Centralized purchasing

From CEOpedia | Management online

Centralized purchising unites all of the company's purchasing demands and consists in communication, collaboration and global coordination between separated parts of organization[1]. Centralized purchasing relates to the providing buying process by a single department of purchases, which chooses potential suppliers, provides negotiations for signing the contracts and creates the purchasing plan. Centralized purchasing provides better specialization, client's influence and discount due to the bigger orders. Larger purchasing quantity is the result of combining orders, that creates a better service and develops lasting delivery sources and networks, and additionally big number of products tends to have less orders[2].

Purchasing in general is aimed on things like studying organization with regular stream of materials and services to satisfy its requirements. As the result comes maintaining good and effective relations with suppliers, which in its turn guarantees consistency of deliveries, but searching and developing relations with some other sources may be the good alternative in case of emergencies or rising needs. Other important target in process of purchasing is to provide the best possible service at the lowest cost, that can be achieved by regular supervising of inventory. Improvement of staff professionalism, procedures, developing policies and organization in general is also one of significant parts in structure of the companies purchasing management. The last but not the least target is to keep strong and lasting connection with other institution departments by offering them necessary information and consultation, as a consequence it will provide the effective cooperation of the whole organization[3].

Pros and cons of centralized purchising

As it was already said, all purchases are controlled by one department, which helps to make deliveries and their management easier and provide better control of every department needs. But that is not the whole spectrum of advantages this type of purchasing can bring, here are more of them[4]:

  • the ability to standardize requirements and set up overall needs of each department, that provides better understanding of product features which are needed and helps to avoid duplications;
  • the possibility of using more accurate and detailed purchase information, which makes purchases more profitable and minimizes inventory costs;
  • financial and budgetary control process becomes more precise and administrative cost decreases as the result of purchasing bigger amounts with less occurrence.

But in contrast to the benefits there are some disadvantages which are represented below[5]:

  • first of all, problems with communication inside of institution, such as delays in receiving the order from the main store. The main reason may be derived from geographical reasons like separation and long distance between the units;
  • second minus is slow reaction to new and unexpected needs in organization supplies and replacing defective products;
  • last one is the fact that lead-time of centralized purchasing takes more time than decentralized, because of processing, ordering and then distributing it to all departments.

Examples of Centralized purchasing

  • Automated purchasing systems: Automated purchasing systems are used to streamline the purchasing process. The system automates the entire purchasing process, from the request for a purchase to the payment of an invoice. It also allows for centralized control of the purchasing process, ensuring that all orders are managed in an efficient and effective manner. Automated purchasing systems are becoming increasingly popular in large organizations as they provide an easy way to manage and control the purchasing process.
  • Vendor Management Systems: Vendor management systems are used to organize and manage the relationships between an organization and its suppliers. These systems provide a centralized platform for managing purchasing activities, such as pricing, order tracking, and contract management. Vendor management systems provide organizations with a centralized view of the entire purchasing process, giving them the ability to negotiate better pricing and terms with their suppliers.
  • Electronic Data Interchange (EDI): EDI is a technology used to facilitate the exchange of business documents, such as purchase orders and invoices, between organizations. This technology enables organizations to collaborate and communicate in real-time, eliminating the need for manual data entry and manual processes. EDI also enables organizations to centralize their purchasing process, allowing for more efficient communication and collaboration between different departments.

Advantages of Centralized purchasing

Centralized purchasing has many advantages for companies. These include:

  • Streamlined processes: a single, centralized purchasing process allows for more efficient use of resources. By having all purchasing requests managed in one place, paperwork is reduced and decisions are made more quickly.
  • Cost savings: Centralized purchasing helps to reduce costs by leveraging economies of scale. By consolidating multiple orders into one, companies can take advantage of bulk discounts and other cost-saving strategies.
  • Improved transparency: With centralized purchasing, all transactions are visible and traceable. This increases accountability and allows organizations to track spending more effectively.
  • Standardization: When purchasing is centralized, it is easier to ensure that all purchases meet the same standards. This improves the quality of the goods and services purchased, and reduces the risk of errors or inconsistencies.
  • Risk management: By centralizing purchasing, companies can better manage risk. With all purchases coming from a single source, it is easier to identify and address potential issues with suppliers and to ensure compliance with applicable laws and regulations.

Limitations of Centralized purchasing

Centralized purchasing has several limitations, including:

  • Lack of flexibility: centralized purchasing can be too rigid and inflexible, with its processes not being able to adapt to changing needs in a timely manner. This can lead to delays in responding to changes in the demand for goods or services.
  • Lack of local control: centralized purchasing can limit the control that local managers have over the purchasing process, which can lead to a lack of accountability.
  • Potential for increased costs: the costs associated with centralized purchasing can be high, as it can require a large amount of resources to effectively coordinate the purchasing process across the organization.
  • Difficulty in adapting to new technologies: centralized purchasing can be slow to adapt to new technologies, which can lead to the organization missing out on potential savings.
  • Difficulty in identifying savings opportunities: centralized purchasing can make it difficult to identify and capitalize on potential savings opportunities.

Other approaches related to Centralized purchasing

Centralized purchasing is a system in which all of the company’s purchasing demands are managed and communicated through a single source. Other approaches related to centralized purchasing include:

  • E-Procurement: This is the use of technology to automate the purchasing process, including the generation of purchase orders, receiving of goods, and making payments. This allows companies to streamline their purchasing processes and reduce costs.
  • Vendor Management: This involves evaluating and selecting vendors, oversight of pricing and terms, and ongoing monitoring and evaluation of vendor performance to ensure they meet the company’s needs.
  • Strategic Sourcing: This is a process of evaluating suppliers, negotiating prices, and selecting the right vendors to meet the company’s needs. It involves analyzing the company’s spending patterns, understanding the market dynamics, and selecting vendors that can offer the best solutions.
  • Supplier Relationship Management: This is an approach to managing the relationship between a company and its suppliers. It involves setting goals, developing plans, and creating metrics to evaluate supplier performance.

In summary, centralized purchasing is a process that involves communication, collaboration, and global coordination between different parts of the organization. Other approaches related to centralized purchasing include e-procurement, vendor management, strategic sourcing, and supplier relationship management.

Footnotes

  1. ↑ T.E. Johnsen and others 2018, p. 67
  2. ↑ L. Li 2007, p. 64
  3. ↑ R. Wild 2002, p. 309
  4. ↑ R. Wild 2002, p. 310
  5. ↑ R. Wild 2002, p. 310


Centralized purchasing — recommended articles
Extended enterprise — Procurement logistics — Principles of Supply Chain Management — Reintermediation — Stockout costs — Integrated management system — Paraplanning — Operational decision — Benchmarking

References

Author: Uladzislau Leonau

Retrieved from "https://ceopedia.org/index.php?title=Centralized_purchasing&oldid=90211"