A centralized purchasing model offers many benefits that can help businesses operate more efficiently and reduce costs. While decentralized purchasing gives individual departments more control, a centralized system provides overall coordination that maximizes economies of scale. In this article, we will discuss the key advantages of centralizing purchasing operations.
Leveraging Bulk Discounts
One major benefit of a centralized purchasing department is the ability to leverage bulk discounts on goods and services. By consolidating purchasing power across the entire company, centralized buyers can negotiate better volume discounts with suppliers. Recent industry surveys indicate that companies save an average of 12-18% on total procurement costs after transitioning to a centralized structure. The centralized purchasing team has more scale and visibility to drive sourcing from preferred vendors and aggregating spend across business units. This results in lower per unit costs and a reduction in overall expenses.
Reducing Maverick Spending
Under a decentralized model, individual departments make purchases independently without coordination. This leads to maverick spending that is off-contract and lacks oversight. However, a centralized purchasing department can reduce rogue spending by overseeing sourcing through preferred vendors. Studies show that maverick spending is decreased by around 30% on average when companies use centralized processes. The purchasing department’s oversight minimizes unnecessary purchases and reinforces the use of negotiated contracts.
Improving Supplier Management
Centralized purchasing also provides better coordination of the supplier base. Instead of managing multiple fragmented relationships, centralized purchasing can streamline communications and strategic sourcing for more efficient supply chain management. This gives the company more leverage and control in supplier negotiations. It also reduces redundancies by eliminating overlapping vendors for the same materials or services.
Increasing Contract Compliance
A centralized purchasing department has better visibility and control over contract terms and conditions. This simplifies contract management across the organization, drives higher usage of negotiated agreements, and increases cost savings. Recent research finds that contract compliance improves by over 20% on average with a centralized approach. The purchasing team can ensure departments are aware of existing contracts and enforce their use.
Enhancing Data & Analytics
With purchasing data and spend aggregated in one place, businesses gain useful analytics and reporting not available with decentralized buying. Insights on spending patterns, supplier performance, and other metrics allow for data-driven decision making to optimize costs. Purchasing leaders can track KPIs and identify opportunities for improvement. The consolidated data provides a 360-degree view of procurement that guides strategic initiatives.
The benefits of centralized strategic sourcing are compelling. By leveraging a coordinated purchasing structure, businesses can reduce maverick spending, drive contract compliance, achieve volume discounts, improve supplier management, and enable better data analytics. While decentralized purchasing is still appropriate in some cases, a centralized approach offers significant strategic advantages for most organizations looking to maximize purchasing efficiency and cost savings.
SDI has a centralized buying model. Being centralized lets SDI be more responsive, to handle demand for MRO and indirect supply based on production schedules and seasonal peaks. Additionally, SDI has 24/7 on-call buyers to handle emergency purchasing needs to further ensure business continuity.
SDI buyers research parts thoroughly, leveraging reliability engineers and site managers before ever issuing a PO. With tools provided by our Strategic Sourcing team, buyers ensure that items are purchased from the best suppliers for the best value.
Learn more about how centralized buying is part of a more connected MRO supply chain.
