Centralized vs. Decentralized Purchasing: Know What’s Best for Your Business

The purchasing process is a critical element of a company’s overall procurement department. No matter the size of your company, how you structure your purchase process has a direct impact on your company’s ability to control costs, manage risks, and maintain process resilience as supply chains evolve.

Below we’ll explain the types of purchase models, the differences, advantages and disadvantages, and how to determine which model is best for your procurement department.

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What is centralized purchasing?

In a centralized purchasing system, all purchases are managed and handled by a single team, department, or branch. This means that any employee or team purchase must be submitted, reviewed, and approved through a single purchasing process. 

Example of centralized purchasing

An example of a centralized purchasing process would be a case where a team requires a new software system or app to manage their deliverables. The team submits the request to an internal purchasing team. A designated reviewer receives and approves the purchase request. The approved request is then delegated to a member of the purchasing team for completion. 

As you can see from this example, a centralized purchasing process relies on a gatekeeper who approves and manages purchases. This gatekeeper — usually someone in a management role — has visibility and control of all purchase requests and transactions. 

Advantages of centralized purchasing

There are many advantages to using a centralized purchasing system within your business, especially with regard to transparency, control, standardization, and cost containment. 

Visibility and control

When purchase requests and related information are consolidated and centralized, oversight becomes easier and faster. Purchasing teams are able to maintain a close watch on budgets, requesters, and requests. 

Better purchasing power

Purchasing teams that are organized and informed have more leverage with vendors. By centralizing all company purchasing information and history, the purchasing team is able to negotiate better prices and volume discounts with suppliers. Purchasing teams are able to establish a better rapport with vendors and can use their relationships (and history) to negotiate better prices and terms. 

Standardization

Standardized processes are easier to manage and produce more consistent results. When purchasing is centralized within a single team, the purchasing process remains stable and predictable. This makes it easier to organize information, avoid errors, and build a single source of truth.

Eliminates maverick spending 

The purchasing team can quickly identify individual spending that goes against purchasing policies or duplicate purchase orders to eliminate excess spending that may lead to company losses.

Team efficiency

Centralized purchasing creates structured processes and stable workflows. As a result, purchasing teams are able to move with speed, accuracy, and efficiency.

Because the purchasing team is familiar with the workflows, there are fewer opportunities for errors and broken handoffs. This familiarity with the process also means that the purchasing team is able to identify opportunities to automate and optimize their workflows.

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Disadvantages of centralized purchasing

Centralized purchasing offers many benefits, but it isn’t right for every business. In some cases, the disadvantages of centralized purchasing outweigh the advantages. Here are some of the cons of using a centralized purchasing process. 

Purchasing rigidity

Centralized purchasing improves visibility and process standardization, but it also makes the purchasing process less flexible. This is important for situations in which adaptability is needed, such as when a company needs to diversify its vendor base quickly or when working with suppliers that have vastly different legal and compliance requirements. 

Lack of purchasing autonomy

Because the purchasing process may take longer, purchasing managers have less autonomy to make time-sensitive decisions. Delivery delays and longer turnaround times can lead to poor employee experiences and job frustrations. 

Processing delays 

For companies that see high volumes of purchase requests, a centralized system may create a bottleneck that leads to processing delays and late approvals.  

Complex and costly management 

For a smaller business with a single location or various branches within a single region, this disadvantage may not actually apply. But for larger businesses with various branches and a wider geographic presence, managing a centralized purchasing model can be complex, time-consuming, and costly. 

That’s because purchasing managers and specialists need to consider how even the most minor improvement may affect the entire purchasing ecosystem. For teams with limited resources, this can be a complicated matter. 

What is decentralized purchasing? 

A decentralized purchasing system is a model in which purchases are made and managed by various specialized teams, departments, or branches. This means that teams or employees refer to a variety of departments or teams — depending on their needs — for purchase requests, rather than a single department. 

Example of decentralized purchasing 

Decision making with this model is divided, so purchase requests are received and managed by various departments. As a result, purchasing authority is distributed to more than one person. 

An example of decentralized purchasing would be a purchase request for equipment or software that impacts more than one team, such as a new HR app that needs approval from both HR and IT. Another example would be a company in which each department has final approval over its internal purchase requests. 

Advantages of decentralized purchasing

Decentralized purchasing offers several distinct advantages over centralized purchasing. These include increased agility, specialized purchasing, and supplier diversity.  

Purchasing agility

Because the flow of communication is much more open and doesn’t require a single approval, decentralized purchasing usually makes decision-making easier and faster than it would be with a centralized purchasing model. Teams are able to process requests without any bureaucratic delays and are able to engage with a more diverse range of suppliers. 

