Centralization

management

and

decentralization

in

purchasing

In organizations having many production centers which are

situated at distant places, it may be an important issue to decide
whether for the purpose of purchasing for all the production
centers, there should be only one purchase department or for
each production center, there should be one purchase
department. Upon the following factors the decision shall
primarily depend:a. the distance between the production centers & the central
godown,

b. the nature of the materials used i.e. whether the material is

bulky, heavy, fragile etc. ,

c. the cost & risk involved in transport,

d. The firms policy in this respect; & secondarily upon the

comparative advantage & disadvantage of the two systems.
Where for the purpose of purchasing for all, there is one
purchase department; in that case it is referred to as centralized
purchase. When, on the other hand, when for each production
center, there is a purchase department, it is referred as
decentralized purchase. The comparative advantage & the
disadvantages of the two systems are as below:

From the point of View of Centralized Purchase Decentralized

Purchase
1.Control

On buying better control Effective control may

is exercised.
not be present.

2. Terms of Purchase

Due to large scale

Less favourable terms
order, better
terms of may be available.
purchase may be
available.

3. Departmental skill

Economy in purchase
can be obtained by
better skill of the staff

Skill of the staff may not

develop up to the mark.

Efficiency is obtained
due to specialization

Efficiency cannot be
expected when
purchase is made by
department heads who
are loaded with other
work

4. Efficiency

5. Standardization of
Materials

6. Regulation of
purchase
Policy

When purchase is made From department to

by centralized
department ,standards
purchasing department, of materials may vary
all departments can get
standard materials
In case if centralization
purchase, regulation of
purchase policy &giving
prompt effect to any
change is easy

In case of decentralized
purchase, change in
purchase policy cannot
be easily given effect
to.

7. Initial cost

Initial cost is relatively

high

8. Economy of staff,

Economy of staff,&
accommodation and
accommodation & finance also finance can be
achieved by centralized
purchase because
excess of stores need
not be held

Initial cost is relatively

low.
More staff and more
accommodation and
more finance to
purchase is required in
decentralized purchase

9. Transport cost

From central go down to From central go down to

production centres,
production centres,
transport cost is
transport cost is
considerable
practically nil

10. Risk in transport

Fragile items are subject There is no risk involved

to risk

11. Local purchase

Advantage of local
market cannot be
obtained

Advantages of local
market can be enjoyed

12. Promptness in supply Prompt supply cannot Prompt supply without

of
be expected, even there bottleneck is there
materials for production may be bottlenecks
13. Inter-departmental
Relation

For favouritism, central Chances of

supp may sometimes be misunderstanding are
criticized and also
absent
misunderstanding
between production
centers and central
purchase department
may be there

14. Blocking of capital

More working capital

even sometimes
unnecessarily , are
blocked

Unnecessary blocking of
working capital may be
avoided

Thus, (a) Centralized purchase is suitable where1. One or several plants are closely situated.
2. For production of standard products, one basic raw material
is used by the plant or plants.

3.
4. (b) Decentralized purchase is suitable where,
1. Several plants are distantly situated.
2. For production of different
different raw materials.

materials,

plants

use

The above cannot be the firm conclusion, because centralized

purchase may benefit plants which are distinctly situated but use
very costly but light materials, the reason behind this is that,
negligible cost of transport is there & better control on material
cost can be achieved.