Nowadays, businesses strive to maintain optimum inventory levels while ensuring supplier visibility, making the purchasing process a vital part of any company's procurement operations.
How a business, irrespective of its size, organizes its purchasing processes affects its cost-cutting, risk management, and process robustness in response to changes in the supply chain.
However, finding the appropriate purchasing system is tricky for most businesses. The decision between a centralized and decentralized purchasing system is often challenging for business leaders, especially the top leadership comprising chief procurement officers (CPOs) and chief financial officers (CFOs).
A corporation that hasn't implemented centralized purchasing might not benefit from the leveraged pricing that such a system would provide.
So here is a comprehensive guide to assist businesses in understanding several critical aspects of centralized purchasing, its benefits, and why it holds the upper hand over the decentralized purchasing system. Let's delve deeper.
Centralized purchasing or procurement refers to a purchasing system in which all of the branches of a corporation that is geographically distributed can make purchases through a single organization that handles all of the firm's purchasing requirements.
In layman's terms, centralized procurement refers to the practice of purchasing all of a company's requisite products and services by a single division on behalf of all of the company's other divisions.
In most cases, the purchasing manager serves as the department's head.
Employing centralized procurement makes the negotiating process for the best bargains with local suppliers for the relevant location of the business or organization's departments much more manageable.
It not only helps prevent duplicate purchases, but it also encourages advantages that arise from high-volume wholesale discounts, cheaper transportation costs, and reduced costs associated with inventory management.
Those who struggle to manage long-running transformations and mend vendor relationships could seriously consider centralized purchasing as their go-to solution.
To provide an example, when a company implements centralized purchasing for the management of numerous outlets and locations, it can:
Another illustration of centralized purchasing happens when a business has a systematic purchasing system.
In this scenario, raw materials, commodities, information technology equipment, maintenance, repair, and operations (MRO) items for upkeep and repair, as well as other conventional services such as cleaning, can be easily procured through a centralized system.
Before getting into why centralized purchasing could offer greater perks to a business, it's vital to know what decentralized purchasing implies first.
A decentralized purchasing system is a framework wherein purchases are ordered and controlled by a number of different specialist teams, units, or divisions throughout the organization.
It implies that teams or individuals do not connect to a specific department but rather a selection of divisions or teams according to the specifications of the purchasing request.
Now, coming back to the question - why should you choose centralized over decentralized purchasing?
The primary reason for this is that centralized purchasing provides increased visibility, transparency, and control over the expenses incurred by the organization.
On the other hand, decentralized purchasing leaves a lot of possibilities for inefficiency, fraud, and overspending, typically maverick spending.
In addition, companies can achieve clearly laid out operational efficiency by utilizing centralized procurement and enhancing the level of internal authority over management. This can't be the case with decentralized purchasing.
Before companies decide between centralized and decentralized purchasing, the following are some of the drawbacks that are linked with decentralized purchasing that they should be aware of:
While decentralized purchasing may make the purchasing process smoother for everyone involved in the business, it also opens the door to an unprecedented number of opportunities for the misuse and exploitation of organizational resources.
The primary advantage of centralized purchasing is that it consolidates all of a business's purchasing activity into one location, making it simpler to track expenditures, point out areas for cost savings, and prevent wasteful or fraudulent transactions.
Other advantages of a centralized purchasing system include:
The holistic purchasing management process throughout the business could be simplified greatly by consolidating all of the organization's purchasing under a single point of control.
As a consequence, the organization will now have increased visibility into how cash flows to and from the organization, the ability to oversee it from a high level, and the capability to regulate the quality and volume of supplies flowing into the company from a single point of control.
Payroll is the most expensive aspect of running a business.
When purchasing operations get centralized, there is no longer a requirement to hire individual procurement managers for each site or department.
Eliminating these redundant staff roles results in a large reduction in the expenditures associated with each of these functions.
If each division were responsible for its own purchasing decisions, it would not only require additional infrastructure, tools, utility deposits, and insurance, but it would also demand more investment overall.
All these requirements get eliminated when purchasing is centralized, which results in a massive reduction in operational costs.
The establishment of mutually beneficial connections with one's suppliers and vendors is a direct natural outcome of the functioning of effective centralized purchasing teams.
The members of these teams learn how to cultivate connections and foster healthy business relationships with their suppliers through effective communication.
The relationship significantly benefits the suppliers because they obtain a deeper understanding of the organization's requirements and facilitate a consistent point of contact for quickly fixing any problems that may arise.
This ensures that deliveries are made on time, fewer product bottlenecks emerge, guarantees high-quality procurement, reduced shipping costs, and realizes considerable savings.
In an organization that employs a centralized purchasing model, the procurement department consolidates orders of the same kind and communicates them to the suppliers that are in a position to provide the best deals.
Owing to the volume of business that the procurement department is capable of offering, it gets rational for the supplier to offer deep volume discounts to secure the organization's business for the future.
Further, when workers make their purchases according to a decentralized model, it gives the impression of being simpler and quicker to manage as a whole across the organization.
However, when the amount of time wasted across a large number of individual transactions is taken into account, the organization suffers a loss.
In contrast, with centralized purchasing, companies witness a significant reduction in the time required to manage purchases and expenses over a large volume of transactions by integrating several purchases and controlling them at scale.
Maverick spending occurs when employees make purchases that violate or go outside the terms of any existing contracts signed with suppliers.
Since there is frequently no straightforward technique for keeping track of all the contracts the organization is involved in with vendors, this is quite a regular occurrence inside organizations that operate on a decentralized purchasing model.
As a direct consequence of this, workers make their purchases from the suppliers that are easiest for them to access.
Often, contracts fail to deliver the promised outcomes and may even result in financial penalties for a company if it's unable to maintain the agreed-upon minimum order figures as demanded by the contract terms.
On the contrary, when purchasing is centralized, the possibility of workers procuring in violation of company policy or current contracts gets eliminated, and as a result, maverick spending gets prevented before it ever takes place.
When employees are engaged with each other as part of a collective workgroup, they become familiar with one another's working practices and management styles.
Because of this, dedicated purchasing teams can function more efficiently and effectively than distributed purchasing workers. These teams also advantage from having their tasks more properly delineated and having precise communication and interaction.
Since all these teams operate under universally established guidelines and standards concerning procurement, business planning, and supplier relationships, it contributes to improving the procurement process.
In addition, it promotes the transparency and responsibility of spending while preserving the high-quality standards for the materials procured.
Centralizing procurement functions helps companies plan more effectively over the long term. Centralized purchasing takes on even greater significance in larger companies, where separate purchases by each department would be both wasteful and expensive.
Having a centralized purchasing system also allows businesses to deal with ethical concerns and safeguard confidential data and information, among many other advantages. Therefore, every business must weigh these factors before deciding on employing a purchasing system.