Purchasing: Centralized or Decentralized?
Should you consider centralizing or decentralizing your operational activities? The answer lies in understanding the costs and benefits of both options in terms if the impact to purchase cost and customer service. Find out what criteria should be evaluated to make an informed decision.
- Is the purchase strategic?
Strategic purchases are linked to your organization’s value proposition. For example, special ink that is specified for use with high capital-cost printing equipment is a strategic purchase for a printing firm as the results will have a direct impact on the quality of the work. Buying office supplies for the organization to support its operations is not strategic. To ensure your organization has a competitive advantage it’s sensible to source strategic purchases centrally. This will also ensure high visibility and control of purchasing dollars.
- What is the cost impact?
Future trends in purchasing are elevating it from a purely transactional activity to one of strategic importance. This translates to organizations partnering with fewer suppliers in an effort to cut costs and improve quality. Whether the reason for the proliferation of suppliers in your organization is multiple service locations, corporate acquisitions or simply ‘that’s how we have always done it’, evaluating the benefits of centralization is a worthwhile exercise. Typically, organizations are able to achieve cost savings of 10% - 15% just by consolidating requirements with a single supplier. Some examples of areas to consider include office supplies, travel, janitorial services and equipment maintenance.
- What is the service impact?
The decision should also consider the impact on service levels. For example, if your organization has three warehouse locations in North America and you are looking to centralize fork lift maintenance services, will the supplier be able to service all locations (i.e. do they have North American coverage)? What will the response time be for a rush service call? In some situations, a local supplier may have a faster speed of response than a national supplier. If a delayed service response time for maintenance means you are not able to load trucks to ship product to your customer, the costs savings for centralization are lost and this creates a negative impact to your customer.
- Where is the expertise located?
It is important to take into account where the purchasing talent is located. If each location has local expertise to source for their needs, it may make sense to keep the structure decentralized rather than have someone from ‘head office’ make decisions for materials that they are not familiar with. On the other hand, if the resident expert is at head office, this individual may be able to help other locations by using this knowledge to make better decisions for the whole organization.
While the best solution may sometimes not be clear, it makes sense to at least investigate alternatives for your organization. It need not be one way or the other; most organizations have a ‘hybrid’ structure where they gain from the benefits of both centralization and decentralization.