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Centralized and decentralized purchasing, understanding the differences
Organizations have several functions, from accounting, sales, marketing, customer service, and production to development, among other departments.
If you think of a product manufacturing department for example, oftentimes they will need highly specialized equipment to produce the different components of a product. A marketing department may outsource social media management to engage with prospects, or sponsor content on online publications that their target market consumes to elevate their brand and create awareness. Regardless, all of these departments within an organization will need specific goods and/or services to get their jobs done.
A purchasing process is required to acquire these items, services, or subscriptions that assist employees to meet organizational goals and increase output. Relying on manual processes to carry out purchasing needs often fails to support effective operations as time is spent completing paperwork, sending numerous emails, and chasing down managers for approvals, where automation could save precious time by enabling digital process efficiency.
There are two different approaches to purchasing within business operations. Centralized and decentralized purchasing. In this article, we will explore how they both work and help you decide which approach might be better suited to your business.
Centralized purchasing: What does it mean? And, what are the advantages and disadvantages?
It means that one department oversees all of the organization's purchases using a process known as centralized purchasing. The purchasing or procurement department often operates from the organization's head office, where it oversees and carries out all of the business's purchases. Even if there are multiple branches or divisions for example, all the purchasing needs will be fulfilled by this singular department.
In essence, with centralized purchasing, the designated purchasing department acts as the link between the many staff members and divisions within the organization and the external vendors. Orders from within the organization are gathered by the purchasing department, which then decides how best to fulfil orders through a network of suppliers.
There are advantages and disadvantages to centralized purchasing, here are some below:
Advantages of centralized purchasing:
● Better management of spend, that leads to benefits of scale
● Implementation of holistic categorization strategies and tactics
● Improved compliance and standardized processes
● A specialized, dedicated team for purchasing
● Centralized management of data and information
● Risk mitigation
● Centralized management of environmental, sustainability, and governance agendas
● Better relationship management and one point of contact for key suppliers
Disadvantages of centralized purchasing:
● High initial costs to staff and set up a purchasing department
● Inefficiencies as the operation may grow too big or complex to run
● May not be suited to geographically dispersed organizations
● Misunderstanding of local requirements
● Missing out on localized discounts
● Delays in the delivery of goods and services to end-users
● Disempowered staff
There are a variety of reasons why organizations are either considering centralized or decentralized purchasing. The most important factor when considering both is choosing the model that best suits your organizational needs.
Decentralized purchasing: What does it mean? And, what are the advantages and disadvantages?
Where purchasing is fully decentralized, each business unit or geographic unit is responsible for its own purchases. This means that purchasing activities are spread over many countries, locations, and stakeholders. For geographically dispersed companies, decentralization is generally a matter of practicality. If an organization has locations all over the country, it may not be realistic to direct all purchases through a single office, however, where decentralized processes exist without controls, the risk of overspending increases.
There are advantages and disadvantages to decentralized purchasing, here are some below:
Advantages of decentralized purchasing:
● Supplier diversity and use of local alternatives
● Interpersonal relationships and supplier knowledge
● Faster decision-making
● Short delivery times
● Specialization for local requirements
● Agility and fast, easy replacement of defective goods
Disadvantages of decentralized purchasing:
● Suboptimal management of spend
● Rogue spending that is out of contract or unauthorized
● Missing out on benefits of scale
● Missing out on bulk discounts
● Scattered management of information and disorganized data
● Duplication of effort in vendor and contract management
● Non-compliance with corporate policy and processes
Whether to centralize or decentralize purchasing, as always, depends on the context and the business needs.
What model is best for your business?
Each business is unique and there can’t be a one-shoe-fits-all approach. Industry, employee count, location, growth rate, and categories under management are all factors that affect whether a more centralized or decentralized structure is better.
Whether or not an organization adopts a centralized or decentralized purchasing model isn’t simply a matter of personal preference. There are foundational factors that determine whether either model is suitable, or whether a combination of both models is the right approach.
In many cases, adopting a hybrid model, incorporating the best features of both procurement models is the most suitable choice for maximizing cost savings and achieving speed and efficiency.
This can be achieved with a procurement system like Fraxion; it empowers dispersed and decentralized teams to easily purchase the goods and services they need to be effective, while system-configured internal controls ensure centralized oversight and compliance with procurement policies. Productivity is enhanced, staff are happier, while business leaders have the peace of mind that all expenditure is approved, auditable, within budget, and compliant with policies, creating an accountable and informed spending culture. Centralized records, visibility, and reporting capabilities enable purchasing consolidation and opportunities to negotiate discounts and more favorable purchasing terms across locations.
Regardless of which model you choose to use in your organization, the ultimate goal your business should be working towards is to effectively manage all purchasing processes in a manner that improves spend control, compliance, productivity, and profitability.
Read our recent blog where we expand on the benefits of procurement automation, and when it’s time to consider transforming your processes.