The purchasing process is a critical element of a company’s overall procurement department. No matter the size of your company, how you structure your purchase process has a direct impact on your company’s ability to control costs, manage risks, and maintain process resilience as supply chains evolve.
Below we’ll explain the types of purchase models, the differences, advantages and disadvantages, and how to determine which model is best for your procurement department.
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What is centralized purchasing?
In a centralized purchasing system, all purchases are managed and handled by a single team, department, or branch. This means that any employee or team purchase must be submitted, reviewed, and approved through a single purchasing process.
Example of centralized purchasing
An example of a centralized purchasing process would be a case where a team requires a new software system or app to manage their deliverables. The team submits the request to an internal purchasing team. A designated reviewer receives and approves the purchase request. The approved request is then delegated to a member of the purchasing team for completion.
As you can see from this example, a centralized purchasing process relies on a gatekeeper who approves and manages purchases. This gatekeeper — usually someone in a management role — has visibility and control of all purchase requests and transactions.
Advantages of centralized purchasing
There are many advantages to using a centralized purchasing system within your business, especially with regard to transparency, control, standardization, and cost containment.
Visibility and control
When purchase requests and related information are consolidated and centralized, oversight becomes easier and faster. Purchasing teams are able to maintain a close watch on budgets, requesters, and requests.
Better purchasing power
Purchasing teams that are organized and informed have more leverage with vendors. By centralizing all company purchasing information and history, the purchasing team is able to negotiate better prices and volume discounts with suppliers. Purchasing teams are able to establish a better rapport with vendors and can use their relationships (and history) to negotiate better prices and terms.
Standardized processes are easier to manage and produce more consistent results. When purchasing is centralized within a single team, the purchasing process remains stable and predictable. This makes it easier to organize information, avoid errors, and build a single source of truth.
Eliminates maverick spending
The purchasing team can quickly identify individual spending that goes against purchasing policies or duplicate purchase orders to eliminate excess spending that may lead to company losses.
Centralized purchasing creates structured processes and stable workflows. As a result, purchasing teams are able to move with speed, accuracy, and efficiency.
Because the purchasing team is familiar with the workflows, there are fewer opportunities for errors and broken handoffs. This familiarity with the process also means that the purchasing team is able to identify opportunities to automate and optimize their workflows.
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Disadvantages of centralized purchasing
Centralized purchasing offers many benefits, but it isn’t right for every business. In some cases, the disadvantages of centralized purchasing outweigh the advantages. Here are some of the cons of using a centralized purchasing process.
Centralized purchasing improves visibility and process standardization, but it also makes the purchasing process less flexible. This is important for situations in which adaptability is needed, such as when a company needs to diversify its vendor base quickly or when working with suppliers that have vastly different legal and compliance requirements.
Lack of purchasing autonomy
Because the purchasing process may take longer, purchasing managers have less autonomy to make time-sensitive decisions. Delivery delays and longer turnaround times can lead to poor employee experiences and job frustrations.
For companies that see high volumes of purchase requests, a centralized system may create a bottleneck that leads to processing delays and late approvals.
Complex and costly management
For a smaller business with a single location or various branches within a single region, this disadvantage may not actually apply. But for larger businesses with various branches and a wider geographic presence, managing a centralized purchasing model can be complex, time-consuming, and costly.
That’s because purchasing managers and specialists need to consider how even the most minor improvement may affect the entire purchasing ecosystem. For teams with limited resources, this can be a complicated matter.
What is decentralized purchasing?
A decentralized purchasing system is a model in which purchases are made and managed by various specialized teams, departments, or branches. This means that teams or employees refer to a variety of departments or teams — depending on their needs — for purchase requests, rather than a single department.
Example of decentralized purchasing
Decision making with this model is divided, so purchase requests are received and managed by various departments. As a result, purchasing authority is distributed to more than one person.
An example of decentralized purchasing would be a purchase request for equipment or software that impacts more than one team, such as a new HR app that needs approval from both HR and IT. Another example would be a company in which each department has final approval over its internal purchase requests.
Advantages of decentralized purchasing
Decentralized purchasing offers several distinct advantages over centralized purchasing. These include increased agility, specialized purchasing, and supplier diversity.
Because the flow of communication is much more open and doesn’t require a single approval, decentralized purchasing usually makes decision-making easier and faster than it would be with a centralized purchasing model. Teams are able to process requests without any bureaucratic delays and are able to engage with a more diverse range of suppliers.
Specialized purchasing knowledge
In a decentralized purchasing model, each department handles purchase requests specific to its needs. This allows the team to become its own “purchasing expert.” They understand suppliers, department needs, and business priorities better than an external purchasing department and apply their expertise to the purchasing process.
More supplier diversity
Supplier diversity is important because it means buyers have more bargaining power and because it protects against supply restraints. If one vendor’s price is too high, or they aren’t able to fulfill orders quickly, the buyers have alternate routes to procure the goods and services they need.
In a decentralized purchasing model, individual teams build supplier relationships and are able to determine which supplier is the best fit given current circumstances.
