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.