Central procurement

Central procurement - process of obtaining goods or services in any possible way (including buying, borrowing, leasing or hiring), controlled at one central location for the entire business . Centralization allows to control resources usage and performance of activities at one place in organization - e.g. at a central purchasing department. The aforementioned department is responsible for search and selection of suppliers, coordination activities and product specification . Central procurement is opposite of decentral one.

Central procurement advantages

There is a great number of researches and discusses in supply chain management, which show pluses and minuses of central procurement usage in enterprises . According to the most of them, the key advantages are :

• Specialization of hired staff

Procurement staff, located in divisions, is responsible for a wide range of activities - that fosters expanding of generalist knowledge and skills. If system of procurement is centralized, each employee can focus on work in a particular area; develop proper skill set and knowledge for that area (e.g. procurement employee specialization - negotiator, skills - effective verbal communication, assertiveness, etc.). Moreover, specialization of human resources facilitates personnel management as well as training organization.

• Volume purchasing

Above-mentioned central purchasing department puts multiple requisitions from different divisions together into one large order. Such firm policy reduces number of orders and related with order frequency transaction, transport and inventory costs. Additionally, volume purchasing brings better prices (or discounts), higher service level and better terms (company becomes more important customer for suppliers).

• No conflicts between divisions, no duplicate orders

Decentralized structure of procurement system may create or arise competition for transport units (if company own ones), rare materials and budgetary allocations of procurement expenditure.

• Institutional benefits

Monitoring of suppliers’ performance and budget control becomes less complex. Procurement procedures are more transparent and measurable. Litigation and disputes concentrated in one place.

• Access to procurement research

Such analyses, commonly, not available at divisional level because of it costs.

Central procurement disadvantages

Taslimul I. (2014) defines the following disadvantages of central procurement :

• Delays and misunderstandings

Necessity of communication, transfer of information and reaching the agreements extends the entire process of procurement. Different divisions should send their requirements to central procurement department. After that, needs should be accepted or modified (this phase may be extended by conflict between particular divisions and central institution). The purchasing department will order the necessary items and organize their way to divisions. Additionally, as Leenders M. and Johnson P. (2000) noticed, sometimes "suppliers behave contrasting in different geografic or market segments" .

• No localized purchasing

Higher costs of transportation and botheration: e.g. local division has a supplier round the corner, but should act through central department.

Examples of Central procurement

• Centralized purchasing of raw materials: A company may choose to centralize its purchasing of raw materials, such as steel, aluminum, wood, plastics, etc. This ensures that all of the company’s locations are using the same materials and getting the best value for their money.
• Centralizing of services: A large company may centralize the procurement of services such as IT services, transportation, advertising, etc. This ensures that all of the company’s locations are using the same quality services.
• Centralizing of vendors: A company may choose to centralize its vendors and only use certain vendors for all its locations. This can help to reduce costs and improve quality control.
• Centralizing of contracts: A company may choose to centralize its contracts and only use certain contracts for all its locations. This can help to reduce costs and ensure legal compliance.
• Centralizing of inventory: A company may choose to centralize its inventory and store all of its stock in one central location. This can help to reduce costs, improve efficiency and streamline inventory management.

Other approaches related to Central procurement

Central procurement is a process of obtaining goods or services in any possible way, controlled from one central location for the entire business. Other approaches related to Central procurement include:

• Just-in-Time (JIT) Procurement: A method of inventory management in which goods are purchased from vendors as they are needed, reducing the amount of inventory on hand.
• e-Procurement: Also known as electronic procurement, this is the automated purchase and sale of goods and services over the internet.
• Strategic Sourcing: A method of procurement in which goods and services are purchased in an organized and systematic way, with an emphasis on getting the best value for money.
• Reverse Auctions: A process where goods or services are purchased from the lowest bidder.

In summary, Central procurement is an efficient and organized way of obtaining goods and services. Other approaches related to Central procurement include Just-in-Time Procurement, e-Procurement, Strategic Sourcing, and Reverse Auctions.

Footnotes

Central procurement — recommended articles

Centralized purchasing — Procurement logistics — Revenue center — Dual distribution — Sales agent — Strategic business unit — Types of supply — Business process outsourcing — Added value (logistics)

References

• Albano G.L., Sparro M. (2010). Flexible Strategies for Centralized Public Procurement, "Review of Economics and Institutions", Vol. 1, No. 2: pp.1-32.
• Bhuvaneswaran S. (2018). For the Last Time: ‘Procurement’ and ‘Purchasing’ Are Different, "kissflow.com".
• CIPS (2017). Contexts of Procurement and Supply, "Chartered Institute for Purchasing and Supply", Lincolnshire.
• Dimitri N., Dini F. and Piga G. (2006). When Should Procurement Be Centralized?, "Handbook of Procurement. Cambridge University Press", New York.
• Junior S., Francisco W. (2013). Assessing the efficiency of centralised public procurement in the Brazilian ICT sector, International Journal of Procurement Management, Vol. 6, No. 1: pp. 58-75.
• Leenders M., Johnson P. (2000). Major Structural Changes in Supply Organizations, "Center for Advanced Purchasing Studies", London.
• Taslimul I. (2014). Effectiveness of Centralized Procurement Systems in Public Sector Enterprises of Bangladesh: A Focus on Economic Census 2013, "Dissertations of BRAC University", Dhaka.
• Weele A. (2009). Purchasing & supply chain management: analysis, strategy, planning and practice, Thomson, London.

Author: Pavlo Smereka