Centralized Procurement in SCM

Centralized Procurement can be defined as the strategic Sourcing of Commodities or Raw Materials from a centralized source or Supplier. The traditional method of procurement was to source the same material from different suppliers in different business units of an organization. For Example, for a Company having two manufacturing units in two geographically distant cities of the same country used to source the same raw material from two different suppliers or vendors. However, with centralized procurement the raw materials would be sourced from a Single Vendor for all the manufacturing units. This helps the buying unit to leverage on costs, avail discounts on volumes and achieve uniformity of quality. However, the implementation of Centralized Procurement is also dependent on many factors apart from Cost and Quality.

Recently, we had a chance to discuss about Centralized Procurement with some of the Industries top Supply Chain Management gurus. Below are some of the key points that were a takeaway from the discussions:

If the buying is with in the country, concept of centralization is most appropriate. In this case one can negotiate to have single manufacturing location and multiple delivery location (Warehouses or second factory) in order to have control on quality and price.

Centralized purchasing helps a lot in reducing cost in manufacturing environment.

Product transportation cost and Landed Cost Management must be Handled Effectively to ensure optimum results.

Lower number of suppliers results in improved quality, cost and delivery results.

All Stake Holders of the Organization must be involved in a Centralized Procurement Decision. This includes (but not limited to) Quality, Program Management, Warehousing, Logistics etc.)

C-Proc helps reduce cost, but it is imperative that the process of Vendor Selection is stringent so as to ensure Quality, Timeliness and Cost Reduction.

Apart from that that there are other Factors which effects the Decision to go for Centralized Procurement like: IT / facility structures, culture of the organization, legal / fiscal requirements, stakeholder buy in / assessment, types of material purchased, RM cost and availability of RM in the country. Etc.

Systems – it’s very hard to have a centralized operation if you have disparate systems that hold information in multiple places and multiple formats.

This concept helps in achieving the overall cost benefit to the corporation, but at times fails to achieve breakeven for the particular cost center.

This also helps in overcome the communication problem and delay in implementation of critical parts.

To Sum Up -‘Centralize what makes sense, leave alone what doesn’t make sense, and systems are key’

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