Centralized Purchasing – Good Or Bad?
Centralized purchasing is the control by one headquarters department of all purchasing that is undertaken by a business. This allows for central management and volume purchases that lead to better prices and terms as well as the ability to work with larger suppliers.
This central control enables more efficient inventory control, lower staffing costs and a decrease in overheads. Staff also benefit with better training and support and the ability to build better relationships with suppliers.
While this may seem obvious, many large companies either have grown quickly and organically or have grown via mergers and acquisitions. This means that they often have several separate purchasing departments that are each responsible for purchasing a group of products.
Advantages of centralized purchasing:
- Allows for fewer overheads.
- Duplication of staff efforts and resulting costs are negated and all activities are standardized.
- Many staff no longer have to spend time on low level ad hoc purchasing.
- Volume purchasing means that better prices, greater discounts and more agreeable terms can be obtained.
- Volume deliveries cut down on delivery charges and staffing costs to move and store the goods.
- Computerized systems can be used to automate much of the work as well as integrate the purchasing systems with accounting and stock control.
- Centralized records can be kept of all purchases.
- Staff can be trained in purchasing and how to minimize costs.
- Suppliers know where and whom to contact which makes supplier contact much easier.
- Purchasing staff can build good relationships with the buyers that enable the supplier to understand the business need and suggest other products that may be more suitable and cost effective.
- It allows for better control of inventories so that they can be kept at optimum levels.
Disadvantages of centralized purchasing:
- Purchase requisitions for ad hoc goods have to be sent from other areas to the purchasing department causing delays and some irritations.
- If the company is very geographically diverse, it may not be able to take advantage of local discounts.
- The centralized purchasing department may become too large and complex to manage.
- Conversely, with a small company it may not be cost effective to have staff and a computer system that only deals with purchasing.
As you can see if you are a large company that is not too geographically dispersed the advantages of a centralized purchasing department far outweigh the disadvantages.
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