Essay: How the structure within the organization and commodity management are related

1. Commodity group management is a part of strategic sourcing and operates in a structural context
‘Strategic sourcing involves taking a strategic approach to the selection of suppliers’an approach that is more aligned with the organization’s competitive strategy.’ (Commodity Sourcing Strategies: Processes, Best Practices, and Defense Initiatives, Rendon, 2005a, page 9)
Over the last decades, the importance of strategic sourcing has grown tremendously and has received interest from both practitioners as well as academics. It is one of the most important purchasing practices for the future. (The future of purchasing and supply: a ten-years forecast, Carter, Carter, Monczka, Slaight and Swan 2000, The Journal of Supply Chain Management, page 16)

An important part of the sourcing strategy of many companies is based on their so called ‘commodity groups’. These are groups of similar materials, which allows companies to create separate strategies for each group. The activity of coordinating and controlling these groups is called ‘commodity group management’. It is important to stress that in this case, the term ‘commodity’ should be considered from a purchasing perspective and not be associated with traditional commodities such as iron and cotton. (See Rendon, 2005a, page 9)

The phenomena ‘commodity group management’ and ‘commodity groups’ have been described in different words in the literature, such as category management, purchasing categories, material groups, sourcing categories, product families, spend categories, buying groups or variations on these words. In this paper, we only use the terms ‘commodity management’, ‘commodity group management’ and ‘commodity groups’.

The most essential reason why commodity groups are created is that it creates a consistent and standardized basis for managing strategies for the commodity group. (See Fr??hlich, Lingohr page 63). Besides, other benefits are that the commodity manager is able to implement strategic decisions quickly and focused. It is easier for the company to build up strong relationships with the suppliers, because the commodity manager is the direct contact person. (See Fr??hlich, Lingohr page 64).

The aim of this paper is to give insights in how the structure within the organization and commodity management are related. We will explain the most important aspects of organizational structure, as well as the steps that have to be taken in order to implement commodity management. We will discuss the application of commodity group management within the different structural aspects and the importance of integrating commodity group management with other functions.

2. Organisational structure: the ‘skeleton’ of the firm determining its internal interaction structure
2.1 The contingency theory to define the organisational set-up
An organisation is ‘a consciously managed and coordinated social entity, with an identifiable boundary, which functions on a relatively continuous basis to achieve a common goal or set of goals.’ (Robbins & Barnwell, Organisation theory, 2006, Page 6) A more elaborated description of the concept of organisational structure, also called the ‘skeleton’, is described by Park and Mason, who defined it as the ‘formal relationships of roles and tasks to be performed in achieving organizational goals, the grouping of these activities, delegation of authority, and informational flow vertically and horizontally in the organization.’ (Park and Mason, Toward an integrated model of the determinants of business performance: a business-level strategic planning process, 1990, Page 10

A major framework that adds to the study of organisational design is the contingency theory proposed by Donaldson. (See Donaldson, Organization Design: The Evolving State-of-the-Art, 2006, Page 19) It implies that the most effective organisational structural design is where the structure fits the contingencies. (See Burton et al., 2011, Page 30, Organization Design, state of the art) A framework of structure proposed by Daft consists of four structural dimensions that provide labels to describe the internal characteristics of an organization. These dimensions are used as a basis of measuring and comparing organizations. (See Daft, 2007, Page 16-17, Organization Theory & Design) Daft defined the dimensions in the following way. As first, ‘formalization pertains to the amount of written documentation in the organization.’ (Daft, 2007, Page 18) Second, ‘specialization is the degree to which organizational tasks are subdivided into separate jobs.’ (Daft, 2007, Page 18) The third dimension is hierarchy of authority, which describes who reports to whom and the span of control for each manager, which is the number of employees reporting to a supervisor. (See Daft, 2007, Page 18) At last, ‘centralization refers to the hierarchical level that has authority to make decisions.’ (Daft, 2007, Page 18)

The structural dimensions are influenced by contingency factors consisting of the organization’s size, technology, environment, culture, and strategy & goals. (See Daft, 2007, Page 17) The principle of ‘contingency’ is defined as ‘one thing that depends on other things, and for organizations to be effective there must be a ‘goodness of fit’ between their structure and various contingency factors.'(Pennings, Structural Contingency Theory: A Reappraisal, 1992, 267’309)

