Seven mistakes in implementing the operational supply model

The concept of organizing a supply service with a division into front, middle and back office (FMB) has become the de facto standard for many large companies in the world and in Russia. However, in practice, with a common understanding of terminology, this operational model is often implemented suboptimally. This does not allow using its full potential and reduces the effectiveness of the supply function as a whole.

What is the FMB operating model?

The FMB approach is based on the principles of conveyor production, the ideas of which originated in the 12th century in Venice, were patented by Ransom Olds seven centuries later and were widely used in industry thanks to Henry Ford in the second decade of the 20th century. Conveyor production, among other things, involves the specialization of personnel in performing basic operations, unlike artisanal production, when one employee is responsible for a large area of work or the entire technological chain.

The “classic” approach to procurement, when one specialist performs the entire end-to-end process, corresponds rather to an artisanal model and is quite applicable in companies with a relatively small volume of purchases. In large enterprises, the procurement process takes on the features of “mass production”, and therefore artisanal methods are less effective here.

An effective operating model is the division of the procurement process into blocks and steps that require different skills and competencies from the contractor. On the one hand, it reduces the routine burden on highly qualified and expensive specialists, such as category managers. On the other hand, it allows not to require employees who are not properly qualified to perform functions that exceed their professional capabilities.

Sales and supply are two interfaces of the company’s interaction with the external market, the first is at the “exit” of the end-to-end supply chain, the second is at the “entrance”. The front office of procurement is similar to the marketing department, the middle office is similar to the work of sales representatives, and the back office is similar to the Sales Order Processing department. This is a simplified but quite relevant analogy. Let’s take a closer look at each element of the operational supply model.

Front office: strategic sourcing management center

The Supply Front office, or strategic sourcing unit, is responsible for the supply strategy. Its role can be compared to the steering wheel of a car: it is here that the general direction of movement is set and the rules for providing the company with goods, works and services by purchase categories are determined.

The main task of the front office is to develop a rational approach to meeting the needs of the category based on data analysis and economic feasibility. Contrary to popular belief, its functions are not limited solely to the development and updating of category strategies, at least because an attempt to cover 100% of procurement costs with them will require significant resources and the maintenance of an expanded staff of category managers — highly paid specialists who are scarce in the labor market.

In fact, the front office forms the procurement strategy:

defines procurement channels and approaches to determining the source of supply;
ensures that needs are covered in advance by sources of supply;
if necessary, sets the rules for the distribution of volumes between counterparties;
performs strategic supplier management.

It is considered good practice to cover about 70% of the company’s needs with existing contracts at the time the need arises. The 100% figure remains the theoretical ideal.

The work of the front office requires a deep analytical approach, understanding of production processes and market dynamics. Since markets are constantly changing, the front office must continuously monitor and adjust purchasing rules.

Case study: diagnostics at one of the companies showed that 80% of the supply division’s efforts were focused on working with suppliers covering only 5% of the total costs. This case clearly demonstrates the need for a strategic reallocation of resources in supply.

There are three typical front office implementation errors:

Suboptimal separation of functions. The most critical mistake is keeping operational tasks (middle or back office) for category managers. Routine can take up to 100% of their working time, making high-quality analytical and strategic work impossible. In such conditions, strategy turns into an after-the-fact description of intuitive actions.
Ignoring the role of the cross-functional team. A category manager is not a “super-brain”, but a leader and integrator. The category strategy is developed in collaboration with experts from related functions (production, MRO, finance, security). It is the combined team that is working on the “internal profile”, which contains up to 60-70% of the economic potential. Incorrectly set work reduces significantly the effectiveness of strategic sourcing.
Insufficient organizational weight of decisions. Front office initiatives should take precedence over general procurement regulations. A category committee at the senior management level (C-level) should approve strategies and resolve controversial issues. If the transformation remains an “internal matter” of the supply function, strategic decisions will be blocked at the tactical execution level by related and controlling units (economics, lawyers, security).

Middle Office: the tactical core of sourcing

If the front office performs the function of strategic management, then the middle office (tactical sourcing division) represents the executive core of procurement activities. By analogy with a car, it is a “motor”. In most Russian companies, the middle office function is organized in the form of a tender department or a similar structure.

