for such centralising forces, imposing a common way of doing business across the organisation, and simultaneously providing a head office with centralised control of those practices. On the other hand, these highly integrated systems exacerbate rather than resolve the managers’ information deficit problems. Though providing a high level of granularity of transactional data, they fail to assist managers in controlling business performance to predefined targets. Taking the material purchasing department of a manufacturing multinational as an example, this article studies the impact of ERP-enabled centralisation on day to day decision making of managers both at a local plant and at corporate head office (HQ). Although huge improvements in data integrity at an operational level (inventory, procurement, standardisation of codes, prices, and so forth) have made local cost control much more robust, local managers have sacrificed the ability to investigate these costs. As prices are set centrally by commodity teams, local managers have been disempowered with respect to leveraging purchase price variance (PPV) and quality in their relationships with suppliers. Furthermore, they are asked to implement radical cost saving programmes without disturbing the availability of raw materials for production. From a local point of view, managers do not have a say in the setting of targets, and do not have the tools (or know how) to work with the detailed transactional data in the ERP system to be able to understand cost drivers. HQ, on the other hand, gain in visibility of local costs, and typically make no change to integrate their own planning applications, retaining legacy tools and interfaces. This article examines the apparent imbalance between the price paid by local materials buyers, namely a huge bureaucratic overhead, and the benefit derived by corporate purchasing.

Key Terms in this Chapter

Uncertainty: The variability introduced into business decision making by fluctuations in factors external to, and beyond the control of, the organisation. Generally caused by aspects of customer behaviour, market dynamics, and competitive forces.

Centralisation: The localisation of decision making responsibility to a central location, usually a head office, leaving the local operation with the responsibility for execution.

Granularity: The level of detail recorded regarding business transactions, usually down to the level of individual items of inventory and their value. The aggregation capability is defined by the amount of detail held on each line item.

Latency: Slowness or lack of responsiveness in decision making induced by structural complexity, in this context relating to either organisational, technical, or uncertainty factors.

Enterprise Resource Planning (ERP): A suite of software modules which manage the administration of a firm’s business processes, including inventory and cash transactions related to sales orders, work orders, purchase orders, financial and management accounting.

Material Requirements Planning (MRP): The generic term used to describe the process of decomposing customer demand for finished goods into its stock item requirements, and used to drive procurement and production planning.

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