What are the major advantages and disadvantages of centralized/decentralized procurement ?

Centralised procurement implies that purchasing decisions are made either by company headquarters or some regional or divisional level. A decentralised procurement function means that an organisation’s activities are spread over a number of plants or locations.

In a centralized contracting firm, there is one procurement department, and a procurement manager may handle procurements on many projects. The project manager contacts the department when he needs help or support.

Advantages:

Centralized purchasing provides for less duplication of resources and processes 

Centralized purchasing also brings about major bulk discounts because of volume purchases and economies of scale.

Optimized Inventory Management leading to Stock reduction

Because they are part of a department that focuses on procurements only, centralized contracting can result in procurement managers with higher levels of expertise and efficiency.

A procurement department will provide its employees with continuous improvement, training, and shared lessons learned etc.

Disadvantages:

One procurement manager may work on many projects, so he must divide his attention among all of those projects. The procurement manager will likely have less time to spend working on your project and understanding its unique needs, and is more likely to forget important details about the project.

In a decentralized contracting firm, a procurement manager is assigned to one project full-time and reports directly to the project manager. The form of contracting environment will impact the procurement manager's availability and authority.

Advantages  :

Fast response and decision making process

It allows many minds to work simultaneously on the same problem

Purchase orders can be placed quickly.

Shorter approval process

The project manager has easier access to contracting expertise because the procurement manager is a member of the team.

The procurement manager has more loyalty to the project.

The procurement manager has a better understanding of the project and its procurement needs.

Disadvantages:

Duplication of effort in buying, receiving, inspection and accounts payable

It is more difficult to maintain a high level of contracting expertise in the company, because there is no procurement department with a focus on improving expertise.

In centralized procurement we have a separate procurement department sitting in main office and doing procurement for all the project from here.                                                            In decentralized procurement all the procurement is done from the individual project.   

Centralized Procurement:

Advantages:
Cost Savings: Centralized procurement allows for bulk purchasing, which can result in volume discounts and lower prices due to increased negotiation power. It eliminates duplication of efforts and reduces administrative costs associated with multiple procurement processes.
Standardization: Centralized procurement enables standardization of procurement practices, terms, and conditions across the organization. This promotes consistency, simplifies contract management, and ensures compliance with regulations and policies.
Expertise and Specialization: Centralizing procurement allows for the consolidation of specialized procurement expertise. Dedicated procurement professionals can focus on strategic sourcing, supplier relationship management, and contract negotiations, leading to improved supplier performance and better value for money.
Improved Transparency and Control: Centralized procurement provides better visibility and control over procurement activities. It facilitates tracking, monitoring, and reporting of procurement data, ensuring transparency, accountability, and compliance.
Knowledge Sharing: Centralized procurement promotes knowledge sharing among procurement professionals. Best practices, market intelligence, and supplier performance information can be shared, leading to continuous improvement and informed decision-making.

Disadvantages:
Lack of Flexibility: Centralized procurement may limit flexibility and responsiveness to local needs or project-specific requirements. Centralized decision-making may not capture unique circumstances or variations across different business units or projects.
Increased Decision-Making Hierarchy: In a centralized procurement setup, decision-making authority is concentrated at higher levels, which can result in delays and bureaucracy. Local or project-level procurement needs may have to go through multiple levels of approval, slowing down the process.
Distance from End Users: Centralized procurement may lead to a disconnect between the procurement function and end users. The centralized team may not have a deep understanding of local needs or user preferences, potentially impacting user satisfaction.
Potential Bottlenecks: Inefficient processes or lack of resources within the centralized procurement team can create bottlenecks, causing delays in procurement timelines and impacting project schedules.
Dependency on Central Team: Business units or projects relying on centralized procurement may become dependent on the availability and capacity of the centralized team. If the team is overwhelmed or understaffed, it can lead to delays and inadequate support.

Decentralized Procurement:

Advantages:
Localized Decision-Making: Decentralized procurement allows local or project-level procurement teams to make decisions based on specific needs and conditions. This flexibility can lead to faster response times and tailored solutions.
Better Understanding of Local Requirements: Decentralized procurement teams have a closer understanding of local requirements, user preferences, and market dynamics. This can result in more accurate sourcing and better supplier selection.
Enhanced Stakeholder Engagement: Decentralized procurement promotes closer collaboration between procurement teams and end users or project stakeholders. This can lead to better communication, stakeholder satisfaction, and alignment with project objectives.
Quick Decision-Making: Decentralized procurement enables faster decision-making as authority is delegated to local teams. This can be beneficial in situations where rapid procurement is required.
Reduced Dependency: Decentralized procurement reduces dependency on a centralized team, allowing local teams to take ownership of their procurement needs. It can foster a sense of autonomy and accountability.

Disadvantages:
Potential Duplication of Efforts: Decentralized procurement can result in duplication of efforts, with multiple teams independently managing procurement processes. This can lead to inefficiencies, increased costs, and inconsistent practices.
Limited Leveraging of Economies of Scale: Decentralized procurement may miss out on the benefits of volume discounts and economies of scale that centralized procurement can achieve through consolidated purchasing power.
Lack of Standardization: Decentralized procurement can lead to variations in procurement practices, terms, and conditions across different business units or projects. This may pose challenges in terms of contract management, compliance, and coordination.
Inefficient Resource Allocation: Decentralized procurement may result in inefficient allocation of resources, with each team maintaining its own procurement infrastructure and expertise. This can lead to duplication of roles and increased costs.

Some advantages of central purchasing include reducing redundant work, lowering costs associated with training and supporting additional staff, and better control. Some disadvantages of central purchasing include increased complexity, delayed deliveries, and forgone local discounts.