What is Centralized Purchasing?
Centralized purchasing is the practice of consolidating all purchasing for an organization through one team responsible for procurement. The central purchasing team will work with other departments across the organization to make use of economies of scale by buying in bulk and negotiating for more affordable prices. Likewise, centralized purchasing is seen as a way to simplify and streamline procurement.
The use of centralized purchasing has been on the rise since 2018. As more companies have created specialized procurement departments to improve their spend tracking, decisions and profits, centralized purchasing tools and practices allow organizations to decrease risk, prevent duplication of efforts, and share knowledge.
Here’s how centralized purchasing works in practice, as well as the advantages and disadvantages of this style of procurement.
How to implement centralized purchasing
Centralized purchasing starts with the process of identifying overlapping or common suppliers. Gather purchasing information from every department to begin identifying areas where centralized purchasing can negotiate a better rate. For instance, if two departments are purchasing paper from different Staples locations, the procurement team can take over that bid and dentify common items, common vendors, and any standard items that are being purchased redundantly.
Next, implement a centralized purchasing policy backed up with the right operational tools. The centralized purchasing policy should cover things such as:
- Vendor selection: how will new suppliers be set up? How will the procurement team work with each department in vendor selection and relationship management?
- What is the approval process? How will a request make its way through the procurement team to final fulfillment?
- How and when should department members approach the procurement team for help with purchasing?
- How will suppliers be paid by the accounts payable team?
Defining these processes helps get everyone on the same page and centralize purchasing through one team.
Advantages of centralized purchasing
Centralized purchasing is not for every organization; but, when it works, it can bring many benefits that help businesses stay organized, lower risk, and save money.
There are many reasons why centralized procurement is appealing to businesses of all sizes. As one procurement leader described, the potential benefits include: “spend under control, supplier consolidation, supplier innovation, leverage with those suppliers. Fewer risks. Less fragmentation.”
Centralized procurement helps organizations avoid duplication and redundancy, thereby lowering costs. It enables volume purchasing, which generally results in better discounts and terms, as well as potentially lower delivery costs. Centralized procurement can also help teams optimize inventory management and reduce waste; ultimately, the advantages of a well-working centralized procurement function are efficiency, cost-savings, and better relationships with suppliers.
If centralized procurement is that great, why doesn’t every organization practice it? The reality is that centralized procurement can be difficult to manage, depending on the company.
Disadvantages of centralized procurement
Not all companies have a great experience with centralized procurement. For some, running all decisions through one team can create bottlenecks and too much bureaucracy that prevents decisions from being made productively. The centralized purchasing process can often move slowly as compared to making immediate purchases when a material or piece of equipment is needed.
Sometimes the benefits of centralized procurement are overestimated, too. Centralized procurement occasionally receives undue credit for overall savings within the organization while hindering specific departments requiring materials that don’t benefit from price breaks, yet still have to get their purchases approved by the procurement team.
Companies that have locations spread around the country are not able to take advantage of bundled discounts, one of the key benefits of centralized procurement. Therefore, decentralized procurement or a blend of both styles may be more beneficial.
What’s best for your business?
There’s no one-size-fits-all when it comes to setting up a centralized or decentralized purchasing model. Many organizations use a blend of the two, incorporating a centralized request management system and allowing some teams to make purchasing decisions for the sake of efficiency.
Centralization can help reduce rogue spend — but it can just as easily encourage it, too. Implementing a manual approval process that takes too long can cause employees to spend off-book with an unapproved vendor. As a result, organizations should shoot for the right balance between centralized and decentralized purchasing.
“It’s still a mix because you have human behavior,” said the Senior Director of Indirect Strategic Sourcing for a Fortune 100 pharmaceutical company. “You’ll always have one-offs take place. But when you’ve got more than 80-90% of spend under management, that’s pretty good.”
To learn more about centralized procurement and how tools like Fairmarkit can help, check out our blog, The Source.