Every organization is multi-faceted, yours included. Accounting, sales, marketing, business development, customer support, production, and development, etc.
There are typically countless departments across an organization that cooperate to produce the products and service customers acquire. And these different departments require different tools and supplies to match to get their job done.
Customer support representatives may use Zendesk, Intercom, Drift, or some other tool that helps them engage customers when they visit the company’s website. Sales people may use LinkedIn, email, and prospecting tools like Hunter to reach out to leads, while marketing may engage with publishing new blogs every day to rank on Google. All these departments need specialized tools and inputs to get their job done.
And, if your company is into purchasing, then it is ideal for you to have a system that helps you with your daily operations. There are two ways to do that. Centralized purchasing and decentralized purchasing. In this article, we’ll explore their use cases and how they both work.
What is centralized purchasing?
Centralized purchasing is a model where a particular department of your organization is responsible for acquiring the supplies needed for the entire organization.
The centralized purchasing department handles all the vendor liaison, supplier sourcing, contract management, risk analysis, and every task involved in getting supplies from vendors right to the employee that needs it. Essentially, in centralized purchasing, the designated purchasing department serves as the connection between the different departments and staff within the organization and the vendors outside. The purchasing department collects orders from within the organization and determines how best to have them supplied from the network of suppliers it’s built up.
The key essence of centralized purchasing is that all purchasing tasks are delegated to one department or even personnel to manage on behalf of the entire organization for reasons we’ll address shortly.
What is decentralized purchasing?
On the other hand, decentralized purchasing puts the power to acquire supplies directly in the hands of individual employees across their departments. Staff may be issued funds or payment cards which they can use to order supplies with little or no vetting carried out before approval.
Why choose centralized over decentralized purchasing?
It’s simply because centralized purchasing offers you more visibility and control over company expenses. Conversely, decentralized purchasing creates ample room for waste, fraud, and maverick spending.
Here are some disadvantages associated with decentralized purchases you should keep in mind when making a decision between it and centralizing your purchasing.
- Maverick spending
- Duplicate purchases and overhead expenses
- Poor vendor relationships
- Waste of time on repeat expenses
While decentralized purchasing offers you a simpler purchasing experience across your organization, it creates an unmatched opportunity for waste and mismanagement of resources. If you are struggling with maverick spend, then we have just the thing for you. Here’s a free guide on how to bring your spend under management in five steps.
Benefits of centralized purchasing
The key benefit of centralized purchasing is that it brings your purchases into one place where it’s easy to manage expenses, save costs, and limit losses due to fraud and maverick spending. Some other benefits of centralized purchasing include:
Reduced overhead expenses
Purchasing isn’t a straight shot affair.
There are typically other responsibilities that crop up alongside purchasing supplies, such as ensuring vendor supply quality, minimizing vendor risk, utility fees, and even contracts potentially. Imagine a situation where employees across your organization are making these commitments and you’ve got a problem.
Centralized purchasing bundles together several micro-purchases and combines them to reduce the overhead costs such as transportation, inventory management, risk analysis, and quality monitoring required for the entire organization.
Cost savings with volume discounts
Under a centralized purchasing model, the purchasing department pools identical orders and channels them towards vendors that can offer the best bargains. This leads to even better bargains since owing to the volume of business the purchasing department can offer it’s reasonable for the supplier to offer the vendor volume discounts to lock in their business for the future.
Improved vendor relationships
Decentralized purchasing empowers employees with the budget and initiative they need to determine what they think is useful and buy it right away (up to a certain limit, i.e. with caveats). Whether it’s software subscriptions or physical supplies, employees can make expenses without having to sign lengthy contracts.
Due to the fact that most purchases made this way are one-off and are not made under any contracts, decentralized purchasing tends to be purely transactional.
Employees simply make purchases without building any long-term relationship with vendors. Even if they’d love to do so, it’s simply not possible since the volume of business each individual employee or department brings in makes it not worth the supplier’s time and effort.
Across the organization, substantial amounts are spent on acquiring supplies but it’s impossible to tie that into a beneficial vendor relationship or to negotiate volume discounts.
This changes with a centralized purchasing model in place since vendor relationships are cultivated for the long-term and both sides can benefit positively.
Advanced controls over the purchasing process
With individual employees across your organization making expenses at will, you can be sure of one outcome. They’ll be countless lapses as expenses may be overstated, purchases duplicated, and even wrong, unnecessary expenses may be made.
Bringing all purchasing under one source of control simplifies the process of managing purchasing across your organization.
As a result, you’ll have more visibility into how cash flows out of your organization, be able to manage it at a high level, and control the quantity and quality of supplies flowing into your organization from one source of control.
Save time spent on purchasing overall
Across your organization, as employees make individual purchases in a decentralized model, it appears simpler and easier to manage it that way. But when you factor in the time lost across countless microtransactions, it’s a net loss to your organization.
Centralized purchasing combines purchases, manages them at scale, and saves the time needed to manage purchases and expenses across numerous transactions.
Eliminate maverick spending
Maverick spending entails a situation where employees make purchases that are outside existing contracts made with vendors.
This is very common within organizations running a decentralized purchasing model since there’s often no easy way to keep track or make sense of all the contracts the organization is tied into with suppliers. As a result, employees purchase from the most convenient suppliers they can reach.
Contracts underperform and may even attract penalties for your organization for not keeping up to the stipulated minimum order figures stipulated in your contract.
Centralized purchasing eliminates the risk of employees buying out of policy or existing contracts and therefore prevents maverick spending before it even happens.
Use Kissflow for purchasing awesomeness
Whether you opt for a centralized or a decentralized purchasing model, Kissflow can help. Kissflow is designed to help businesses of all sizes manage purchasing within one platform where it all works. Using Kissflow, you can:
- Onboard and engage suppliers seamlessly
- Manage purchase requisitions easily
- Order supplies easily from a product catalog
- Source and vet the best suppliers
- Allow suppliers to accept multiple payment options
Kissflow Procurement Cloud serves as the one source of truth where your purchasing team can visualize and exercise the control they need to transform your procurement. Request for a free procurement software demo now!
Recommended Reading:
- Guide to Internal Procurement Audit Program
- Top 5 Procurement Trends for 2021
- Use Automation to Unleash the Enabling Power of Procurement