Specialized purchasing knowledge

In a decentralized purchasing model, each department handles purchase requests specific to its needs. This allows the team to become its own “purchasing expert.” They understand suppliers, department needs, and business priorities better than an external purchasing department and apply their expertise to the purchasing process.  

More supplier diversity

Supplier diversity is important because it means buyers have more bargaining power and because it protects against supply restraints. If one vendor’s price is too high, or they aren’t able to fulfill orders quickly, the buyers have alternate routes to procure the goods and services they need. 

In a decentralized purchasing model, individual teams build supplier relationships and are able to determine which supplier is the best fit given current circumstances. 

Disadvantages of decentralized purchasing

While a decentralized purchasing model offers many benefits for larger companies, there are also some downsides.

Lack of process standardization 

Since each department or team manages its own purchase requests, there may be different purchasing processes at work at the same time. This lack of standardization can make it difficult to monitor and centralize purchasing requests, which can be disruptive to budgets and the accounts payable process.

Difficulty enforcing compliance standards

Unstandardized processes create complexity for IT teams, who are tasked with enforcing compliance and security requirements. When different departments manage their own purchases, it’s also more difficult to ensure that vendor vetting or other policies are being applied consistently.

Missed opportunities for discounts 

Vendors often offer discounts based on volume and/or timely payment. In a decentralized purchasing process, the lack of coordination and centralization may lead to a situation in which vendors don’t award discounts based on sales volume. Likewise, delays can cause the buyer to miss out on discounts available for paying invoices early or within terms. 

Scattered purchasing history and poor spending management 

The greatest disadvantage to this model is that it leads to disorganized data. Not only does this open the door to errors, duplicates, and maverick spending, but it also makes it more difficult to perform a holistic spending analysis because the information is so scattered. This disorganization can wreak havoc on budgets and create unnecessary headaches for the finance team. 

What is the difference between centralized and decentralized purchasing?

The difference between these two models comes down to the structure and business benefits. 

Centralized vs. decentralized purchasing: Which is the right choice?

There’s no definitive answer for which model is the right or best one. In order to decide which is the most suitable, the procurement team must be aligned with business priorities and strategic objectives. Companies and procurement teams also need to have an in-depth understanding of their supply chain so that they can meet business and departmental needs at a strategic and financial level. 

This alignment and transparency with stakeholders is essential to building a model that achieves not only procurement goals, but also business goals. To help guide your purchase model framework, below are some considerations for each model.

Choose centralized purchasing for:

• Higher degrees of oversight and control
• Greater data transparency
• Purchasing in high volumes to benefit from discounts
• Streamlining spend management and purchasing history
• Centralizing contracts and invoices 
• Reducing maverick spending or cost leakage
• Standardizing processes 
• Greater leverage to negotiate with suppliers

Choose decentralized purchasing for:

• Higher degrees of agility
• Faster immediate and long-term purchasing decisions
• Specialized supplier knowledge and local compliance requirements 
• Managing a high volume of purchase requests
• Greater supplier diversity
• Shorter delivery times 
• More use of local suppliers and discounts 
• Greater purchasing autonomy 
• Less process bureaucracy 

The third choice: A hybrid purchasing model

If neither of these options seems like the perfect fit, consider combining the benefits of centralized and decentralized purchasing to create a hybrid purchasing model. This model is also known as a center-led or coordinated model. 

This more coordinated and customized alternative can be used to maximize the benefits of purchase process standardization, data centralization, supplier diversity, increased supplier knowledge, higher purchasing autonomy, risk mitigation, and faster delivery times. 

With this model, it’s also easier for procurement managers to better align the purchasing process, sourcing strategies, and departmental needs with overarching business priorities. 

Best practices for centralized and decentralized purchasing

Whether you opt for a centralized or decentralized model, here are some best practices that can be applied to both models. 

Automate manual tasks

Whether you choose a centralized, decentralized, or hybrid model, they can all benefit from automation. Look for tasks that take up employee resources, or that fall within any of these task types: 

Reduce errors by standardizing requests  

Don’t let the names of these purchasing models distract you from these process management must-haves. By standardizing and centralizing requests, purchasing teams can gain better visibility into data and request management to reduce errors, duplicate purchasing, and overspending. 

Standardizing the request process ensures that all requests are made in a similar manner. This makes it easier to quickly assess requests and avoid any compliance or purchasing policy issues, especially with a decentralized model. Adding an additional layer of centralization elevates the benefits of standardization. 

In addition to creating a single source of truth, centralizing requests also eliminates the time-consuming process of chasing after any missing or additional information. That’s because all incoming requests are being received into a single channel that many reviewers can then easily access. 

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