The centralized purchasing avails the following advantages:
1) As the duplication of efforts in buying function is eliminated, its cost will be relatively less and it will be managed efficiently
2) The Manager of manufacturing departments, departmental heads and office managers are relieved from the responsibility of purchasing their own requirements. They can concentrate in their assigned areas of activities in a better way.
3) It is possible to tap the advantage of the specialized skill of the buying staff.
4) Bulk buying strengthens the bargaining position of the buyer. Moreover, the advantage of the quantity discount can be tapped. Direct contact with the suppliers will be possible which will eliminate the link of the intermediaries
5) It enables to develop and maintain good relations with the suppliers. Moreover, it facilitates the supplier to maintain relations with few buyers and thus it enables him to pass over some benefits on buyers.
6) It will enable the purchase of standardized items through standardized procedure.
7) It will reduce the inventory carrying costs. The minimum level of inventory are not maintained at different centers but at centralized center which reduce investments in inventories along with the other incidental storing costs. The central buying staff manages the stock levels, recording material usage, lead time and prices effectively.
8) The receiving of large supply through consolidated orders reduces the transport cost per unit.
9) The cost of order processing such as order placing, receiving, inspection, accounts etc are reduced substantially due to few orders of large quantities
10) As the responsibility center is fixed on one departmental head, the shifting of responsibility for wrong decisions is eliminated.
11) The inter-section requirements of the materials can be easily adjusted. Scarce materials can be allocated according to the economical advantage.
The centralized purchasing suffers from the following limitations:
1) The specific requirements of the individual items may not be attended successfully. At times, it may result in absence of matching of mind between the needy section and the buying section resulting in wrong buying.
2) The centralized standard procedure may result in delays in receiving the materials.
3) It is likely that the centralized buying staff may not be expert in buying varied types of items.
4) In case of multi-plant units located at distant places and receiving their requirements from centralized storing, it may not be possible to tap the local resources. However, this situation can be handled effectively authorizing the regional purchase agent to make local purchases if they involve cost advantage.
5) It adversely affects the employee morale. It can be concluded that the company should centralize all policy matters, the purchase of major raw materials and capital equipment should be made by the head office, while the individual divisions should be allowed to make their own purchases in accordance with the policies established by central office. If the company adopts the “profit center decentralized” set up the decentralized should be made accordingly.
Purchasing manual: The purchasing manual is an important means of effective purchasing. It outlines the policies and procedures to be followed by the purchasing personnel. It contains the approved statement of policies and thus provides standing answer to recurring questions.
Purchasing manual sometimes becomes a source of irritation and conflict. Many purchasing managers consider it to restrictive. In fact such situations can be eliminated if the following aspects are considered while preparing the manual:
1) The purchase authorities should be clearly defined
2) It should clarify the relationship with other departments.
3) The co-operation of the personnel should be sought while preparing the manual
4) It should be drafted clearly.
5) The policies and procedures should be segregated. Generally, policies are of permanent nature while procedures are subject of frequent changes.
Purchasing manual is an important tool for managing the purchase function efficiently. It is not only useful to the large organization, but is required in small organizations as well. In the large organization, the purchase function is relatively complex and can be eased with the help of the purchasing manual. In the small organization, it is essentially required because in such organization, purchasing function becomes a one man show and the absence of such key man may paralyze the purchase activity. Purchasing manual attempts to reduce such over dependence of one man.