Centralized Versus Decentralized Purchasing The issue of centralization versus decentralization of purchase function is basically concerned with decision

about the purchasing policies defining the purchasing authorities and the resultant responsibilities. This issue is highlighted in the situations such as a single plant with diversified production, geographically scattered multi-plant with diversified production, geographically scattered multi-plant with single product, scattered multi-plant with diversified products, ubiquitous availability of basic raw materials etc. 1) Centralized Purchasing: In centralized purchasing buying and managing process is performed from one location to all locations within an organization. This can also be run by a central location buying into a distribution warehouse that feeds smaller warehouses. This is called a hub and spoke system. 2) Decentralized Purchasing: In large firms there are many branches, sections or departments. If each branch or department buys its own materials and equipment, it is known as decentralized purchasing. Following table shows the difference between centralized purchasing and decentralized purchasing Basis of Differentiation Centralized Purchasing Decentralized Purchasing Meaning Purchasing decision is taken by one Individual make their own purchase Centralized unit on behalf of its decision at local purchasing different manufacturing firms. department. Sourcing Global sourcing is done. Local sourcing is done, firms often desires supplies from local businesses. Response time Slow response time as purchasing Quick response time due to close department will purchase the necessary contact between the user and the buyer. items and send to other departments. Standardization or Localization No Competition within units This ensures the same type of product is brought throughout the organization to avoid different quality product. Purchasing is done from a central unit, so no competition among different units. Centrally controlled purchasing reduce the amount of duplicated effort. Bulk purchasing is done therefore better negotiation. Low transportation costs due to larger shipment. Due to consolidate demand, more quantity discounts and less costly volume shipments. It understands the local needs and ensures the purchasing according to the needs of local customer. When different units purchase the same material, a situation created in which units are competing among themselves. Duplication of purchasing effort is high as the each unit has to follow the purchasing process. No bulk order is given therefore negotiation is not much favourable. High transportation costs due to smaller shipments. Not so cost effective due to decentralized demand.

Duplication of purchase Negotiation Transportation Costs Costs

Generally small size organisations accept centralized purchasing. When the purchasing function is entrusted to a single person, it is said to be centralized purchasing. It means all purchases are made by the Purchasing Officer. This type of structure requires a large number of skill sets and purchasing expert. This system may also be too rigid and even unfeasible for large, multi- unit organization consisting of several unrelated business operation. Where as decentralized purchasing are mostly preferred by large and multi business unit, where the project managers, subsidiary, office or departments purchasing their own products or services. Decentralized purchasing normally has individuals attached to the project manager or office responsible for the purchasing needs of the project or office. In practical situation, there are Some organizations adopt a hybrid system that combines both centralized and decentralized purchasing. It is decentralized at the corporate level and centralized at the business unit level. They use centralized purchasing for larger organization-wide contracts, but give individual business units autonomy to make small purchases for their departments or subsidiaries. This hybrid system helps the organisation to exploit the advantage of both centralized and decentralized system. For Example, Tata Motars has decentralised purchasing at the corporate level and utilizes it at its Jamshedpur and Pune units.