Centralized purchasing in supply organisation

  • 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.

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