Disadvantages of decentralized purchasing
While a decentralized purchasing model offers many benefits for larger companies, there are also some downsides.
Lack of process standardization
Since each department or team manages its own purchase requests, there may be different purchasing processes at work at the same time. This lack of standardization can make it difficult to monitor and centralize purchasing requests, which can be disruptive to budgets and the accounts payable process.
Difficulty enforcing compliance standards
Unstandardized processes create complexity for IT teams, who are tasked with enforcing compliance and security requirements. When different departments manage their own purchases, it’s also more difficult to ensure that vendor vetting or other policies are being applied consistently.
Missed opportunities for discounts
Vendors often offer discounts based on volume and/or timely payment. In a decentralized purchasing process, the lack of coordination and centralization may lead to a situation in which vendors don’t award discounts based on sales volume. Likewise, delays can cause the buyer to miss out on discounts available for paying invoices early or within terms.
Scattered purchasing history and poor spending management
The greatest disadvantage to this model is that it leads to disorganized data. Not only does this open the door to errors, duplicates, and maverick spending, but it also makes it more difficult to perform a holistic spending analysis because the information is so scattered. This disorganization can wreak havoc on budgets and create unnecessary headaches for the finance team.
What is the difference between centralized and decentralized purchasing?
The difference between these two models comes down to the structure and business benefits.
|Ideal business size
|A centralized purchasing model is ideal for smaller businesses striving for more efficient purchasing management.
This is also beneficial to businesses that need complete oversight of strict compliance policies.
|A decentralized purchasing model is ideal for larger businesses striving for more specialized purchasing management.
This is also beneficial for growing businesses that need to adapt their purchasing process to a more efficient model.
|Purchasing transparency, process standardization, and purchase history and supplier information centralization
This model makes it easier for purchasing managers to identify opportunities for high-volume purchase discounts.
|Shorter delivery times, greater employee autonomy, purchasing agility for managing a high volume of specified purchase requests
This model makes it easier to tap into a more diverse supplier database and grow relationships with localized suppliers.
Centralized vs. decentralized purchasing: Which is the right choice?
There’s no definitive answer for which model is the right or best one. In order to decide which is the most suitable, the procurement team must be aligned with business priorities and strategic objectives. Companies and procurement teams also need to have an in-depth understanding of their supply chain so that they can meet business and departmental needs at a strategic and financial level.
This alignment and transparency with stakeholders is essential to building a model that achieves not only procurement goals, but also business goals. To help guide your purchase model framework, below are some considerations for each model.
Choose centralized purchasing for:
- Higher degrees of oversight and control
- Greater data transparency
- Purchasing in high volumes to benefit from discounts
- Streamlining spend management and purchasing history
- Centralizing contracts and invoices
- Reducing maverick spending or cost leakage
- Standardizing processes
- Greater leverage to negotiate with suppliers
Choose decentralized purchasing for:
- Higher degrees of agility
- Faster immediate and long-term purchasing decisions
- Specialized supplier knowledge and local compliance requirements
- Managing a high volume of purchase requests
- Greater supplier diversity
- Shorter delivery times
- More use of local suppliers and discounts
- Greater purchasing autonomy
- Less process bureaucracy
The third choice: A hybrid purchasing model
If neither of these options seems like the perfect fit, consider combining the benefits of centralized and decentralized purchasing to create a hybrid purchasing model. This model is also known as a center-led or coordinated model.
This more coordinated and customized alternative can be used to maximize the benefits of purchase process standardization, data centralization, supplier diversity, increased supplier knowledge, higher purchasing autonomy, risk mitigation, and faster delivery times.
With this model, it’s also easier for procurement managers to better align the purchasing process, sourcing strategies, and departmental needs with overarching business priorities.
Best practices for centralized and decentralized purchasing
Whether you opt for a centralized or decentralized model, here are some best practices that can be applied to both models.
Automate manual tasks
Whether you choose a centralized, decentralized, or hybrid model, they can all benefit from automation. Look for tasks that take up employee resources, or that fall within any of these task types:
|High volumes that must be completed multiple times in an hour, day, or week
|Involves the same steps or inputs each time
|Does not require complex information or problem-solving
|Regularly occurs at the same time or on the same day each week or month
|Planned element of a regular workflow or process
|Requires action, input, approval, or visibility from multiple stakeholders
|Triggered by a specific event or change in status
|Emails or notifications
Reduce errors by standardizing requests
Don’t let the names of these purchasing models distract you from these process management must-haves. By standardizing and centralizing requests, purchasing teams can gain better visibility into data and request management to reduce errors, duplicate purchasing, and overspending.
Standardizing the request process ensures that all requests are made in a similar manner. This makes it easier to quickly assess requests and avoid any compliance or purchasing policy issues, especially with a decentralized model. Adding an additional layer of centralization elevates the benefits of standardization.
In addition to creating a single source of truth, centralizing requests also eliminates the time-consuming process of chasing after any missing or additional information. That’s because all incoming requests are being received into a single channel that many reviewers can then easily access.
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