The evolutionary transition to the FMB model often begins with the separation of tactical sourcing into a separate unit. The main driver of this process is not only operational efficiency issues, but also the need for increased control and security. Consolidation of potentially corruption-intensive supplier selection procedures in one department allows for increased transparency, controllability, and compliance of procurement with corporate regulations.

Practice shows that the need to isolate this function often arises when violations in procurement activities are detected. As part of one of the optimization projects, we recommended that the tender department be identified and isolated as much as possible, up to and including relocation to another city to minimize informal contacts. The principle of organizational isolation and centralization of tactical sourcing operations remains relevant, despite the proliferation of distributed teams and online communications.

The key tasks of the middle office include:

identification of specific sources of supply in accordance with the approved rules, including a specific work strategy for the category;
organization of competitive supplier selection procedures;
conclusion of contracts based on the procedures carried out;
in some implementations of the model, the middle office is also responsible for assigning the source of supply.

It is important to note that problems in the work of the middle office are often the result of shortcomings in the construction of strategic sourcing.

Let’s highlight two typical mistakes in the work of the middle office:

Strategic deafness. If the strategic rules for the category are not approved at the highest level (error 3 when building the front office), the middle office is forced to work according to universal template procedures. Any deviations (closed tender, work with a single supplier, non-standard lotting) proposed by the category manager will be rejected by the supervisors.
Hypertrophied passion for tenders. The template application of competitive procedures to any procurement is ineffective. The instrument (open tender, request for quotations, direct transaction) should be determined by the front office based on market conditions and the specifics of the category. In a falling market, frequent bidding can lead to lower prices. On a growing scale, it is important to consolidate the volume in order to fix the price (or a formula that restrains price growth) for as long as possible. The blind belief that “the more frequent the bidding and the wider the range of participants, the better” leads to the loss of volume discounts, increases the risks of supply reliability and ultimately leads to lower economic efficiency.

Back office: the operational basis of procurement activities

The back office is an operational level that ensures the practical implementation of decisions made at the strategic and tactical levels. If the front office determines the direction of movement, and the middle office provides energy for it, then the back office is the mechanism that provides movement (by analogy with a car, these are “wheels”).

At the initial stages of the development of the supply function, many organizations actually exist in the format of an “extended back office”, where employees combine the search for suppliers with the operational tasks of meeting the need. In the mature FMB model, the back office focuses solely on operational execution, with the source of supply already determined by the middle office.

Key features of the back office in the FMB model:

Centralization of routine operations of the P2P process. The back office concentrates the full Procure-to-Pay (P2P) cycle, from processing applications to initiating and controlling payments. This process is characterized by a high degree of routine and repeatability of operations, the possibility of clear formalization of procedures, relatively low requirements for the qualifications of performers, and high potential for automation and robotization.
Resource optimization. The operational model of the back office provides for the possibility of performing its functions in common service centers (CSOs) or outsourcing.

The back office is the most formalized and automated component of the supply chain function — it scales well and can be optimized.

There are two typical mistakes of back-office implementation:

“Modesty” in the transfer of functions. The key mistake is transferring to the back office document management functions only. The range of its potential tasks is much broader: monitoring the status of supplies, catalog management, contract support, collecting primary analytics in various areas — all that operational purchasers in the “traditional” model do not have enough time for.
Insufficient regulation. Back-office work should be based on comprehensive instructions and checklists describing all possible scenarios. This makes it possible to attract staff with average qualifications and even without higher education, reduce training time, and mitigate the risks of high turnover. Any situation that is not described in the instructions should be escalated to a strictly defined supervisor. Creativity and independent decision-making by back-office staff are unacceptable and lead to operational failures.

In conclusion, it should be emphasized that the FMB model is not identical to the organizational structure: it describes, first of all, the presence of clearly defined roles and functions. At the same time, the successful implementation of this model is possible within the framework of various organizational construction options — from a fully centralized to hybrid structures. It is precisely the flexibility of the FMB model that has led to its widespread adoption among leading companies in the field of modern supply practices.