Central Purchasing

Central Purchasing

Investopedia / Julie Bang

What Is Central Purchasing?

Central purchasing is a department within a business or organization that is responsible for making all necessary procurement. Central purchasing works with other departments and agencies to consolidate orders for products to make use of economies of scale for receiving cheaper prices.

Additionally, organizations use a central purchasing department to simplify a procurement budget or to keep the organization's spending contained in a centralized location that can be checked for discrepancies and audited more easily.

Key Takeaways

  • Central purchasing is a business unit that makes all procurement for an organization, often better suited for large corporations with various locations.
  • Some advantages of central purchasing include reducing redundant work, lowering costs associated with training and supporting additional staff, and better control.
  • Some disadvantages of central purchasing include increased complexity, delayed deliveries, and forgone local discounts.

Understanding 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 on time. 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 companies to engage in a central purchasing strategy given the costs associated with enhanced technology and additional staff.

Advantages and Disadvantages of Central Purchasing

Central purchasing, especially in large, geographically diverse enterprises, provides some key advantages. Still, even with the considerable advantages, central purchasing—when executed poorly or employed incorrectly—may come with some disadvantages:

  • Avoids duplication or redundancy of efforts, which means lower costs and standardized processes

  • Allows for more comprehensive control and optimization of inventory

  • Reduces the 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

  • Potentially lower delivery costs, as well as staffing necessary to move and store goods

  • Allows for centralized record-keeping 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

  • Can become too big or too complex to be run efficiently

  • May be a delay in the delivery of essential goods as they may have to come from a central location

  • Has locations widely spread over a region or country, it may not be able to take advantage of local discounts

  • May lead to under-investment, and therefore inefficiency