centralizedvslocalizedbuying-120117090731-phpapp02

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2007 Pearson Education

Centralized Vs.

Decentralized Buying


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What Is Centralization?

If top manager make the organizations decisions

with little or no input from subordinates, then the

organization is Centralized

The degree to which decision making is

concentrated at a single point in the organization


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What is Decentralization ?

When the managers and supervisors at the middle

and lower levels are given considerable autonomy in

decision-making, the organization is considered to bedecentralized

It assumes that those most involved with the

particular product, service, or consumers know what

to do and can do it more quickly if given the

authority to commit resources.


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Centralization Vs Decentralization


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Buying Decision

Purchasing is a window to the outside world.

In any industry purchase means buying of equipments,

materials, tools, parts etc. required for industry. The major task of the purchasing decision related

with:

Getting the right quantity of material,

At the required or right quality,

At the right time,

At the right place,

From the right source, and

At the right cost.


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Centralization Vs.

Decentralization on Buying

Decision

The issue of centralization versus decentralization

of purchase function is basically concerned with

decision about the purchasing policies defining the purchasing authorities and the resultant

responsibilities.

When an organization has several facilities,

management must decide whether to buy locally or

centrally.


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What is Centralized Buying?

Centralized purchasing is a method of procurement of all types of

materials, supplies, equipment etc. through a single department (not

necessarily centrally located) under the direct control and superintendence

of one responsible person.

He is directly accountable to the top management for all duties fallingwithin the broad area of purchase function.

Supplier

Warehouse

Plant BPlant A Plant C Plant D


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What is Decentralized

Buying?

Localized /Decentralized Purchasing means

that divisions or smaller areas of an

organization have their own purchasing dept.

Head office

Plant DPlant CPlant BPlant A

Purchase Dept Purchase Dept Purchase Dept Purchase Dept


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Situations where

conflict occurs

Single plant with diversified production

Geographically scattered multi-plant with

diversified production

Geographically scattered multi-plant with

single product

Scattered multi-plant with diversified products

with

Freely availability of basic raw materials etc.


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Centralized or not

Centralized?

Availability of resources

Transportation costs

Lead timeOverhead

Safety

Service level


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Advantages of

centralized buying

Bulk buying strengthens the bargaining position of the

buyer.

Advantage of the quantity discount can be tapped.

It will reduce the inventory carrying costs

Lower transportation cost per unit..

Duplication of efforts in buying function is eliminated

Skill development of purchase head

No competition within units

Easy to procure from foreign supplier


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Disadvantages

Problem when specific requirement needed

Delay in receiving the materials

Problems to use local resources in small

quantity

Helps for autocratic management style

Central purchasing staff may not be expert in

buying various types of itemsLoss of local control

Creates another level of hierarchy

Suitable more for small organization


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Advantages of

Decentralized buying

Closer knowledge of requirement

Reduction on transportation costs (central

warehouse to units)

Reduction in lead time

Close coordination with local production

schedules

Suitable when head office is in foreign nation.

Promotes democratic management practices.


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Which is the best?

According nature and size of the organization, buying

decision depends either centralized or localized.

Perhaps the best solution is a compromise strategy,

whereby both local and central buying are possible. For a large group company with multiple plants at

several locations it is advisable to have both

centralized and decentralized purchase.

Hybrid Buying

System


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Hybrid buying system

It is the system derived by taking advantages from both

centralized as well as localized buying.

High value and large consumption items can be procured

through centralized purchase forcost effectiveness. whereas plant operating supplies, purchases can be

decentralized and can be made to be procured by the plant

as they are ofday to day requirements.

For instance, the corporate group of IBM negotiatescontracts on centralized basis only at the request of local

plant and day to day requirement are procured at plant

level.


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Thank You !


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