A typical measure of size is the total number of employees, or as Blau (can Sociological Review, 35: 201-218. 1972 “Interdependence and , 1-24, 1972) proposed ‘the scope of an organization and its responsibilities’. Researchers concluded that the larger the size, the more elaborate its structure, that is, the more specialized its tasks, the more differentiated its units, and the more developed its administrative component of the middle line and the technostructure.’ (See Mintzberg, Structure in 5’s: A Synthesis of the Research on Organization Design, Page 327, 1980 )

‘Technology refers to the tools, techniques, and actions used to transform inputs into outputs.’ (Daft, 2007, Page 20), or defined by many researchers as ‘an organization’s modal system of production’. (Barley, The Alignment of Technology and Structure through Roles and Networks, Page 1, 1990) The impact is measured by Woodward (See Management and Technology, page 16-20, 1958), who argued that technologies directly determine differences in such organizational attributes as span of control, centralization of authority, and the formalization of rules and procedures.

‘Environment includes all elements outside the boundary of the organization.’ (Daft, 2007, Page 20) According to research by Sharfman and Dean (See Conceptualizing and measuring the organizational environment: a multidimensional approach, page 682-683, 1991) the various dimensions that have been used to describe the environment generally fall into three categories: complexity (the level of complex knowledge that understanding the environment requires), instability or dynamism (the rate of unpredictable environmental change) and resource availability (the level of resources available to firms from the environment). Dynamic environments have been identified with organic structures, and complex environments with more decentralized ones. (See Mintzberg, Structure in 5’s: A Synthesis of the Research on Organization Design, Page 322-341, 1980)

‘Culture is the underlying set of key values, beliefs, understandings, and norms shared by employees.’ (Daft, 2007, page 20) Geert Hofstede (Culture’s Consequences: International Differences in Work-Related Values, p. 25, 1980) defined culture as ‘the collective programming of the human mind that distinguishes the members of one human group from those of another’.

As Porter (See Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors, 29-32, 1980) defined strategy, it is mainly about an organisation’s plan to achieve a competitive advantage. According to Daft, the organization’s goals and strategy are defined by ‘the purpose and competitive techniques that set it apart from other organizations.’ (Daft, 2007, page 20) ‘Goals and strategies define the scope of operations and the relationship with employees, customers, and competitors.’ (Daft, 2007, page 20)
2.2. Organisational structures in practice: a continuum of mechanistic and organic designs
Burns and Stalker (See The management of innovation, Page 104-108, 1961) categorized organisational structures along a continuum ranging from a mechanistic design to an organic design. ‘Mechanistic design means that the organization is characterized by machine-like standard rules, procedures, and a clear hierarchy of authority. Organisations are highly formalised and are also centralised, with most decisions made at the top.’ (Daft, 2007, page 30) Mechanistic design are often found at companies of a large size in a stable market. These companies, often manufacturing companies, focus on an efficiency strategy which they try to achieve through a rigid culture. (See Daft, 2007, Page 30-32)

‘In a mechanistic design, tasks are broken down into specialized, separate parts, with each employee performing activities according to a specific job description.’ (Daft, 2007, Page 30) Specialization gives the employees the time to master a handling and improve efficiency and performance. (See Shepard, Specialization, Alienation, and Job Satisfaction, 1970, Page 210-213) Its Formal systems consists of numerous rules, regulations, and standard procedures. For efficiency goals, March and Simon have identified that the use of rules or programs to coordinate behaviour between interdependent subtasks results in routine predictable tasks. (March and Simon, Organizations, Page 75-91, 1958). ‘Formalization of strategic collaboration can lead to enhanced performance by eliminating ambiguity and clarifying priorities; it provides focus and can save time.’ (Daugherty, Is collaboration paying off for firms?, Page 63, 2005) The structure is ‘centralized, which means that decision authority is located near the top of the organizational hierarchy.’ (Daft, 2007, page 30)

