Should Purchasing Be Centralized or Decentralized?
In many medium-sized companies, purchasing is centrally organized and managed by the purchasing department. One of the primary advantages is cost efficiency, as framework agreements can be negotiated under favorable conditions and cost advantages arise from higher purchasing volumes. However, raw materials or products do not always reach departments quickly enough, especially when there is time pressure or an emergency situation. Centralized purchasing therefore has both advantages and disadvantages.
The Central Purchasing Model – Framework Agreements and Cost-Saving Opportunities
When purchasing is centralized within a company, it allows for bundling demand, which leads to cost reductions. Trained professionals within the purchasing organization often negotiate framework agreements and leverage economies of scale by ordering larger quantities.
Cost savings do not always mean choosing the lowest price. What matters is what the price includes. A slightly higher price may already cover warranty services, maintenance, or removing packaging and delivery costs.
Centralized purchasing also strengthens a company’s position with suppliers. Long-term relationships often lead to better terms. However, there are drawbacks, mainly related to time. When deliveries are urgent, the process through the purchasing department can be too slow. Quick reactions to emergencies or tight deadlines are not always possible. Centralized storage also requires more warehouse space, leading to higher costs and more administrative work.
Pros and Cons of Centralized Purchasing
Pros:
- Stronger negotiating position with suppliers
- Favorable conditions through framework agreements, including cost savings and warranties
- Cost savings through larger order volumes
- Reduced transportation costs
- Lower processing costs per order
- Volume discounts
- Promotion of standardization
Cons:
- Longer internal processes between departments and purchasing
- Required deliveries may not arrive where needed quickly enough
- Higher warehouse capacity requirements due to larger volumes
- Increased bureaucracy
- Higher administrative workload
Decentralized Purchasing – Demand-Driven Ordering
When purchasing is handled through decentralized purchasing by individual departments, companies can react more quickly to time pressure and emergencies. Goods reach departments faster, and special offers can be used more easily. Processes are shorter because no purchase request is sent to the purchasing department, and administrative effort is lower.
However, decentralized purchasing makes it harder to negotiate framework agreements or benefit from volume discounts. Long-term supplier relationships and their advantages are often missing. In addition, finding the right supplier for each product or service can require a lot of effort, depending on how complex the need is.
Pros and Cons of Decentralized Purchasing
Pros:
- Shorter processes and faster delivery to departments
- Use of special offers
- Lower administrative workload
- Reduced need for warehouse capacity
- Greater flexibility and faster response to bottlenecks and emergencies
- Increased responsibility and motivation within departments
Cons:
- No cost savings through framework agreements or volume discounts
- No long-term supplier relationships
- Limited ability to negotiate better payment and delivery terms
- Higher personnel requirements and potential training needs for specific product groups
The Solution: Separating Strategic and Operational Purchasing
The best way to combine centralized purchasing and decentralized purchasing is to separate strategic purchasing from operational purchasing. Products and services that are needed regularly can be bought strategically through centralized purchasing. Items and services needed quickly can be purchased directly by individual departments.
This approach helps ensure that urgent needs are met fast, while the company still benefits from a clear strategic sourcing process. Good communication between departments and the purchasing department is essential to create transparency and make the most favorable conditions.
Strategic Purchasing:
- Negotiation of framework agreements for regularly required goods and services
- Ordering long-term requirements in larger quantities to benefit from volume discounts
- Supplier evaluation and development of long-term supplier relationships
- Supplier consolidation
Operational Purchasing Within Departments:
- Short-term purchasing of urgently required goods and services
- Rapid response to bottlenecks and emergencies
- Ongoing communication with the purchasing department
Separating Purchasing Functions to Maximize Benefits
Centralized purchasing offers cost benefits through framework agreements and volume discounts, but it can be slow. Decentralized purchasing allows faster delivery and more flexibility, but it limits cost savings. A combined procurement strategy that separates strategic procurement and operational purchasing helps companies benefit from both.
By clearly defining roles in the strategic procurement process, companies can improve their procurement strategy. Many procurement strategy examples show that using centralized purchasing for long-term needs and decentralized purchasing for urgent orders improves efficiency, reduces costs, and strengthens supplier relationships.
This combined approach supports strategic procurement, strengthens the purchasing organization, and ensures the overall strategic procurement process supports business goals.
The advantages of centralized and decentralized purchasing can be leveraged through strategic and operational purchasing:
- Long-term supplier relationships
- Framework agreements and volume discounts
- Reduction of administrative effort
For more ideas on purchasing, europages Inside Business offers helpful tools and inspiration.
