OMNIA Partners Blog

Decentralized Vs. Centralized Purchasing Structures

Posted by Ara Arslanian on May 22, 2019

"The grass is always greener on the other side." It turns out this common proverb even rings true in the debate over whether purchasing operations benefit from centralized versus decentralized management.

If your company isn’t set up to accommodate a centralized purchasing structure, you probably long for the leveraged pricing that your current decentralized approach may never achieve.

If your company has a centralized structure, you probably lament the compliance challenges you face. After all, you may have built relationships with local vendors and prefer to continue those over using a vendor that 'corporate' suggests.

In reality, both vantage points are correct: Both decentralized and centralized purchasing structures offer benefits and disadvantages. Here's why.

Centralized Purchasing Structures Have Their Limitations Too

If you're confused about whether you should choose a centralized versus decentralized organizational structure for your purchasing operation, understand that decentralization creates both departmental autonomy and silos.

Decentralized structures place purchasing power directly into the hands of those in need, bypassing corporate procurement processes, which makes order processing fast and easy, albeit myopically informed.

In contrast, centralized purchasing structures have a lot going for them in theory: With these systems in place, company-wide spend should largely be under control, maverick spending reduced, comprehensive spend analysis at the ready and supplier management improved.

However, a centralized purchasing structure will only be effective if it has the necessary resources – including broad category management expertise and tools to:

  • Analyze spend data
  • Manage contracts
  • Track compliance
  • Measure performance
  • Execute continuous improvement

Most procurement departments don’t have these often expensive resources and are unlikely to get them.

Consequently, the most effective structure tends to be a coordinated one that is neither centralized nor decentralized. These structures balance local requirements and aggressive corporate targets.

How a Coordinated Indirect Purchasing Structure Works

A coordinated indirect procurement structure is more effective at leveraging indirect spend than either a high-cost centralized system or a decentralized structure that fails to leverage best practices and best suppliers across the organization. It takes the pros of decentralized and centralized purchasing structures while avoiding the cons found in each model.

Indirect Procurement Needs to Get Organized

Are Most Procurement Organizations Centralized or Decentralized?

According to a recent report by ProcureCon Indirect West, 38% of procurement departments are "centralized across regions and business units." Decentralized departments make up 22%. That leaves 36% that function with a center-led approach (i.e., procurement strategy is determined centrally, but business units or locations handle the actual purchasing).

It appears that in today's procurement departments would rather deal with limited resources and barriers to compliance than lack leverage and consistency.

Which approach do you use? What pros and cons would you add to either of these lists? Share your thoughts in the comments.

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Topics: Group Purchasing Organization, Supply Chain Management, Procurement, gpo