Centralized Purchasing – Everything a Procurement Professional Should Know
When we talk about centralized purchasing, we may think of control as one of its elements. However, we know that it is not an easy task in every company.
For this article, we will examine what central purchasing is. We will also check how it benefits a business in using this process.
Once you finish this article, you will be able to know if this can be used for the benefit of your business. Furthermore, this will allow you to recognize its possible effects if this will be implemented in your business. Let’s now begin to explore and get into its core.
What is Centralized Purchasing?
Centralized purchasing is a term used to describe a purchasing system where a department manages the entire acquisition of goods and services for the whole organization. In simple words, one department is delegated to purchase all the needs of another department or for the entire organization.
Commonly, central purchasing works by working with other departments in consolidating their needs to acquire cheaper prices. Also, most organizations use this to simplify their purchasing budget or to keep track of their spending.
The purchasing department is usually the branch that handles all the purchasing for all the departments of the organization. The purchasing department is led by the purchasing manager to track all the materials and their quantities.
Benefits of Centralized Purchasing
1. Reduction of overhead expense
There are a lot of factors that affect purchasing materials. It includes the supply quality of vendors, utility expenses, and lease agreements. Centralized purchasing consolidates all the purchases to reduce the overhead cost of an organization.
2. Control over the process of purchasing
Like what we said earlier, centralized purchasing involves control. When one department handles the purchasing process, it simplifies the purchasing management which allows for transparency and accuracy of materials.
It eliminates the risk of employees buying unnecessary things for the organization. Also, central purchasing limits outside spending which can be a door for procurement fraud.
Furthermore, it reduces the countless lapses of employees in terms of spending. Employees may have failures as they may declare an overstated expense, understated expense, duplicate purchases, and unnecessary expenses. These lapses may affect the finances of an organization which may result in huge losses.
3. Saves you money
Central purchasing bundles the needed materials of the organization which can make an organization save money. Purchasing manager buys in bulk which reduces the cost of materials due to discounts that resulted in volume buying.
Central purchasing does not need to employ another purchasing manager for its various locations of branches. Only one purchasing manager is required which can save the organization a lot as they do not have to hire many purchasing managers.
4. Improve collaboration
Employees must work together to communicate their needs as they will be consolidated before the materials will be purchased. This allows employees to get to know each other well. This will enable them to collaborate effectively as they know how they will approach each other.
A centralized system provides the organization to be consistent across all departments and the employees working in it. This system will fortify brand development and customer relations due to being in the same guidelines.
5. Saves you time in the purchasing process
Central purchasing combines the purchases of each branch in an organization rather than catering to each department what it needs. This allows the organization to save more time needed to manage its transaction as it controls it at a scale.
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Risks of Centralized Purchasing
1. Complexity of management
Centralized purchasing offers a lot of advantages but when an organization becomes too big, it may pose a risk that may affect its efficiency.
When an organization becomes too big, all departments will grow too. This will decrease the efficiency of a centralized system as there will be a lot to cater for. Due to this, it may cause delays in giving them their needs.
2. Delays in the purchasing process
When there is too much to accommodate, delays in acquiring the goods will be inevitable. This is due to the fact that the purchasing manager will wait for a certain department to access their needs. The purchasing will wait for the others until it is finalized.
Additionally, the approval process may be slowed down as all the purchasing decisions are handled by the central team. This may result in delays in the delivery of the needed materials in each branch.
3. Not suitable for organizations with branches worldwide
Centralized purchasing is not a good fit for organizations that have many branches spread out in different parts of the world. A purchasing manager will find it hard to manage the requirements of each branch due to their location.
With different branches in every part of the world, centralized purchasing will potentially cost you more. This is due to the fact that each country has its own laws and tax regulations.
Centralized purchasing entails having only one purchasing department that will handle all the acquisition of the materials. This will only make it counterproductive as it is too large for it to handle numerous branches of the organization.
What is Decentralized Purchasing?
Decentralized purchasing is the exact opposite of centralized purchasing. Decentralized purchasing puts the power to purchase the materials in the hands of an employee in each department.
The organization may issue funds or procurement cards that they can use to order the materials needed in their own department.
Choosing Centralized Rather than Decentralized Purchasing
Centralized purchasing offers more control and visibility over the organization’s expenses than decentralized purchasing. Although decentralized purchasing offers a simpler purchasing experience in the organization, it has numerous consequences.
A decentralized system may incur unnecessary expenses that may affect the organization’s financial health. Another is when an employee duplicates purchases due to them being free of vetting and approval from the central management.
This is why it is much safer to lean on centralized rather than decentralized purchasing.
Frequently asked questions
1. What is centralized purchasing?
A centralized purchasing is a process that consolidates each department’s needs before purchasing it.
2. Who handles the entirety of centralized purchasing?
The one who handles its entirety is called a purchasing manager.
3. Will it be suitable for my business?
If you do not have numerous branches in different locations then a centralized system will work for you.
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