‘In a mechanistic organization the communication flow is primarily vertical up and down the hierarchy.’ (Daft, 2007, page 31) A formal set of rules provides employees with guidance in case of uncertainty. Top management will only be consulted when this set of rules does not provide enough guidance. (See Daft, 2007, page 31) Employees bring problems up the hierarchy and top managers pass information downward to employees about goals and strategies, procedures, and solutions. (See Daft, 2007, page 31) ‘There is a close adherence to vertical hierarchy and the formal chain of command. Work activities are typically organized by common function from the bottom to the top of the organization and there is little collaboration across functional departments.’ (Daft, 2007, page 31, 32) Galbraith identified that ‘like the use of rules, planning achieves integrated action and also eliminates the need for continuous communication among interdependent subunits’. (Galbraith, Organizational Effectiveness (Army Journal), Page 22-23, 1984)

‘An organic design means that the organization is much looser, free-flowing, and adaptive. Rules and regulations are often not not written down or, if written down, are flexibly applied. People may have to find their own way through the system to figure out what to do. The hierarchy of authority is looser and not clear-cut. Decision-making authority is decentralized.’ (Daft, 2007, page 30) Organic designs are usually applied at companies of a small size in a turbulent market. These companies, often service companies, focus on an innovation strategy for which they need an adaptable culture that is suitable to make quick changes in order to stay competitive. (See Daft, 2007, page 30-31) ‘The speed of economic and technological changes means that the right path yesterday may not work today and could be a disaster by tomorrow’. ((Neal Jenson, The ‘8 Great’ Challenges Every Business Faces (And How To Master Them All), 02/062015, QazzTek, As a consequence of this increasing turbulence, organizations are shifting towards more organic designs.

‘In an organic organization, knowledge and control of activities are located with employees rather than with supervisors or top executives. People are encouraged to take care of problems by working with one another and with customers, using their discretion to make decisions.’ (Daft, 2007, page 30) Consequently, lower levels of managers are encouraged to experiment, develop, and implement innovations

The organic design emphasizes collaborative teamwork, where the structure is created around horizontal workflows or processes, with people working across department and organizational boundaries to solve problems. Employees play a role in the team or department and roles may be continually redefined or adjusted. A role has discretion and responsibility, allowing the person to use his or her discretion and ability to contribute to an outcome or meet a goal. This role empowerment provides opportunities for the cross-fertilization of ideas as different organizational members share knowledge. (See Daft 2007, page 30-32)

‘In an organic organization, there is greater emphasis on horizontal communication, with information flowing in all directions within and across departments and hierarchical levels. The widespread sharing of information enables all employees to have complete information about the company so they can act quickly.’ (Daft, 2007, page 31) Leaders need to acknowledge that they cannot know everything. In certain situations they serve their people better by listening and accepting their expertise. (Coping with complexity, 2010, Ivey Business Journal, Gerard Seijts, Niels Billou, Mary Crossan, Niels Billou, Mary Crossan, )

2.3 The functional structure of the purchasing department in congruence with its organisational structure
As Weber (See: The theory of social and economic organizations, Page 61, 1974) suggested, organization’s structure determines the performance of the system. Each department requires a different structure to optimize its performance, as its contingencies varies among each situation so does each business unit and department. The purchasing department is one of a subunit within the organization. Therefore, the analyses of the organizational structure can be extended to an analysis of the purchasing function. (See Stanley, Linking purchasing department structure and performance – toward a contingency model, Page 213-214 1993)

Ruekert et al. (See Ruekert et al., The Organization of Marketing Activities: A Contingency Theory of Structure and Performance, page 15-16, 1985) proposed a contingency framework influencing the purchasing department’s structure. The first contingency is the environmental uncertainty, which is ‘the degree of an organization’s familiarity with the elements and tasks typically encountered in its overall environment’ (See: Burns & Stalker, The management of innovation, page 103-105, 1961). This environmental uncertainty is caused by the environmental variability, environmental complexity and the environmental illibirelability. (See: Stanley, Linking purchasing department structure and performance – toward a contingency model , Page 212, 1993) The second contingency is the size, which are the number of employees in the purchasing unit. The last contingency is the technology employed. In the notion of structure influencing the performance of the social system, the structural dimensions of centralization, formalization, and specialization/differentiation are considered to be of central importance. (See: Ruekert et. al, The Organization of Marketing Activities: A Contingency Theory of Structure and Performance, Page 15, 1985)

All contingencies are known from the organizational structure contingencies identified earlier by Daft (2007). However, not all contingencies have the same effect on the dimensions of the purchasing structure than it has on the corporate structure. The environmental dimension has a different influence on the purchasing structural dimensions, as it follows a reverse logic.

