3 - Centralized vs. Decentralized Purchasing

Centralized

corporate headquarters (Chief Purchasing Officer) has the authority for purchase expenditures.

What are the advantages of centralized purchasing?

-Leverage Purchase volumes (spend analysis identifies items purchased in common among divisions or business units)

-More uniform consistent performance standards across all locations

-Reduce duplication of purchasing effort

-Development of specialized expertise

Decentralized

business units/branches have the authority for purchase expenditures

What are the advantages of decentralized purchasing?

-Speed and responsiveness

-Understanding unique operational requirement

Center-led (hybrid)

combines central approach for purchases common to several business units and decentralized approach to unique requirements

What factors influence centralized or decentralized structure?

-Firm's overall business strategy

-Similarity of purchases

-Total purchase dollar expenditures

-Overall philosophy of management

Overall business strategy

Competitive advantage is built on being more efficient than the competition => More centralized

Competitive advantage is built on responsiveness to customer needs => More decentralized

Similarity of purchases

Purchases are fairly similar across the organization => More centralized (for leverage) e.g. Walmart

Purchases are very different across business units => More decentralized e.g. General Electric

Total Purchase Dollar Expenditures

Large purchase expenditure => centralized

Branches are geographically dispersed => decentralized in tradition. E-sourcing software enables centralized purchasing.

Overall Philosophy of Management

Upper management is committed to operating in a decentralized mode => decentralized

Management philosophy is more to control the operations from a central location => centralized

What are the purchasing organization structures?

Centralized

Decentralized

Center-led (hybrid)