Centralized and Decentralized Purchasing: Which is Best for Your Business?

Centralized and Decentralized Purchasing

A decentralized purchasing model is a business model where the company does not have a centralized purchasing department. Instead, each business unit has its purchasing department. This means that each business unit is responsible for its spending, and there is no centralized control over purchasing decisions.

Every business unit has different needs and requirements, so each department must be able to tailor its purchasing decisions to meet those needs. It can be a challenge, as it can be difficult to ensure that all departments are working towards the same goal.

Let’s take a look at how the decentralized purchasing model works and some of the benefits and challenges associated with it.

Also, Read: What is Purchase Order Automation?

What is Centralized Purchasing?

The purchasing process of most businesses is centralized. That means there is one primary department or individual responsible for making all purchases on behalf of the company. The centralized purchasing model has several advantages, including economies of scale and negotiating better deals with suppliers.

This model allows businesses to easily compare prices and terms from different vendors and take advantage of quantity discounts.

However, coordinating procurement activities across different departments can be challenging, and centralized purchasing can lead to bottlenecks in supply chain logistics. In addition, this model does not always allow businesses to take advantage of local suppliers who may offer better terms.

Suggested Read: Procure-to-pay (P2P) Cycle

What is Decentralized Purchasing?

Decentralized purchasing is a business arrangement in which each business unit or subsidiary purchases goods and services independently, without central approval. It can be contrasted with centralized purchasing, in which all purchasing decisions are made at a single location, typically by a central procurement department.

With a decentralized procurement model, buyers have more control over their budgets. They can choose suppliers that offer the best value rather than being forced to purchase from a single, pre-approved vendor. This purchasing arrangement is typical in large organizations, where there may be many different business units with specific needs.

The procurement process may be more efficient because buyers can work with suppliers specializing in the needed products rather than relying on a central procurement department to source all goods and services.

Unlike a centralized procurement model, a decentralized model can be more responsive to the needs of individual business units. It may lead to cost savings in some cases because buyers can purchase goods and services at lower prices by working directly with suppliers.

Quick Read: Purchase Order vs Sales Order vs Invoice

Centralized vs. Decentralized Purchasing

Centralized	Decentralized
The centralized model is less flexible. The company must go through a centralized decision-making process if it decides to add or remove a product from its offerings.	In a decentralized system, the decisions are made locally, which allows for more agility.
All decisions must go through the central authority, which can take time.	Decisions can be made quickly locally.
Centralized systems often have higher costs because there are more layers of management.	Decentralized systems can be less expensive because they often have fewer managers.
Centralized systems give the central authority more control over the system.	There is more decentralization of power.
The company deals with fewer vendors in a centralized system, which can improve relationships.	The company is dealing with more vendors, which can lead to more competitive prices.
In a centralized system, all customer service decisions must go through the central authority, which can lead to delays.	In a decentralized system, customer service decisions can be made quickly at the local level, improving customer satisfaction.

Pros and cons of Centralized Purchasing

There are many factors to consider when making the decision to centralize purchasing for your company. The primary driver for most companies is usually cost savings, but there are other important factors to weigh as well.

Here we will take a look at some of the pros and cons of centralized purchasing so that you can make an informed decision for your business.

Pros of Centralized Purchasing

1. Reduce inventory

By consolidating your purchasing; you can reduce the amount of inventory you have on hand at any given time. It can free up valuable storage space and help to reduce carrying costs.

2. Improved cash flow

When you purchase in larger quantities, you may be able to receive discounts that will enhance your cash flow. In addition, paying for a large shipment all at once can help improve your business’s cash flow.

Cons of Centralized Purchasing

1. Inflexible contracts

You may be locked into inflexible contracts when you commit to purchasing large quantities of a product from a single supplier. It can limit your ability to take advantage of better suppliers’ prices or switch to alternative products if necessary.

2. Long lead times

It can take longer to receive shipments when you purchase in large quantities. It can be a problem if you experience a sudden spike in demand or run into other production issues.

Also, Read: Purchase Requisition and Purchase Order

Pros and Cons of Decentralized Purchasing

Pros of Decentralized Purchasing

There are many different ways to organize the purchasing function within a company. Some businesses opt for a centralized approach, while others choose decentralized purchasing. Each method has its own advantages and disadvantages, which you’ll need to consider before making a decision about how to structure your own purchasing department.

1. Accelerated purchasing process

With a decentralized purchasing model, the purchase process is accelerated. In a centralized system, a single department is responsible for all purchases made by the company. 

It can lead to delays in the purchasing process, as approvals must be received from multiple sources before a purchase can be made. Purchasing team needs to get the requisition form from departments, fill it and submit it for final approval.

2. Reduced costs

A decentralized procurement process can also help to reduce costs. It is because each department is responsible for its budget. It means that departments are more likely to be mindful of how they spend their money, as they will be held accountable for overspending.

3. Enhanced communication

For a decentralized purchasing system to be effective, enhanced communication is essential. It is because each department must be aware of the purchasing decisions made by other departments. 

It can help ensure that duplicate purchases are not made and that all departments get the products or services they need. Local vendors are more accessible and responsive to our needs.

Also, Read: What Is Strategic Procurement?

Cons of Decentralized Purchasing

1. It can lead to duplicate purchases

One of the main disadvantages of decentralized purchasing is that it can lead to duplicate purchases. Each department is responsible for its budget and may not know what other departments are buying. Spend analysis can help to overcome this obstacle.

2. May encourage unnecessary purchases

Decentralized purchases may also encourage unnecessary purchases, as each department tries to justify its budget. The procurement unit should, therefore, establish clear guidelines and expectations to avoid this pitfall.

Centralized or Decentralized Purchasing: Which is best for your business?

It depends on your specific needs and circumstances. Decentralized purchasing may be the best option if you need to respond quickly to market changes. If you want to have greater control over your supply chain, centralized purchasing may be the better option.

Depending on the purchased item, some companies choose a mix of centralized and decentralized purchasing. For example, they may buy raw materials centrally and then allow individual locations to purchase finished goods. For contract management, many companies choose to have a centralized purchasing department.

It’s also important to consider whether your company is large or small. If you’re a large company, centralizing purchasing may make more sense to take advantage of economies of scale.

If you’re a small company, decentralized purchasing may be the better option to be more nimble. For example, if you need to change your product mix quickly, decentralized purchasing may allow you to do that faster.

When deciding whether to decentralize or centralize purchasing, it’s essential to consider all factors and make a decision that’s best for your company.

Also, Read: 10 Best Procurement Software

Conclusion

Decentralized purchasing is a way of conducting business that involves distributing the sourcing and decision-making authority for procurement across an organization. Companies with decentralized purchasing say that it allows them to be more agile and responsive to customer needs.

Others argue that it can lead to inconsistency and inefficiency. Considering decentralized purchasing for your organization, it is essential to weigh the pros and cons before deciding carefully.