COLLEGE OF BUSINESS EDUCATION (CBE)
DAR ES SALAAM CAMPUS
BASIC PROCUREMENT PRINCIPLES (PST04101)
TOPIC 3: THE ORGANIZATION OF PROCUREMENT FUNCTION
Topic Contents
Centralized Procurement Function
Decentralized Procurement Function
Semi Centralized Procurement Function
Factors to consider in organizing the procurement function
Introduction
The organization of procurement activities simply means the determination of how the
procurement activities will be carried out in the institution. Each operating unit or department or
branch can potentially have its own distinctive culture and structure appropriate to the particular
activities. In cases where there are multiple operating units, the organization has to decide
whether it is going to maintain decision-making at a central point or delegate responsibilities to
individual operating units or department. These options are called centralized procurement,
decentralized procurement and semi-centralized or mixed procurement system.
Centralized Procurement
This refers to the procurement systemin which all the procurement activities are managed by the
organization's headquarter or a single unit of the organization. The other divisions or
departments are required to channel their requirements through this central unit.
Advantages of centralized procurement
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a) Forms the basis of quantity discounts and learning curve reductions due to consolidation of
quantities.
b) Permits the employment of procurement professionals to enhance specialized procurement
expertise and reduce the number of personnel to be engaged in procurement activities.
c) Provides an incentive to suppliers to compete for bulk tenders, resulting in price reductions
due to stiff competition.
d) Have a greater strategic focus than decentralized procurement due to proximity to major
organization decision-makers.
e) Leads to the elimination of maverick purchasing and duplications between functions or plants
of the organization.
f) Uniform policies can be easily adopted to enhance control of all organization’s procurement
activities.
g) Uniformity of requirements’ prices is obtained to facilitate standardization of materials’
costing by the organization.
h) Reduction of the number of transactions between suppliers and buyers.
Disadvantages of centralized procurement
a) User specifications may not be met successfully especially when there is no good
communication or coordination of activities between the procurement function and the user
departments.
b) Centralized standard procedures may result in delays in receiving the materials due to
bureaucratic procedures within the organization.
c) Difficult to attend emergencies due to the complex coordination process
d) Lack of flexibility to satisfy unique requirements and meet [Link] the items
are not common to all users or in the presence of small orders.
e) There is a lack of effective use of local suppliers which may result in high transportation
costs when the plants are dispersed located.
f) Higher coordination costs and set-up costs.
Decentralized Procurement
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This refers to the procurement system in which procurement activities are managed by multiple
units, i.e each user department/branch/plant executes its own procurement activities.
Advantages of decentralized procurement
a) Closer to the actual users thus creates environment for better understanding of local needs.
b) Response time to departments or plants needs may be rapid and of high quality.
c) Provides great flexibility in meeting the emergence requirements of the division.
d) Enhance closer relationships with the local suppliers.
e) Effective use of local suppliers to lower transportation costs.
f) Direct responsibility of operating units.
Disadvantages of decentralized procurement
a) Reduced purchasing power due to unconsolidated purchase orders.
b) Limited expertise in requirements and few opportunities for cross-functional collaborations.
c) Focus on local rather than corporate and operational rather than strategic considerations.
d) Possibly lack of standardization in materials and prices.
e) Poor inventory control and duplication of efforts
f) May resultin maverick purchasing due to low budgetary control.
Semi-centralized/mixed procurement
Incorporates the use of both centralized and decentralized procurement systems by the
organization, whereby the organization determines the range of procurement activities that have
to be centralized and which have to be decentralized. More advantageous since it complements
the two main structures of centralization and decentralization.
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Factors to consider in centralization–decentralization decision of procurement activities
Commonality or nature ofthe requirements
The firms that use entirely different materials among units or branches decentralized
procurement is proved to be more beneficial, but if they are using common items the benefits of
increased specialization and requirements consolidation can be realized througha centralized
procurement system.
Size of the organization
The organizations with few departments or branches a single unit can be responsible for all the
activities of procurement hence centralization of the procurement function can be adopted and
implemented while large organizations that comprise many departments or branches may
implement a decentralization procurement system to foster effectiveness and efficiency in the
execution of procurement activities.
Geographical location of the organization
The closer the firms’ departments, plants or branches are situated geographically the easier
centralization becomes and if the plants, branches or units are located far away from each other
the decentralized system will be advantageous over the centralized system.
Savings potential
With regard to the volume of purchases to be made by all departments or branches of the
organization, the choice should be based on the organisational structure of the procurement
function that will facilitate the availability of savings on capital to be tied up on the
organization’s requirements to allow investments to be made on other areas.
Supply market structure
Depending on the supply risk and the negotiation power between the suppliers and the buyers,
once the supply risk is high and suppliers have high negotiation power then centralized
procurement should be implemented, but when the supply risk is low and buyer negotiation
power is high then decentralized procurement can be implemented.
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Expertise level required
For the procurement of specialized items, the focus should be on the centralization of the
procurement function since there is a high amount of capital to be tied up and needs expertise in
procurement to allow cost savings and ensuring value for money procurement while for varied
types items decentralization can be used since it involves the procurement of non-critical items
with low value, risk and low potential benefits to the organization hence no much expertise on
procurement will be required.
Centralized activities
Purchase of bottlenecks, leverage and strategic products
Purchase of capital equipment and systems
Determination of purchasing strategies and policies
Negotiation of bulk contracts for commonly used items by a number of plants
Market trends research
Control of group inventory
Staff training and development on procurement profession
Decentralized activities
Small value orders and maintenance, repair and operating (MRO) items
Emergency purchases
Uncommon used items
Local purchasing undertaken for social reasons
Local buying to save transport costs
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