Centralization or decentralization of purchasing function has nothing to do with physical location of purchasing personnel. It is a problem concerned with placement of purchasing authority.
When supervisor or any other executive of each of the departments is authorized to procure materials required by his department, such a placement of purchasing authority is known as decentralization of purchasing. In this case, authority for purchasing is disposed through the organization and purchasing for each department is done by its in-charge who decides about the sources of supply, carries out negotiations with suppliers, and performs all other functions of purchasing.
Since decentralization is opposed to the principle of specialization and also suffers from a number of other defects, it is found only in relatively small companies.
Centralization of purchasing, on the other hand, refers to placement of authority for the entire purchasing function in the purchasing department headed by the Purchase Manager. Centralization also exists when authority for purchase of some technical components and parts is vested with different departments. In medium-sized and big companies. purchasing function is generally centralized.
Advantages of Centralized Purchasing
Important advantages claimed of centralization are :
1. Benefits of Specialization : Centralization leads to development of special skills. Since purchasing personnel devote their full attention to procurement task, they become expert purchasing agents, and acquire considerable knowledge about market characteristics, available suppliers and knowledge about materials to be procured. Purchasing experts generally buy more efficiently than purchasing by non-specialists.
2. Control of Purchasing Expenditure : With decentralized purchasing, control of purchasing expenditure becomes difficult Under scheme of centralization, the chief executive can get up-to date information about total purchases by each of the departments and thus control expenditure on total purchasing by the enterprise and also those for its different departments.
3. Quantity Discounts : Centralization leads to consolidation of quantities of similar materials required by different departments. This helps the company to get benefits of bulk buying and quantity discounts.
4. Better control of inventories : When there is centralization, the purchase manager is able to determine for the company as a whole the stock level, prices, materials usage and lead times. This helps him to devise better control of inventories and minimize investment in materials.
5. Duplication of Efforts Minimized : Centralization helps to coordinate all company purchases, and by placing authority for purchasing in one person it minimizes the possibility of duplication of efforts in this regard.
6. Effective Control over Purchasing Function : Centralization fixes responsibility for the entire Purchasing function of the enterprise in a single department head, and thus helps the management to exercise effective control over the level of performance in this regard.
7. Economy in Transportation : Through consolidation of orders and delivery schedules, materials are transported in bulk to the factory, and thus cost of transportation is reduced.
8. Better Vendor Relations : Suppliers offer attractive price and better services to those who buy in bulk. Consolidation of purchasing in one department will, therefore, lead to better care and goodwill for the company by suppliers.
9. Record-keeping is Reduced : As compared to decentralization, placing of authority for purchasing in one department leads to consolidation of a large number of small orders into a few orders. This helps to reduce paper work and record keeping.