Centralized vs. Decentralized Purchasing
Centralized or decentralized purchasing is a question that often arises in discussions about how a purchasing function should be structured. In practice, it is rarely possible to describe an organization solely in terms of centralized or decentralized purchasing. Most organizations have some kind of hybrid structure with elements of both centralized and decentralized purchasing. A common division is that strategic and tactical purchasing is managed centrally, while the more operational tasks are managed closer to the business in a decentralized structure.
Centralized purchasing
In a centralized purchasing organization, all supplier contracts and purchasing decisions are managed centrally by a common purchasing organization. The purchasing organization consults and involves different business areas, but these are not responsible for purchasing activities.
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Centrally managed purchasing
Central purchasing projects are run with the support of specialists from the business areas. The central purchasing function drives process standardization, manages reporting, manages IT systems and skills development. Mandates for decisions are centralized but the main focus of the central purchasing function is to support networking between business areas to stimulate the exchange of knowledge and experience. Local purchasing organizations report both to their own business areas but also to a central purchasing manager.
Coordinated purchasing
Coordinated purchasing, also known as hybrid, consists of decentralized purchasing functions within each business area supported by a small central purchasing function. This function develops purchasing strategies, manages purchasing-related risks and is responsible for deals where a joint company-wide initiative is beneficial. The mandate to make purchasing decisions lies mainly with each business area.
Locally driven purchasing
A small central purchasing function that supports the business areas by providing a common infrastructure. This infrastructure may consist, for example, of processes and IT systems. Company-wide purchasing projects are rare, apart from voluntary efforts. Each unit thus purchases for its own needs but does so in a similar way because the procedures are developed centrally.
Decentralized purchasing
This is an organizational structure where each unit manages all purchasing and supplier contracts separately. There is no central coordination. If cooperation exists between units, it is voluntary, ad-hoc and informal. Purchasing does not necessarily have to be handled by buyers, but in extreme cases it is carried out directly in the business by, for example, production or development staff. This type of structure is more common in companies where each unit is responsible for its own financial performance.
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Management of product segments
It is worth pointing out that categorization such as the one above is done at a very general level. In reality, it is common for different product segments to be managed in different ways within an organization. In some cases, travel is managed centrally, while machine maintenance is purchased at a more local level.
Two important aspects to consider
There are two main aspects to consider when deciding how to manage a particular product segment:
- The degree of common supplier market
- The degree of common specifications
By a common supplier market we mean the extent to which there are suppliers that can supply the whole business both organizationally and geographically. By common specifications, we mean the extent to which different entities have similar needs, both organizationally and geographically. Depending on how well these two aspects are met, some guidance can be given on the type of management that is appropriate for the given product segment.
If these two criteria are well met, there is a good basis for managing the product range concerned jointly in the organization at a central level. This is advantageous as the synergies are high in carrying out one central procurement instead of a large number of local ones with a similar content. However, if neither of these two criteria is met, there are few advantages to joint management. Rather, there is a high risk that central management will fail to take account of local needs, resulting in a poorer end result for the organization as a whole.
Where similar needs and specifications exist between local units but where there is no common supplier market, there are good opportunities to collaborate on the purchasing process and the specification of the good or service. In cases where the same suppliers cover the whole market but local requirements vary, cooperation should focus more on common framework agreements that pool volumes. In this way, the negotiating power vis-à-vis the supplier is strengthened.
Analyze at segment level
By analyzing how different products or services are purchased at segment level, we can differentiate the management and find a good and efficient solution for each segment. Needs are different depending on what you need to buy. That’s why it’s advantageous to have some flexibility compared to managing all purchases in the same way. However, it requires a certain basic ability of both the central and the local purchasing organization to be able to adapt this management at segment level. In other words, some kind of hybrid between a centralized and decentralized purchasing organization is needed. This partly explains why in practice companies often have elements of both centralized and decentralized structures.
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Advantages and disadvantages of different levels
Different types of organizations suit different companies and product segments. A centralized purchasing function may work very well in one company and for a particular segment, while in other cases a more decentralized structure may be effective.
Some of the main advantages of a more centralized organizational structure are:
- Obtain economies of scale and purchasing power by coordinating purchases between units
- A common front with suppliers
- Common purchasing conditions across the business
- Ability to build expertise in areas that require it
The benefits of a more decentralized structure are:
- Direct communication with suppliers
- Buyers closer to the business often have a better understanding of the actual needs of the business
- Purchasing activities are more closely linked to the respective results unit
- Less internal bureaucracy
Centralized or not, a few final words
In conclusion, the issue of decentralization and centralization is a complex one as both principles have their advantages. In reality, this means that companies often use a hybrid between these two extremes. One effect of using a hybrid solution is that it allows the organization to manage some product segments more centrally and others at a more local level. This allows each segment to be managed in the most appropriate way, which in turn leads to greater efficiency and better results.
A literature tip on the subject is van Weele, who points out that the company’s purchasing maturity combined with the company’s cohesion are the two most important variables to take into account when deciding on the type of purchasing organization.
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