Centralized procurement, where one location retains control over most, if not all, of the organization's purchasing decisions, is one of the go-to fixes within the procurement industry.
The problem with decentralized procurement is each location has its own purchasing process. The result is there are more contracts to monitor, RFP/RFQs to issue, and prices to negotiate. Not to mention you risk uncontrolled tail spend, and having non-procurement-experts make critical purchases.
Of course, the appeal of consolidating is that you get all those POs and data points to one central location. Still, many hesitate to make the switch, wary that the downside won’t be worth it. If you're unsure which purchasing structure is right for your organization, keep reading. This article covers the pros and cons of centralized procurement, and why you may not need to choose between centralized or decentralized after all.
Pros of Centralized Procurement
How important is control and transparency to your team? That's the most important question to ask yourself. Consider the benefits of having a centralized purchasing process:
- The process is typically more efficient on the whole. For example, it's much easier to manage a single department's spend
- Because it's centralized, there is greater transparency
- Higher purchasing volume equates to better discounts
- Your budget and spend analysis will be far more accurate
- Enables you to audit tail spend and prevent savings leakage; similarly, there is improved supplier risk management
- Straightforward commodity price tracking
- Less time spent researching and negotiating with suppliers
- A central location for PO’s, invoices, and spend reports
- Simpler inventory management
- Standardized purchasing process
- Straightforward supplier communication
- Minimal maverick spending
- Purchases are more likely to be made by a specialist
- Fewer compliance issues
- Opportunity to implement strategic sourcing for all locations
If you decide to centralize, make sure your procurement team is ready to handle the increased workload. Are they equipped with the necessary skills? Do they have the bandwidth required?
Also, be mindful that your department managers will likely be reluctant to consolidate. Frame the change as freeing up their time. They'll be able to focus on managing their department rather than negotiating prices or dealing with invoices.
Cons of Centralized Procurement
Below are some disadvantages of centralized procurement to bear in mind.
- The “deciding” location’s process can become too complex and costly to maintain
- Managers will have less autonomy, which can cause frustration
- It requires a longer, more time-intensive purchasing process
- The one-size-fits-all solutions won't meet each location’s unique needs
- Purchasing software and or analytics may be necessary
- Your organization won't be able to use local discounts
- Results in extended delivery and turnaround times
At the end of the day, is centralized or decentralized purchasing more effective for corporate procurement?
It all boils down to how well you’re able to track spend and manage contracts. If you want more control and transparency, consolidating is likely worth the effort. Yes, there are downsides to centralized procurement. But, the piecemeal process of decentralized is usually a more significant risk.
However, it doesn’t have to be all or nothing. For example, it might make sense for your organization to have 80% of purchases centralized. With the remaining quick-turn-around-required items managed by each department. This approach is also known as a "center-led structure." As this helpful My Purchasing Center article put it, “A center-led procurement structure centralizes the strategic aspect of procurement and sourcing while leaving the tactical purchases to the individual business units.”
Bottom line, you need to consult your key stakeholders, ask for their feedback and concerns. Discuss how much autonomy your managers need to be effective in their role, and how quickly they need their supplies. Once you have all the data, it will be much easier to identify which approach is the best fit for your organization.
Ultimately, when it comes to controlling costs in your purchasing process, the key is getting creative. That may mean consolidating. It may even mean working with a partner like a group purchasing organization who can help you save 22% on your indirect spend.