Difference Between Centralised and Decentralised Purchasing

Businesses procure raw materials and then convert them into finished goods. For this aspect of the supply chain, purchasing is a fundamental function. It is essential for any business to make purchases efficiently in order to improve quality, productivity and reduce the overall cost to the company. There are two primary approaches when it comes to the purchasing aspect of a business: centralised and decentralised purchasing. Both types of purchasing have their advantages and limitations. The type that is more suitable for a business depends on its structure, size and its goal.

In this article, we will explore the primary difference between centralised and decentralised purchasing and also look into its advantages and disadvantages.

What is Centralised Purchasing?

Several businesses have a procurement strategy called centralised purchasing. Under this strategy, decisions regarding purchasing goods are handled by a single team or department. The purchasing authority is centralised in one department in the business, thereby fostering cost control and improving overall efficiency. 

What is Decentralised Purchasing?

Decentralised purchasing is a procurement strategy in which multiple departments or business units have the authority to make purchases for different processes. These departments or business units can make their own procurement decisions. The decentralised purchasing approach provides speed and flexibility in a business.

Centralised Vs. Decentralised Purchasing: Detailed Comparison

Centralised purchasing and decentralised purchasing are both procurement strategies. However, they are drastically different from one another. Understanding the differences helps a business to know which is the best strategy for meeting the business requirements. Below is a detailed comparison analysis between centralised and decentralised purchasing.

Comparison Aspect	Centralised Purchasing	Decentralised Purchasing
Decision-making authority	Under centralised purchasing, the decision-making authority lies with only one team or department.	Under decentralised purchasing, the decision-making authority pertaining to procurements is delegated to different departments as per the departmental needs.
Cost Control	As procurement is centralised, the quantity of purchases is higher. Hence, it provides the business with the option to negotiate. This, in turn, reduces the overall cost.	As the purchases are smaller and more individual in nature, there is less scope for negotiation, leading to higher costs.
Efficiency	Bulk purchasing helps increase efficiency in the overall business process.	Decentralised purchasing allows us to attend to immediate procurement needs.
Customisation	Centralised purchasing offers limited customisation of products as they are bought in bulk by a single department.	Here, every business unit does the procurement based on their individual needs.
Speed	It can take time to complete centralised purchasing as different hierarchical approvals may be required.	Decentralised procurement of goods is definitely faster as departments have to make their independent decisions.
Vendor Management	Centralised purchasing offers stronger relationships with suppliers as fewer parties are involved in the process.	Multiple suppliers and decision-makers can lead to potential inconsistencies.
Risk Management	As there is one point of contact, there is lesser potential risk and better oversight.	As there are multiple points of contact for different procurement needs, it can lead to potential risks of miscommunications, inefficiencies and poor contracts.
Uniformity	Centralised purchasing provides the opportunity for uniformity throughout the process.	Whether it is the quality or the pricing, there is a lesser chance of uniformity as the decision-making authority is divided.
Accountability	Only one department handles the entire procurement, and hence, only one department is accountable for any inaccuracies or inefficiency.	Since different departments handle their procurement, the accountability is also shared. Every department is liable for the inaccuracies and inefficiencies in the procurement done by them.

Advantages and Disadvantages of Centralised Purchasing

Centralised purchasing involves various benefits and drawbacks in a business. 

Advantages of Centralised Purchasing

Below are the benefits of centralised purchasing in a business:

• The centralised purchase helps to leverage economies of scale, which helps in better price negotiation, thereby reducing the overall cost.
• If procurement decision-making is limited to one department only, an organisation can have uniformity in product quality, contract terms, and compliance.
• Centralised purchasing also allows for smoother demand forecasting and procurement planning.
• As there are few suppliers in centralised purchasing, it helps foster long-term partnerships, which can help in better price negotiations over time.
• Under a centralised purchasing approach, procurement is entirely overseen by one department, which helps reduce risk related to fraud and supplier inconsistencies.

Disadvantages of Centralised Purchasing

Centralised purchasing also has certain limitations, as listed below:

• With centralised purchasing, it might become difficult to understand and cater to the unique needs of different business units and different departments. 
• As there is mostly only one supplier, if the supplier fails, the entire procurement process will be impacted, and so will the different processes in a business.
• For the single department to move ahead with the procurement under centralised purchasing, several approvals are required, and hence, it can make the process lengthier. 

Advantages and Disadvantages of Decentralised Purchasing

Advantages of Decentralised Purchasing

Decentralised purchasing also has several benefits when done correctly, and some of the advantages of the approach are as follows:

• A decentralised purchasing approach offers more flexibility as different departments can adapt to different purchasing strategies based on their unique requirements.
• Overall, the process is faster as it eliminates approval bottlenecks. It allows for quick decision-making.
• Under this approach, different teams can experiment with new suppliers or technologies for their procurement strategies.
• Due to this reduced requirement, it is easier to get customised solutions and even fast deliveries.
• Decentralised purchasing offers the option for faster adjustments in dynamic environments.

Disadvantages of Decentralised Purchasing

Below are some of the drawbacks of decentralised purchasing for a business:

• The limitation of purchasing in smaller quantities can lead to higher prices for the products.
• The quality of products and compliance with the suppliers can vary from department to department.
• It is tricky to monitor decentralised purchasing for every department, and hence, it can lead to procurement fraud.
• Managing different suppliers for different needs can become complex and inefficient at times.

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Conclusion

Procurement of goods is an integral part of any business. Depending upon requirements, a business can decide between opting for a centralised or decentralised purchasing approach. Both approaches play a crucial role in supply chain management. It is essential for businesses to choose the right approach as it can affect their cost efficiency and productivity. It is also possible for businesses to now adopt a hybrid purchasing model that can help them harness the strength of both centralised and centralised purchasing approaches.

Suggested read – Sourcing vs Procurement: Understanding Key Differences in the Supply Chain

FAQs About Centralised and Decentralised Purchasing

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