What is Central Purchasing
Central purchasing is a department within a business or organization that is responsible for making all procurements. Central purchasing works with other departments and agencies to consolidate orders for products, and then use economies of scale in order to exact cheaper prices. Additionally, organizations use a central purchasing department in order to simplify a procurement budget or to keep the organization's spending in a centralized location that can be checked for discrepancies easily.
Breaking Down Central Purchasing
Using a central purchasing department is part of an organizational strategy aimed at efficiency. While consolidating may allow the organization to order goods in larger quantities and reduce costs, it may also slow down the procurement process and prevent employees from getting the materials they need in a timely manner. Centralized planning may result in more bureaucratic red tape that can stymie innovation by preventing emerging departments from obtaining the materials that they need.
Central purchasing may work better for larger organizations that are less spread out geographically. It may not make sense for smaller concerns to engage in a central purchasing strategy given the technology costs associated with it.
Central Purchasing Advantages
Central purchasing, especially in large, geographically diverse enterprises, provides some key advantages. They include:
- Avoids duplication or redundancy of efforts, which means lower costs and standardized processes.
- Allows for more comprehensive control and optimization of inventory.
- Reduces total number of staff necessary and facilitates training, which may be seen in lower costs.
- Volume purchasing is enabled, which means greater discounts and better terms.
- Volume delivery cuts down on delivery costs, as well as staffing necessary to move and store goods.
- Allows for centralized recordkeeping of orders and inventory.
- Enables the use of computerized systems to automate the purchasing process, as well as integrate it with stock control and accounting.
- Provides a known, centralized contact for suppliers, which can lead to cost and time savings.
- May enable procurement staff to develop better relationships with suppliers, which can lead to greater collaboration and cost-saving suggestions.
Central Purchasing Disadvantages
Even with the considerable advantages, central purchasing — when executed poorly or employed incorrectly — may come with some disadvantages.
- A centralized purchasing department can become too big or too complex to be run efficiently.
- There may be a delay in delivery of essential goods, as they may have to come from a central location.
- If a company or other entity has locations widely spread over a region or country, it may not be able to take advantage of local discounts.
- The investment in people and technology necessary to effectively manage a central purchasing office may lead to underinvestment, and therefore inefficiency.