When a company has several production centres and situated in different location, the company may think whether they should maintain Centralized and Decentralized purchasing. The decision may depend on the following considerable points:
- the distance between production centers and central godown
- the nature of the material used,i.e bulky, heavy, fragile etc.
- Costs and risks associated with the transport etc.
Centralized Purchase
Centralized Purchasing : When a company has one purchase department to purchase for all the production centers is called centralized purchasing department. Centralized Purchasing has strong control over its Raw materials but there is a chance of capital blocking.
Advantages and Disadvantages of Centralized Purchase
The Advantages and Disadvantages of Centralized Purchase are as follows:
Serial No. | Advantages | Disadvantages |
1.00 | Control is better over the purchase due to centrally procure | Initital Cost is very high |
2.00 | Due to large quantity of order purchase discount could be obtained | As Centrally procured, supply of raw materials to the production department may take time for internal policy that may hamper to the production. |
3.00 | Procurement team can improve their efficiency for large quantity of purchase and maintaining necessary compliance regarding purchase | Transportation cost to central godown to production centers to be considered. |
4.00 | Related departments can get standard materials purchased by Centralized Purchasing Department | Advantages of local market can not be obtained. |
5.00 | Purchase policy can easily regulate and can give prompt effect to any change in case of centralized purchase. | Excessive working capital is blocked. |
Decentralized Purchase
Decentralized Purchasing : When a company has different purchase department to purchase for all the production centres is called Decentralized Purchasing Department. Decentralized Purchasing Department reduces the chances of production disruption but it requires to appoint more man power than centralized purchasing department.
Advantages and Disadvantages of Decentralized Purchased
The Advantages and Disadvantages of Decentralized Purchasing are as follows:
Serial No. | Advantages | Disadvantages |
1.00 | Initial costs is lower than centralized purchase | Effective control may not be present |
2.00 | For less official formalities, prompt purchase can be happened | As lesser quantity purchase, the company can not get favorable terms |
3.00 | Benefits from local market can be obtained | Transportation cost from central godown to production department is nil |
4.00 | Misunderstanding chances are lower than Centralized purchase | Standards of Materials may vary department to department |
5.00 | Working Capital blocking can be avoided | Additional staff requires for each production centre that would increase employee costs. |
Conclusion
Centralized purchase is suitable for the organization where there is only one plant or several plants situated nearby. Only one Raw materials are used in the production process. On the other hand, Decentralized purchase is applicable where where there are several plants situated at different location and different Raw materials are used in the production process for producing products.