What is Centralized Purchasing?
Most organizational leads would definitely agree that choosing the right control scheme is always a challenge. For most CPOs and CFOs it is especially hard to determine which purchasing system is better: centralized or decentralized. In our today’s article, we will outline pros and cons of centralized procurement and figure out for which companies this control system would be the perfect decision.
What is centralized purchasing
Business Dictionary defines centralized procurement as a purchasing system in which all the departments of a company with a wide geographical distribution can make purchases through a common purchasing organization.
In simple words, centralized procurement is a purchase of all required goods and services by a single department for all the branches of the entire company. Generally, a purchasing manager heads the department.
Centralized procurement is beneficial in finding the best deals with local vendors for the corresponding location of the company department. It not only aids in avoiding duplicity of orders, but also promotes advantages arising from the high volume bulk discounts, lower transportation and inventory management costs. Centralized purchasing is an indispensable solution for those who feel difficulties in managing long-running transitions and mending fences.
What are the key benefits of centralized procurement
Overhead expense reduction
First and probably the most important feature of centralized purchasing is the reduction in overhead costs for the enterprise. Separate facilities require not only individual lease agreements, but also separate utility deposits, insurance policies, security features, office equipment, network, etc.
Better relationships within the organization
Interpersonal communication in recent years has been consistently placed high as an important requirement for conducting successful job performance in the organizations. Communication is what makes a team strong. In a centralized office, where employees and managers have the opportunity to interact in person, atmosphere is much more pleasant, than in departments where colleagues communicate via telephone or e-mail. Company meetings, conferences and training seminars that are held in a group setting increase employee productivity and rally team.
Management teams may operate more efficiently and cost-effectively in a centralized office. Managers who are often absent or spread out among various departments are typically less effective due to the absence of regular contact with employees.
Employees who work together as a collective group get to know one another's work styles and approaches as their own. That’s why such teams are typically better able to collaborate on projects as a group. A centralized office also increases its ability to be consistent across all channels, with employees all working under the same set of guidelines with regard to brand development and customer service directives.
Centralized purchasing has many cost-saving features. Purchasing managers can buy in bulk at reduced costs, can better manage inventory and assess company needs. Moreover, in centralized procurement there is no need to employ individual managers for individual locations. It’s obvious that addition of duplicate staff positions implies additional costs. Fortunately, in centralized purchasing you don’t have to bother about that.
Among the other key advantages of centralized procurement, we can define avoidance of duplication, saved time, knowledge resource sharing, reduced transportation costs, increased specialization, better relationships with the buyers and uniformity in purchasing policies.
As we can see, centralized office gives management the ability to save money, encourage greater communication between workers, and improve the efficiency of operations across the board.
What about centralized purchasing disadvantages?
As they say, every medal has two sides. Centralized procurement disadvantages include:
- Complex management of the company in case organization becomes too large;
- Difficulties with timely replacement of defective materials;
- High probability of delays – often requisitions for goods have to be sent from distant areas;
- Difficulties with purchasing materials from local suppliers in case of an emergency;
- Centralized purchasing is not suitable, if branches are located at different geographical locations
Once you outweigh all advantages and disadvantages of the centralized procurement, it will be way easier for you to make the right decision regarding your own business. As you can understand, centralized purchasing is a perfect decision for big-sized organizations that are not too geographically dispersed. While choosing, don’t forget to consider the distance between the production centers and the central warehouse, as well as nature of the materials used and transportation costs and risks.