Today, many businesses are spread out with branches all over the world and usually most of these branches are given separate responsibility for purchasing the goods and services they require to keep their part of the company moving smoothly, if not cost-effectively. The problem with that approach is that these businesses are missing an incredible opportunity to not only streamline the procurement process but also to save a great deal of money.
One solution to this problem is to centralize procurement. Essentially, centralized procurement allows one firm or department to be in charge of all of the purchasing needs for the entire company, including all of its branches. While in the past, this approach was not possible because of a lack of efficient communication channels, today advanced procurement software and the Internet have made it not only a possibility, but also an important strategy used successfully by many businesses.
Opting for a more centralized approach has many benefits for companies. The first of these is that it puts the purchasing power in the hands of only one group or department instead of spreading it out. What this means for businesses is that they have more control over the choice of suppliers, the specifications of the goods purchased, the prices paid for products and services, etc. It also provides more consistency from branch to branch.
Another benefit is that it saves money on employees. Generally, purchasing is done by either a single department or group of individuals within each branch or division of the company. If the purchasing is all handled by one firm or outlet, then all of the additional procurement employees for each division are unnecessary. Thus, the business can streamline their workforce and save money on benefits, training, etc. Less office space and equipment are also needed which cuts costs even further.
In addition to saving money by centralizing purchasing is that the business will be able to leverage its buying power. For example, if a furniture company had three divisions and each bought 100 pounds of lumber a week, they would pay more per pound than if they purchased a total of 300 pounds of lumber because suppliers provide discounts for higher volume orders. Additionally, suppliers will be more willingly to offer savings or specials to businesses that provide a steady stream of large orders which would be the case with centralized purchasing. With traditional methods, each division would generally have his or her own supplier or their purchases would count separately from all of the other divisions, so they could take advantage of this benefit.
Consolidating a business's purchasing power is not always easy. First, the decision of which division or external firm should be allowed to handle procurement must be made. Experience is, of course, a key factor in this decision. Purchasing is too important to trust to just anyone, so those who will in charge of centralized procurement must be carefully selected, trained to use the software, and routinely evaluated to ensure that all of the divisions' are having their purchasing needs met by the consolidated staff.
Another difficult challenge that comes with the implementation of such a system is that many employees and managers will be reluctant to accept such a drastic change. Because these individuals are used to doing their own purchasing, they will feel as if they are being stripped of power by the change and will initially react negatively to the idea. In order to combat that reaction, the business must impress upon them the benefits of the consolidation. They need to understand that the change is not a reflection on their performance but on a change in the purchasing environment and that this move will allow the company to continue to grow, to remain competitive, and to build stronger customer relationships in the future. All of which means job security for the employee.