Centralized purchasing in supply organisation

Centralized purchasing encompass grouping of purchasing tasks and specialist functions or services into one serving unit and under unified control.

Advantages of concentrating purchasing

The advantages of concentrating purchasing in a strong central department with a responsibility of coordinating across functions include:

(1) Economies of scale:

Centralized purchasing enables an organisation to use its purchasing power or leverage to the best effect, since:

• Consolidation of quantities can take place resulting in quantity discounts
• Suppliers dealing with a central purchasing department have an incentive to compete for the whole proportion of an undertaking’s requirements
• Cheaper prices by enabling suppliers to spread overheads over longer production runs
• Specialist staff can be employed for each of the major categories of purchase
• Lower administration costs e.g. it is cheaper to place and process one order for one million shillings than ten each for one million.

(ii) Coordinating of activity:

• Uniform policies can be adopted e.g. single sourcing, partnership sourcing etc.
• Uniform purchasing procedures can be followed
• Competitive buying between departments within the organisation is eliminated
• Standardization is facilitated by the use of company’s wide specification
• The determination of order quantities and delivery dates is facilitated.
• Staff training and development can be undertaken on a systematic basis.
• Purchasing research into sources, quantities and supplier performance is facilitated
• Suppliers find it more convenient to approach one central purchasing department.

(iii)  Control of activity:

• The purchasing department may become either a separate cost centre i.e. a location within the organisation in relation to which costs may be ascertained or a profit centre.
• Budgetary control may be applied both to the purchasing department and to the total expenditure on supplier.
• Uniformity of purchase prices obtained by centralized purchasing assists standard costing.
• Inventories can be controlled, reduced obsolescence and loss of interest on capital locked up in excessive stocks.
• Approaches such as Just-in-time and MRP ii can be implemented
• Purchasing department performance can be monitored by setting objectives and comparing actual results with pre-determined standards.

Disadvantages of centralized purchasing:

• Centralized can result in many activities that involve expenditure and time without adding value.
• Centralization can foster emphasis on functional objectives with a minimum concern for overall organisational goals.
• User departments will resort to informal procedures if formal purchasing procedures are slow.
• Training of managers with broad perspectives and wide understanding of business may be inhibited.
• Employee identification with a specialist group or function can make it difficult to implement change. It is a more rigid structure.
• Long chain of command.
• Slow-decision making.
• More bureaucratic.