Centralized Purchasing (A Detailed Guide)

Read on to know the difference between centralized and decentralized purchasing processes, and the best practices for implementing a centralized process.

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Let’s begin by defining centralized purchasing.

What is Centralized Purchasing?

Centralized purchasing or centralized procurement is a process wherein one designated department handles all the purchasing decisions on behalf of the entire organization or enterprise, instead of different teams having to buy goods and services as and when the need arises for their specific department.

The centralized purchasing department will thus be responsible for organization-wide coordination and place the necessary orders for bulk purchase after determining overlaps in inter-departmental needs. 

The process as a whole facilitates a better negotiation position for your organization and is likely to get you more affordable prices in the long run!

Another method of incorporating centralized purchasing is by following a center-led structure. In a center-led structure, a single department is responsible for developing and maintaining certain standard policies and operating procedures for other departments to follow while making purchasing decisions.

Regardless of whether your organization is entirely centralized or center-led, adopting a centralized purchasing policy ensures the efficient and strategic management of all your purchasing activities.

Examples of Centralized Purchasing

To better understand how the process can be implemented, let us consider two centralized purchasing examples:

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1. Imagine that an organization’s HR team requires new software, like Slack, to streamline intra and interdepartmental communication. The purchase of such a software would entail the following steps:

• First, a request needs to be submitted to the centralized purchasing or procurement team.
• The decision maker on the procurement team will then read and approve or deny the request.
• If approved, a member of the centralized purchasing team will place the order, after coordinating with the HR department.

Thus, a centralized purchasing strategy is characterized by the presence of an authority who has the ultimate control over procurement activities.

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2. A good centralized purchasing example would be when digital cleanup and antivirus services, or common products used by all departments like toiletries or notepads, are procured via a centralized setup on a regular and scheduled basis from selected suppliers.

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This illustrates how the process can save unnecessary manpower and streamline supplier and resource management.

Centralized vs Decentralized Purchasing: What is the Difference?

The key difference between centralized and decentralized purchasing is that centralized purchasing requires a designated procurement team or department to make purchasing decisions for an entire company or organization, whereas decentralized purchasing refers to when different departments or teams within an organization are responsible for their own procurement process.

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As a result of this, there are several distinctions between the workings of centralized and decentralized models, some of which are outlined in the table below:

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Centralized Purchasing Model

Decentralized Purchasing Model

All purchasing decisions are handled by a central team from one central location or headquarters.

Different departments and teams carry out decentralized procurement according to their individual needs, schedules, and locations.

The hierarchical structure establishes a clear line of authority and a standardized purchasing process across the entire organization.

Departments follow their own purchasing templates within their budget and organizational framework.

The vertical communication required for the process might slow down decision-making when it comes to buying goods and services.

A relatively flat interdepartmental hierarchy means that decision-making can be immediate, with purchase orders placed as quickly as within a couple of hours.

Buying control is limited to one single department.

Buying control is divided among different professionals across different departments.

Industry professionals recommend using software tools to streamline centralized procurement.

Decentralized purchasing models are manually executed and do not require software tools to function effectively.

Negotiation processes result in volume discounts due to bulk purchasing.

Scattered purchasing can be inconvenient and expensive if the same goods and services are required across departments.

Fewer vendor interactions can prove beneficial for contract management and vendor relationship management.

The chances of upselling are higher when dealing with multiple vendors due to competitive pricing strategies.

The added layer of management increases your organization’s payroll expenses.

Fewer managers mean less payroll expenditure for the entire organization.

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Centralized purchasing models are often recommended for small to medium-sized businesses and enterprises, whereas large organizations and corporations commonly adopt a decentralized purchasing process. 

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This is because smaller businesses can benefit more from the streamlining of their purchasing processes, whereas larger organizations with a varied and diverse inventory of required goods and services need interdepartmental freedom when it comes to executive decision-making.

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Advantages of Centralized Purchasing

Centralized purchasing is being increasingly adopted by businesses and enterprises because of its many advantages. Some centralized purchasing advantages include:

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1. Increased operational efficiency

• A clearer management hierarchy ensures operational efficiency since there is a standard procedure that all internal departments and teams must follow prior to purchase.

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• The shift to centralized purchasing often means that a company or organization has the necessary infrastructure to plan long-term strategies. This is because interdepartmental transparency and coordination is leveled up!

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• Centralized purchasing means that your employees can focus on their main day-to-day responsibilities rather than spending precious time maintaining an inventory of goods and services or placing orders. 

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• Documentation and reporting, including the sending and processing of invoices, become hassle-free since they are concentrated in a single designated location or at the official headquarters.

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2. Better supplier relationships

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• Because fewer orders are placed, and goods and services are purchased in bulk, your relationships with suppliers have a chance to grow and flourish. Sourcing becomes a more intentional process towards longevity rather than speed.

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• Better interdepartmental coordination also means that issues of order duplication and purchasing overlaps are greatly reduced. This means that there is more consistent and streamlined communication with your suppliers, which benefits your entire organization in the long run.

