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Centralized vs Decentralized Purchase

      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 centre, there should be one purchase department. Upon the following factors the decision shall primarily depend:-

  1. the distance between the production centers & the central godown,

  2. the nature of the materials used i.e. whether the material is bulky, heavy, fragile etc. ,

  3. the cost & risk involved in  transport,

  4. the firm’s 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 is exercised.             

Effective control may   not be present.

 2. Terms of Purchase

Due to large scale order, better     terms of purchase may be available.

Less favourable terms 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.

  4. Efficiency

Efficiency is obtained due to specialization

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

 5. Standardization of               
   Materials

When purchase is made by centralized purchasing department, all departments can get standard materials

From department to department ,standards of materials may vary

 6. Regulation of purchase   
   Policy

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

Initial cost is relatively low.

 8. Economy of staff,                
accommodation & finance

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

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

9. Transport cost

From central go down to production centres, transport cost is considerable

From central go down to production centres, transport cost is practically nil

10. Risk in transport 

Fragile items are subject to risk

There is no risk involved

11. Local purchase          

Advantage of local market cannot be obtained

Advantages of local market can be enjoyed

12. Promptness in supply of 
materials for production

Prompt supply cannot be expected, even there may be bottlenecks

Prompt supply without
bottleneck is there

13. Inter-departmental                  
Relation
               

For favouritism, central supp may sometimes be criticized and also misunderstanding between production centers and central purchase department may be there

Chances of misunderstanding are absent

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 where-

  1. 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. (b) Decentralized purchase is suitable where,

    1. Several plants are distantly situated.

    2. For production of different materials, plants use different raw materials.

    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.

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