Centralized versus decentralized purchasing in plant operations


The issue of centralization versus decentralization of purchase function is basically concerned with decision bout the purchasing policies defining the purchasing authorities and the resultant responsibilities. This issue is highlighted in the situations such as a 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, ubiquitous availability of basic raw materials etc.

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.

A single-plant company with centralized operating facilities readily recognizes the efficiency and profitability of those arising from the centralized purchasing. In a single-plant company with diversified products or in a scattered plant company with a single product, the issue of centralized purchasing would become relatively difficult.

However, in a scattered plant company with diversified products, the issue of centralized purchasing would become increasingly complex. The complexity will be directly related with the number of plants, size off the plant, geographical dispersal and diversification of product range.

Under the policy of centralized purchasing all types of purchases in a single-plant organization are made by the central buying section, who are authorized to decide on the sources of supply, negotiate with the vendor, place the order and instruct the mode of delivery. In a multi-plant organization with scattered plant locations, all purchases are made by the central buying section of the head office. In such organizations sometimes regional or branch purchasing agents are employed to make purchases in local markets. They are doing so under the superintendence and control of the centralized department. Materials which are used by more than one plant are purchased y the centralized purchase department. If the sources of the suppliers are scattered, then the suppliers are instructed to canalize the deliveries at various centers on the basis of freight advantages available from such deliveries. In such organizations, the regional or branch purchase agents are allowed to buy the material from the local market if they are available and involve freight advantage. They are also authorized to make emergency buying. However, this should be restricted to the minimum. The degree of decentralization should be reduced to the minimum. According to Lee and Dobler, “If 97 percent or more of the purchasing is performed by the purchasing department, decentralization should not be considered a problem. However, the correct extent of decentralization must be determined for each firm from an analysis of the individual factors involved in its operations.� Though centralization avails certain advantages, certain degree of decentralization is desirable under the following conditions:

1. Where the unit uses single natural raw material which is available at local markets, it is desirable to have decentralized buying. The price of such commodities fluctuates various markets, the grades differ as per the localized climatic conditions, the deals are completed through auction in local mandis e.g. cotton, tobacco, groundnuts etc.

2. Sometimes certain low-value technical items are obtained from local vendor. The exact specifications of the materials are decided after the series of trials and tests. The buyer has to himself in close touch with the vendor.

3. The purchases of some non-technical odd items are allowed to be purchased from local markets. The reason is that the cost of paper processing from placing an order sometimes exceeds the cost of such items.

4. Particular decentralization of purchase function would be highly desirable in a scattered multi-plant unit manufacturing diversified products.

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

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