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• Suppliers also gain a better understanding of your organization's purchasing requirements over a long period, which further increases the efficiency of the purchase process as a whole.

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• Over time, especially if your contracts are pre-negotiated, supplier management becomes an easier and more standardized process.

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3. Increased cost efficiency 

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• As a regular buyer. suppliers are more likely to give you volume discounts on every purchase. If several orders are clubbed together, you save substantially on transportation costs and other overhead expenses. This is useful in balancing your accounts and increasing your profit margin.

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• Centralized purchasing leads to better strategizing across departments, which means that budgeting and other financial planning become more accurate and viable.  

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• Accountability regarding departmental budgets and expenses is increased. Maverick spending, which is when employees spend outside of the organization’s official purchasing policies, is thus greatly curbed by centralized purchasing.

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• Having a designated purchasing team rather than multiple purchasing managers across different teams might even reduce your payroll expenses, depending on the size and structure of your organization.

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Disadvantages of Centralized Purchasing

Centralized purchasing also comes with its own set of limitations. Some centralized purchasing disadvantages are:

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1. Inapplicability to larger organizations and enterprises

• Large organizations with multiple branches spread across different geographical locations are not ideal candidates for centralized purchasing because different branches might operate under different laws and regulations. Trying to centralize purchasing activities may inevitably violate some of them.

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• It makes more sense for multinational corporations to cut costs by availing local discounts wherever possible. This is not possible in a centralized purchasing process.

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• Centralized purchasing teams for large organizations would have to be much bigger than one for smaller or mid-sized businesses. This means that it might be more cost-efficient, keeping in mind payroll expenses, to just have local or regional purchasing managers across different branches and adopt a decentralized purchasing process.

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• It does not make sense to collate organization-wide purchase requirements and find common suppliers only to have the goods and services delivered to different geographical locations, which could lead to exorbitant shipping costs.

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2. Increased time inefficiency

• The hierarchical nature of any centralized purchasing strategy means that all purchasing decisions need to be vertically communicated before they are approved. This can be time-consuming because of the red tape involved.

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• To cut down on the steps involved in placing an order, organizations can turn to centralized processing software to streamline the process. Software installation and setting up along with getting all departments and teams to incorporate the software in their day-to-day activities might take time.

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• Because of the bulk nature of orders placed in centralized processing, delivery time may increase, and turnaround might take longer.

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• Supplier management can be slow to take off at first since a specialized team is in charge of a thorough and exhaustive sourcing process. Supplier selection will only get easier as you form advanced supplier networks, which is only possible over long periods.

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3. Lack of operational flexibility

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• The centralized process relies on the placement of orders for increased operational efficiency. This makes it difficult to accommodate last-minute changes or updates to your orders, especially since your turnaround has already increased.

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• If a specific department or team has unique requirements that can only be fulfilled locally, a centralized process might not be able to accommodate them.

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• Employee morale can be affected by the lack of operational flexibility since individual departments are used to doing things a certain way. Sometimes it is just more convenient to distribute buying control across more departments and people than limit all decision-making to the central purchasing team.

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• Supplier diversity takes a hit because a centralized purchasing policy prioritizes the thorough vetting and shortlisting of reliable suppliers.

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Now that we have defined and learned the pros and cons of centralized purchasing, let’s understand what the process actually entails.

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What Does the Centralized Purchasing Process Entail?

The centralized purchasing structure can be broken down into the following steps.

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1. Assessing your current purchasing process

This is where you take stock of your current purchasing process, asking questions like:

• How are departmental purchases handled?
• How effective is volume purchasing for your organization?
• How are purchasing responsibilities dispersed within your organization?
• How important is supplier diversity to your entire process?

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2. Identifying key stakeholders

This step involves identifying the exact department or individual responsible for purchasing functions. At this stage, ask questions like:

• Who conducts procurement activities for different departments?
• Who holds final purchasing autonomy?
• What is the general employee sentiment regarding direct and indirect procurement?

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3. Testing different procurement models

Centralized processing involves a substantial overhaul of how your organization functions. To avoid sudden and abrupt changes, consider different procurement solutions in detail.

• Is it advisable to give complete control over procurement activities to one department?
• Should you start by standardizing policies and slowly build up to reassigning purchase decisions to a single team?

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4. Deciding whether or not your centralized process needs automating

At this stage of the centralized process, you will have identified the centralized procurement model that is the perfect fit for your organization. Thus, it is now time to consider automation. 

• Will automating help streamline your individual departments?
• Does your current purchasing volume require automation?
• Will automation help your procurement goals?

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5. Getting your employees on board

While training your employees for the change, allot time to address their concerns about the new process. 

• How prepared are they for the shift?
• Do they get on well with newly appointed procurement staff?
• Are they satisfied with the team that now holds purchasing autonomy?

You should have the answers to these questions to develop better employee management strategies.

