Daily Archives: December 10, 2006

The Dangers of Centralized Buying

One of the more interesting talks at the 2006 Informs Annual Meeting was Katri Karjalainen’s talk on Conflicting Goals in Centralized Organizational Buying.

Many organizations large and small pursue centralized buying in hopes of achieving the following benefits:

  • economies of scale
  • purchasing expertise
  • administrative efficiencies
  • specialization
  • volume discounts
  • optimal use of resources and process efficiencies

However, centralized buying brings with it the following corresponding disadvantages:

  • missed local opportunities
  • loss of local knowledge
  • loss of control over supplier performance

As a result, the organizational conflicts often arise due to:

  • divergence of subunit goals
  • conflicts of preference between purchasing center and remote units
  • lack of subunit inclusion
  • cost of certain purchases on a corporate contract may be higher than the subunit could achieve locally
  • quality of certain purchases on a corporate contract may be lower than the subunit could achieve locally

As a result, the benefits of centralization are highly dependent upon commitment to contracts by the organization and the subunits and economies of scale, the primary reason most organizations centralize purchasing efforts, are often the last to materialize.

That’s why I keep promoting Center Led Procurement where you can have the best of both worlds.

I know it might be difficult, as Jason Busch points out over on Spend Matters, but I think it’s worth it.