Procurement can happen at the central or corporate level or it can happen at local unit level. Centralization or decentralization depends on many factors.
Centralized procurement model is the traditional procurement model where procurement processes, policies and decisions are taken by central department usually in headquarters.
There are several advantages with the model.
- Companies can achieve economies of scale.
- Vendor negotiation is easier as contracts are signed for whole organizations.
- There is better control and compliance.
Decentralization procurement model attempts to eliminate the issues with centralized model by providing complete autonomy to business units and plants. It results in higher level of satisfaction in the organizations, but causes issues of lost savings opportunities, low level of integration among different units of organizations.
Most organizations do not follow extreme models of Centralization and Decentralization but fall somewhere between. There are certain shared resources such as IT systems to integrate organizations. Many contracts are handled centrally to achieve economy of scale. But local units are given required autonomy to run business. The degree of centralization or decentralization will depend on several factors.
- Stability: How stable is the environment in different geographies and businesses company work in? If environment is stable and predictable, Procurement can be mostly centralized. If environment is complex and unstable, Local units should be given more autonomy to react to situations. Procurement should be mostly decentralized in this case.
- Nature of Business: What kind of processes company follow? For example, If company follows JIT, than more agility will be required. The organization will required high level of decentralization in this case.
- Procurement Expertise: What kind of expertise exist at local and corporate level. If local units do not have high level expertise required for purchasing, Centralized model would be better. If Corporate level does not have much knowledge about local units, than decentralized model would be better.