Centralization – Centralized purchasing implies that purchases are made from either company headquarters or some regional or divisional level. (See Hutt and Speh, Business marketing management: a strategic view of industrial and organizational markets, page 34-67, 1992). Centralization provides several advantages of such as combining order quantities, greater standardization of the materials purchased, a decrease in administrative duplication, and increased control over purchase commitments. The key to an effective centralized function is the development of good lines of communications between headquarters and the plants or divisions. (See: Stanley, Linking purchasing department structure and performance – toward a contingency model , Page 214-215, 1993)

‘Decentralized purchasing, where purchasing is done by individual plant or division, can be an effective approach as the buyers are closer to the situation and understand the local needs of the community. (See Leenders et al., purchasing and materials management, page 45-55, 1989). In addition, the response time to the division or plant needs may be quicker and of higher quality. Finally, decentralized purchasing is often used because the performance of a specific plant or division can be measured in part by the activities of the local purchaser.

The person’s level of responsibility will be determined by the firm’s operations and its attitude toward centralization. As many firms realize that purchasing is a key element in a supply chain management strategy, the trend has been toward a stronger, more centralized function and greater participation in the firm’s strategic planning process. However, as firms grow in size, a combination of purchasing at a central location and at the division/plant level is used. (See Leenders et al., purchasing and materials management, page 45-55, 1989). It has also been suggested that under the condition of environmental uncertainty, the purchasing department will be more centralized. (McCabe, Buying group structure: Constriction at the top, page 90-93 1987) This view of the relation between environmental uncertainty and structure can be found in the constriction of authority perspective. According to this view, with increasing levels of environmental uncertainty the task of integration in decision making units is accomplished to a greater extent by increasing levels of upper management involvement, that is, via increased centralization of decision-making authority at higher levels of organizations.

Formalization – Formalization refers to ‘the degree that buying activities and interaction patterns with other functions are formalized by policy, procedure, and rules.’ (Stanley, Linking purchasing department structure and performance – toward a contingency model , Page 214, 1993) Theorists have different perspectives on the relationship between environmental uncertainty and formalization. One view, rooted in the contingency theory of Lawrence and Lorsch (See: Organization and environment, page 1-30, 1967) and applied in the context of the buying centers by Spekman and Stern (See: environmental uncertainty and buying group structure: an empirical investigation,page 54-64 ,1979), is that ‘increasing levels of task uncertainty lead to a buying decision process characterized by increasing participation by a lower level members of the organizational hierarchy and less subject to control of formalized rules and procedures.’ (McCabe, Buying group structure: Constriction at the top, page 90-93 1987) This is in congruence with the traditional contingency model. However, in contrast to this model extensive support is found in the buying literature (See: Cardozo, Situational segmentation of industrial markets, Page 264, 1980) (See Corey, The organizational context of industrial behaviour, page 78-106, 1978) for the view ‘that at high levels of uncertainty, organizational decision-making processes are characterized by a constriction of authority (i.e., decisions are made at higher levels of the organization by a smaller number of organization members) and an increase in rule-governed behaviour as decision units acts to minimize errors often associated with decision making in uncertain situations.’ (McCabe, Buying group structure: Constriction at the top, page 90-93 1987)

Specialization – The construct of Specialization/differentiation ‘examines the degree to which tasks are divided into unique elements.’ (See: Ruekert et. al, The Organization of Marketing Activities: A Contingency Theory of Structure and Performance, Page 15, 1985) It is defined that ‘the higher the specialization, the narrower are the job descriptions. With specialization, each purchasing employee has more extensive knowledge in his/her particular area and has access to specific information sources outside the organization. Therefore, when the environment is uncertain, the purchaser has the ability to adapt more quickly to changing conditions due to these outside sources.’ (Stanley, Linking purchasing department structure and performance – toward a contingency model , Page 215, 1993)

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