Centralized vs localized buying

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Centralized Vs. Decentralized Buying


What Is Centralization?

If top manager make the organization’s decisions with little or no input from subordinates, then the organization is Centralized

The degree to which decision making is concentrated at a single point in the organization


What is Decentralization ?

“When the managers and supervisors at the middle and lower levels are given considerable autonomy in decision-making, the organization is considered to be decentralized”

“It assumes that those most involved with the particular product, service, or consumers know what to do and can do it more quickly if given the authority to commit resources.”


Centralization Vs Decentralization


Buying Decision

“Purchasing is a window to the outside world.”

In any industry purchase means buying of equipments, materials, tools, parts etc. required for industry.

The major task of the purchasing decision related with:Getting the right quantity of material, At the required or right quality,At the right time,At the right place,From the right source, andAt the right cost.


Centralization Vs. Decentralization on Buying

Decision

The issue of centralization versus decentralization of purchase function is basically concerned with decision about the purchasing policies defining the purchasing authorities and the resultant responsibilities.

When an organization has several facilities, management must decide whether to buy locally or centrally.


What is Centralized Buying?

Centralized purchasing is a method of procurement of all types of materials, supplies, equipment etc. through a single department (not necessarily centrally located) under the direct control and superintendence of one responsible person.

He is directly accountable to the top management for all duties falling within the broad area of purchase function.

Supplier

Warehouse

Plant B Plant A Plant C Plant D


What is Decentralized Buying?

Localized /Decentralized Purchasing means that divisions or smaller areas of an organization have their own purchasing dept.

Head office

Plant D Plant C Plant B Plant A

Purchase Dept Purchase Dept Purchase Dept Purchase Dept


Situations where conflict occurs

Single plant with diversified production Geographically scattered multi-plant with

diversified production Geographically scattered multi-plant with

single product Scattered multi-plant with diversified products

with Freely availability of basic raw materials etc.


Centralized or not Centralized?

Availability of resources Transportation costs Lead time Overhead Safety Service level


Advantages of centralized buying

Bulk buying strengthens the bargaining position of the buyer.

Advantage of the quantity discount can be tapped. It will reduce the inventory carrying costs Lower transportation cost per unit.. Duplication of efforts in buying function is eliminated Skill development of purchase head No competition within units Easy to procure from foreign supplier


Disadvantages

Problem when specific requirement needed Delay in receiving the materials Problems to use local resources in small

quantity Helps for autocratic management style Central purchasing staff may not be expert in

buying various types of items Loss of local control Creates another level of hierarchy Suitable more for small organization


Advantages of Decentralized buying

Closer knowledge of requirement Reduction on transportation costs (central

warehouse to units) Reduction in lead time Close coordination with local production

schedules Suitable when head office is in foreign nation. Promotes democratic management practices.


Which is the best?

According nature and size of the organization, buying decision depends either centralized or localized.

Perhaps the best solution is a compromise strategy, whereby both local and central buying are possible.

For a large group company with multiple plants at several locations it is advisable to have both centralized and decentralized purchase.

Hybrid Buying System


Hybrid buying system

It is the system derived by taking advantages from both centralized as well as localized buying.

High value and large consumption items can be procured through centralized purchase for cost effectiveness.

whereas plant operating supplies, purchases can be decentralized and can be made to be procured by the plant as they are of day to day requirements.

For instance, the corporate group of IBM negotiates contracts on centralized basis only at the request of local plant and day to day requirement are procured at plant level.


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Centralized vs localized buying