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CHAPTER 1
PRINCIPLES OF SUPPLY CHAIN AND PROCUREMENT MANAGEMENT
1.8.1 ADVANTAGES AND DISADVANTAGES OF A CENTRALISED
PROCUREMENT FUNCTION
Centralisation of the procurement function offers several advantages [10]:
• The co-ordination of purchase volumes
– The larger volumes that result
from centralising purchases lead to favourable prices. The centralisation of
the procurement function does not only lead to centralisation of sourcing of
products and materials but also of the ordering process. This may lead to
decreased responsiveness to manufacturing needs. Thanks to advances
in technology, some organisations identify common product items between
divisions or SBUs for centrally co-ordinated sourcing. This helps organisations
to achieve a reduction in material costs by combining purchase volumes while
at the same time recognising the operating requirements of divisions or SBUs.
• The reduction of duplicated procurement effort
– In decentralised
procurement functions it frequently happens that individual SBUs or divisions
develop their own purchasing policies, procedures and systems, leading
to duplication of effort. Centralisation reduces this duplication and in turn
reduces the cost of duplication.
• The ability to develop and co-ordinate procurement strategy
–
Centralisation facilitates the development of an organisation-wide procurement
strategy. Such a strategy provides operational direction and enables the
organisation to align the procurement function with other functions.
• The ability to co-ordinate and manage company-wide purchasing
systems
– The latest technology is important for the procurement function
and influences how the function operates. It allows the organisation to co-
ordinate the procurement requirements across the SBUs and divisions of the
organisation. Centralisation prevents each division from developing its own
procurement systems, which can sometimes end up being incompatible and
increasing the cost of operations.
• The development of purchasing expertise
– Centralised procurement leads
to the development of specialised knowledge and support for the individual
buying units. These include expertise with regard to purchasing negotiations,
international procurement, the legal aspects of procurement, training
and development programmes, supplier quality programmes, purchasing
research, total cost of ownership and many others.
Centralised procurement can also have disadvantages. During the early stages
of product development, the engineering department is deeply involved with the
design, which can be difficult to achieve with remotely centralised procurement
functions. Next, there is sometimes a great need to co-ordinate purchases with
production schedules. This is particularly the case when low volumes are ordered
frequently and the supplier organisation is expected to guarantee just-in-time
deliveries. This might not be cost effective when the procurement function is
centralised. Finally, a centralised procurement system may not be suitable in
cases where procurement officers need to buy from the local communities.
Organisations buy locally to remain in good standing with the communities in
which they operate.