3 - Centralized vs. Decentralized Purchasing

What are the purchasing organization structures?

Centralized Decentralized Center-led (hybrid)

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

Total Purchase Dollar Expenditures

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

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

Centralized

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

What factors influence centralized or decentralized structure?

-Firm's overall business strategy -Similarity of purchases -Total purchase dollar expenditures -Overall philosophy of management

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

What are the advantages of decentralized purchasing?

-Speed and responsiveness -Understanding unique operational requirement

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

Decentralized

business units/branches have the authority for purchase expenditures

Center-led (hybrid)

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