Advantages and Disadvantages of Centralizing Procurement

1. What are the advantages and disadvantages of centralizing procurement?

Centralized purchasing is the control by one department of all purchasing that is undertaken by a company.  There are several advantages that make business and purchasing process more effective:  

• Volume purchasing lead to better prices and more agreeable terms can be achieved.
• It enables to standardize activities and to make purchase through standardized procedure. Many staff avoid to spend time for purchasing of standardized components and take care of delivery issues.
• Centralized purchasing allows for better control of inventories. They can monitor them and keep at optimal levels and avoid ways of coping inventories.
• The information is kept centralized about all purchasing. Easy to access the records by other departments.
• Concentration of personnel on purchasing develops specialized knowledge and skills.  The staff become experts in negotiation with suppliers and finding the ways how to minimize the costs.
• Purchasers and suppliers build good relationship, and suppliers can offer products that will be more suitable and cost effective for the buyers based on personal relationship.
• The function can be better controlled and it becomes easy to measure and manage the performance of purchasers.

However, this approach can cause several challenges:

• The employees from other business units may feel like they have less power since only certain individuals make the purchasing decisions.
• Standardization of orders can not satisfy the requirements of other departments since their demand is changing. And it takes longer time to get the order and may result in delays in receiving the products.
• The departments can resist to accept the system due to losing influence on purchasing process.
• If a company that has units in different locations, the process can become too complex and advantages of local suppliers will be unable to access.
• The procurement might not have enough knowledge of products to make good decisions. They might not understand the specific requirements from other units.
• The wrong quantities or product type can cause waste of money and delays in production.
• The purchasing department become larger and can be complicated to manage. In small companies it might be not cost effective to have centralization purchasing.

1. Compare management of car fleet and travel categories at Kone. Why do the management of these categories differ and how?

The management of these both categories focus on identifying and driving savings activities that effect TCO. TCO optimization of car fleet can be achieved by control of demand management, logistics, safety and etc. However the car fleet cannot be reduced since cars service customer’s needs. And it is important to improve such elements as fuel consumption or reduce accident that will cut expenses during maintenance.