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6. Evaluating your newly formed procurement department

• Are your cost savings making up for the loss in supplier diversity?
• Are employees adjusting well to the new structure?
• Have relationships with vendors improved?
• Are your business goals being met?

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Knowing the process is just the beginning. How do you go about implementing it? And how do you know whether the centralized model is right for you? Read on to know more!

How to Implement Centralized Purchasing?

Before implementing the centralized purchasing process comes the consideration of whether centralized procurement is right for you. To do this you must know when this shift is inadvisable.

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You should stick to decentralized purchases if your organization

• is a multinational corporation,
• has scattered business units with their separate profit and loss record keeping,
• does not have significant interdepartmental supplier overlap, or
• has vastly different purchase requests from different business units.

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On the other hand, if your organization 

• is small or medium in size,
• follows similar purchasing practices across departments, and
• has significant supplier overlaps

then a centralized policy is just what the doctor ordered!

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When implementing centralized purchasing, here are a few things to keep in mind:

1. Keep a consistent purchasing manual

A purchasing manual outlines internal purchasing policies for your employees. It is easy to understand and defines

• the identities and roles of purchasing authorities,
• interdepartmental policies concerning purchasing decisions, and
• procedures for supplier engagement.

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Keeping a consistent purchasing manual ensures that there is an official document to refer to in case of internal disputes or conflicts.

2. Hire qualified personnel

The centralized purchasing shift brings with it a reduction in the individual employee’s purchasing power. This can sometimes cause friction and resistance to new policies.

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Thus, it is advisable to compose your procurement staff of people from different internal teams who have been working with your organization in a managerial capacity, instead of relying on new hires. 

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This not only ensures cohesiveness and cooperation from departments in the long run but also makes sure that your purchasing power is maintained during the shift from decentralized to centralized purchasing.

3. Review your changes regularly

Centralized purchasing is not a straightforward process. Even after implementation, some decision-making power must be dispersed within existing departments.

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Therefore, it is crucial to stay on top of the new structure you have introduced and make continuous improvements. 

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By doing so, you ensure that your employee relationships and procurement activities continue to thrive!

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Read on to learn best practices that will ensure that your transition to centralized purchasing is a huge success!

Best Practices for Centralized Purchasing

There are four best practices to follow when adopting centralized purchasing in the long run. They are:

1. Dedicated Supplier Relationship Management (SRM) Efforts

A good centralized purchasing strategy relies heavily on strong supplier relationships. 

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Make sure that your team is dedicated to maintaining and fostering supplier relations to reap the benefits of the same in the form of bulk discounts or flexible payment terms.

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Good SRM can also make a significant difference when it comes to accessing relevant information, like changes in market pricing, product availability, or newly launched services.

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2. Regularly Updated Inventories

Regularly updating your product or service inventory is the backbone of an effective centralization process. Not only does it ensure that there are no overlaps when placing orders, but it also helps in scheduling purchases for different departments.

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If you use centralized purchasing software, you can organize your dashboard such that it becomes easier for employees from different departments to quickly log updates.

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3. Standardized Purchasing Policies

As mentioned above, standardized purchasing policies do away with the confusion associated with managerial shifts. 

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Keeping a consistent purchasing manual is part of enforcing such policies, making intradepartmental procedures easier for everyone to interpret and adhere to.

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Standardized purchasing policies also ensure that no department’s requirements get special treatment, keeping all business units on an established footing!

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4. Automated Workflows

Automating your centralized purchasing process is the best strategy for long-term satisfaction with your organization’s transformation. 

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Automation reduces the chances of orders being overlooked or forgotten due to manual error. 

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Furthermore, automated workflows allow procurement teams to minimize delays and stay updated regarding changes in the purchasing cycle.

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Conclusion

Adopting centralized purchasing can seem like a daunting process, but once you incorporate all the above-mentioned advice, you’ll find it to be a breeze.

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Any roadblocks you face in the process can quickly be resolved by maintaining thorough reviews of your process and gathering extensive feedback. 

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Since the process of centralizing all your purchases is a long-term change, you have a lot of time to test out different methods and hone your skills.

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Good luck on your centralization journey!

FAQs

What are the benefits of centralized purchasing?

The benefits of centralized purchasing are improved operational efficiency, better supplier relationships, and increased cost efficiency. Enhanced interdepartmental communication is also a happy side-effect!

What is an example of centralized procurement?

A good example of centralized procurement is when digital cleanup and antivirus services, or common products used by all departments like toiletries or notepads, are procured via a centralized setup on a regular and scheduled basis from selected suppliers.

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This illustrates how the centralized procurement process can save unnecessary manpower and streamline supplier and resource management.

What is the difference between centralized and decentralized purchasing?

The difference between centralized and decentralized purchasing is that centralized purchasing requires a designated procurement team or department to make purchasing decisions for an entire company or organization whereas decentralized purchasing refers to when different departments or teams within an organization are responsible for their procurement process.