Issues Relating to Purchasing

Centralized Vs Decentralized Purchasing 

This issue is comparatively more important and relevant to large corporations operating multiple plants may or may not be located at different places. For a single place, organisation decentralization might be feasible on a very limited scale. There are advantages relevant to both the policies. At times, better results can be achieved through combining the two and specifically remarking the items or volumes for which central or local purchasing is responsible. 

Some of the possible advantages of centralization are as follows : 

1. Favorable price and terms can be negotiated because of large volume purchases. 
2. Specialized vendors ancillaries can be encouraged to take up manufacture and supply of items/components of required and specified quality. 
3. Administration and control is comparatively more easy and efficient. 
4. Number of personnel required is comparatively less, resulting into reduced overhead costs of purchasing. 
5. Paper work, record keeping is consolidated. Possible to develop uniform procedures and policies. 
6. It is easier to maintain the quality of purchased participates through centralized testing and inspection. It is also possible to conduct testing and inspection at the vendors facilities. 
7. It is beneficial to the vendor also, in case the size of order constitutes major proportion of his total production capacity. 

Some of the possible advantages of decentralization are as follows : 

1. Coordination between purchase department and the user department in the plant is quicker and simple. 
2. It is possible to develop local suppliers, which can result into lower transportation costs and also lower levels of holding inventors. 
3. Availability of local suppliers facilities, quicker readjustment of the internal requirements is feasible. 
4. Better quality coordination between local supplier and the plant can be maintained. 
5. Local control, local coordination, and local rescheduling become easy and quicker. 

Normally, a well balanced combination of centralization and decentralization can be used more advantageously. 

Single Source Vs Multiple Source Purchasing 

The purchase department can decide to choose and depend on a single source for each of some selected items. In the extreme case, the department can decide to use single source for each of the item. On the other extreme, the policy may be to have multiple sources for each of the item. Each policy - single source or multiple source has its own advantages and disadvantages. 

Advantages due to single source are as follows : 

1. For small total annual requirement of an item multiple sources tend to increase clerical and other expenses. 
2. Due to bulk purchases from single source, it becomes possible to avail of discounts of prices or freights or other services. 
3. Supplier tries to cooperate, update and improve his services because of long term relations. 
4. Scheduling of deliveries or long term contract is feasible. 
5. If supplier is the only producer or owns the patent or his quality is far superior than other suppliers or priced are highly competitive, one has to depend on single supplier. 

Sometimes by judicious development of single suppliers on long term basis overall material cost can be reduced significantly. 

Advantages of multiple source are as follows : 

1. Dependency on single supplier is reduced. 
2. Breakdown, strike, stoppage of work with one supplier does not unduly affect the working of the company. 
3. Competition among suppliers keep them alert. 
4. It provides flexibility in the choice of placing an order.