Laurel Leverage, Director of Purchasing at Regenesis Biotech, stared intently out her office window. It was a crisp Frid

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Laurel Leverage, Director of Purchasing at Regenesis Biotech,stared intently out her office window. It was a crisp Fridayafternoon in the middle of February, and Laurel knew it was crunchtime. The Sourcing Reconfiguration Task Force, which Laurel led,had completed an arduous 6-month review of ReBio's global sourcingorganization. Next week, she would meet with ReBio's StrategicPlanning Committee. What would she recommend?
At the review's outset, it was clear that ReBio's decentralizedsourcing structure was obsolete—it simply was not lean enough tohelp ReBio compete in a consolidating industry. Senior managementwas convinced that centralizing sourcing would deliver much-neededcost reductions. But, centralization would require a radical changein sourcing philosophy and practice. The problem: Everyone knewReBio's regional purchasing managers were hostile to the idea ofcentralization. They did not want to risk a loss of influence onkey sourcing decisions. Laurel sensed that the task force could notreconfigure sourcing to obtain global efficiencies without losingkey members of her global sourcing team.
The Mandate For Change
For as long as Laurel could remember, the pharmaceuticalindustry had been in a state of flux. Two issues drove theturmoil:
Patent Expiration
R&D Costs
Pharmaceutical companies had long made their profits from just afew blockbuster drugs.1 When patents on a blockbuster drug expired,profits vanished. Low-cost generics siphoned off as much as 90% ofsales.2 The sales drop off was so precipitous that patentexpiration had become known as the "patent cliff."
Worse, these profits subsidized risky R&D efforts. Nineteenof 20 drugs that reached clinical trial failed—and most new drugconcepts never made it to trial stage. The low hit rate meant thatnew blockbusters were hugely expensive. Estimates put the medianprice tag for a new drug at $1 to $5 billion.3
Responding to the industry's competitive and financialrealities, pharmaceutical companies had been on a merger spreesince the turn of the millennium.4 The goal: Increase market powerand R&D effectiveness. Consolidation had created some massivelypowerful drug companies, leading critics to label the industry BigPharma. Consolidation had also ratcheted up the competitivepressure felt by ReBio, causing Laurel some sleepless nights. Tosurvive, ReBio had to free up resources to more aggressively pursueits biotech R&D strategy. Cutting the cost of sourced materialshad become Laurel's top priority.
Company Background
Regenesis Biotech, headquartered in Rochester New York, hadgrown dramatically over the past 15 years. From a small start-upbiotech company, ReBio had become a global operation withmarketing, production, and R&D facilities around the world.Like other pharmaceutical companies, ReBio had grown organically aswell as through its own mergers and acquisitions (M&A). Unlikesome rivals, ReBio operated with a "be-a-good-citizen-everywhere"philosophy. For purchasing, this meant, "buy where we sell." As aresult, ReBio had maintained autonomous purchasing groups in sevenlocations in Asia, Europe, Latin America, and the UnitedStates.
The Sourcing Reconfiguration Task Force was created with a clearmandate—reconfigure ReBio's purchasing organization to obtainefficiencies and support ReBio's competitive strategy. Although shehad only joined ReBio two years earlier, Laurel was widely likedand respected among ReBio's senior management. Laurel's clout madeher the right person to lead the task force.
Laurel, however, was not altogether pleased with that fact. Likeother task force members, she knew that when the C-suite spokeabout sourcing efficiencies, they meant "cut costs now." To free upcapital and improve ReBio's cost competitiveness, a drastic andpainful overhaul was needed. Few managers made friends during sucha politically charged transformation.
Task Force Findings
The Task Force's first step was to discern why ReBio hadmaintained a decentralized purchasing structure over the years.Beyond corporate philosophy, decentralization was an artifact ofReBio's M&A activity. Further, the task force discovered thatkey influencers liked decentralization. Internal and externalcustomers 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'sdecentralized organization took pride in the technical expertisethey had developed to meet the needs of the local operations. Theyalso claimed unbeatable rapid-response capability.
Of note, ReBio's purchasing managers were familiar with the costarguments behind centralization, but they were highly skepticalthat greater centralization could really meet ReBio's purchasingneeds—especially across global operating divisions. "We'redifferent" were two words the Task Force had heard many times overthe past six months. The bottom line: The regional purchasingmanagers were firmly committed to retaining a decentralizedstructure.
Given ReBio's regional manager's "discounted" centralization'spotential cost savings, the Task Force performed a simple spendanalysis on ReBio's Top 20 purchased items (by dollar value) toquantify the benefits. They identified numerous opportunities toreduce administrative duplication and to leverage ReBio's globalpurchasing volume. A comparison of the different divisions'purchase requirements revealed that almost 60% of all purchaseditems were common to two or more locations. In close to 20% of thecases, all seven purchasing groups bought the same or an equivalentitem.
The Task Force's benchmarking also identified several companiesthat had recently shifted from decentralized to centralizedpurchasing with dramatic cost savings. A consulting studycommissioned by ReBio revealed that a centralized organizationwould reduce ReBio's purchasing costs by 7-10%. The studyidentified 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 thedecentralized structure had become a threat to ReBio's long-termcompetitiveness. The benefits of centralized purchasing seemedundeniable.
Laurel's Dilemma
However, as the Task Force had begun to develop animplementation plan, it discovered that it would be next toimpossible to fully centralize purchasing. Not only did ReBio'spurchasing professionals complain vigorously but various internalcustomers also voiced serious concerns, arguing that the lostflexibility would more than offset the cost savings.
The Task Force found itself in a delicate situation—cost savingshad to be obtained, but centralization was not politically viable.As the Task Force reexamined key findings, two points stoodout.
Everyone agreed that as a company that competed against globalpowerhouses with lower cost structures, ReBio needed to achieve thecost benefits of centralization.
Advocates for decentralization used responsiveness as therallying cry to thwart centralization.
The Task Force had begun to look for a way to get the best ofboth worlds.
A Hybrid Structure
Laurel glanced at her watch. It was getting late. She lookedback at the PowerPoint deck she was designing. The Task Force hadagreed 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 timelyspend analysis needed to coordinate global spend. But, that was theeasy part. It was a pronounced lack of commitment to rolerealignment that made everyone nervous. If they wanted to, regionalmanagers could easily undermine a hybrid structure. They simplyneeded to "misplace" key spend information or persuade suppliers toput up "roadblocks" to change.
A Time for PI?
Laurel glanced at her watch—again! It was way past late.Quickly, she tucked her laptop into her satchel. As she walked outthe door, she swore, "The business case is obvious. Why the helldon't these buyers see it?" Catching herself before going toonegative, she took a deep breath and wondered, "What can we do toget key thought leaders to buy-in? If they commit, we can make ahybrid structure work and bring real savings to ReBio."
1. Short introduction of the case, one paragraph.2. The challenges to be addressed in this study.3, Analyses of the case. Theories are used to analyze the thecauses of above challenges or issues. if the data provided by thecase, quantitative analyses are expected
How could you help help Laurel reduce regional buyers'resistance to a reconfigured sourcing structure?
What would be an ideal hybrid sourcing policy andperformance measures