Advantages and disadvantages of multi-site centralisation and decentralisation
The other key influencing factor on the organisation of the Procurement department is the issue of centralisation and decentralisation.
A multi-site firm faces one additional organisational question that does not concern most single-site firms: To what extent should procurement activity be centralised at the corporate level? In practice, virtually every firm answers this question differently. Some firms centralise the activity almost completely, doing the procurement for all sites at a central headquarters office. Others decentralise the function entirely, giving each site full authority to conduct all of its procurement activities. Still some firms — the majority of them — develop an organisation somewhere between these two extremes. Each extreme approach offers significant benefits.
1. Advantages of multi-site centralisation
a. Greater buying specialisation: Perhaps the greatest benefit of centralisation stems from the fact that it permits greater technical specialisation among buyers. This leads to the development of more knowledgeable and more highly skilled buying personnel.
In most firms, the importance of specialised buying cannot be overvalued. The complexity of industrial materials increases constantly. A buyer who does not fully comprehend the significance of a material’s major technical and manufacturing characteristics cannot perform effectively. If buyers fail to perform with technical competence, the important buying decisions will ultimately be made in the using departments, and buyers will be relegated to a glorified clerical status.
b. Consolidation of requirements: Just as single-site centralisation facilitates the consolidation of organisation requirements, multi-site centralisation facilitates the consolidation of material requirements at the corporate level. In most situations, such consolidation results in larger procurements from a smaller number of suppliers, yielding more favourable prices and increased supplier service. Increased procurement volumes also permit the negotiation of highly profitable long-term contracts for many production materials.
c. Easier procurement coordination and control: When all organisation procurement activities are consolidated in one office, procedures for coordinating and controlling individual segments of activity can be effected more quickly and with less paperwork. Consolidation permits more direct administration and control of such important policies as those affecting supplier selection procedures, supplier relations, procurement ethics, budget compliance and the consistency of general procurement practices among the various buyers. In general, under this type of organisation, the chief procurement executive finds it easier to control the total efficiency of the corporate procurement activity.
d. Effective planning and research work: The existence of a centralised group to handle corporate-wide procurement requirements provides the concentrated staff know-how to improve procurement research work. Virtually, all procurement-planning needs — from internal systems design to strategic materials planning — can be conducted in more depth with greater efficiency for all procurement operations throughout the corporation.
2. Advantages of multi-site decentralisation
a. Easier coordination with operating departments: From an operating standpoint, the greatest advantage of decentralisation is that it facilitates the coordination of procurement activities with the activities of using departments at each site. When a complete Procurement unit is located at each operating site, procurement personnel are close to the users’ operating problems and develop a much better feel for unique site needs and their implications in the procurement area. Buyers can personally discuss procurement matters with using supervisors anytime they wish. A site Procurement department can develop a much closer working relationship between suppliers’ technical representatives, buyers and site engineers/users than is possible under a centralised organisation.
In brief, under a decentralised arrangement, Procurement personnel can participate more fully as members of a specific Procurement-Production or Procurement-Operation team.
b. Speed of operation: A Procurement department located at the site clearly can respond more quickly to users’ needs. The transmittal of
information from site to headquarters can considerably lengthen the procurement procedure and cycle even when telephone, fax and computer links are used. If most operating needs could be adequately planned, and plans always function according to schedule, the time delay factor would be a minor problem. In a dynamic business situation, however, unforeseen events could cause enough deviations from schedule so that this rarely is the case.
c. Effective use of local sources: If a firm’s sites are geographically dispersed, it can be difficult for a centralised Procurement department to locate and develop potentially good suppliers in the locale of each site. At times, this difficulty deprives a site of various technical and procurement benefits resulting from close working relationships between site personnel and suppliers. If sites are separated by great distances, decentralised Procurement departments in many cases may also be able to reduce material transportation costs by the wise use of local suppliers. For example, a Penang manufacturing facility could purchase materials from Penang suppliers situated in Bayan Lepas, Perai and Kulim High Tech. A Selangor facility could purchase materials from Shah Alam or Nilai industrial areas.
d. Site autonomy: A fundamental principle of management holds that the delegation of responsibility must be accompanied by the delegation of adequate authority to carry out that responsibility. A site manager who is given full responsibility for the operation and profit performance of a site can properly contend that he or she should have full authority over the expenditures for materials and other procurement items. Decentralisation of Procurement gives a site manager this authority.
3. Factors affecting feasibility and desirability of centralisation
Generally, three factors determine how feasible or desirable centralisation of the Procurement function may be in a given situation.
a. Similarity of materials usage: If a firm’s sites use entirely different materials, centralisation of Procurement offers only minimal benefits; the major benefits of increased specialisation and requirement consolidation cannot be achieved. In such cases, potential disadvantages of centralisation usually outweigh the advantages gained from better coordination and control.
Most firms, however, generally have a greater similarity of materials usage among sites than is at first apparent. To make specialisation profitable, the various sites do not have to use exactly the same items. The important thing is the similarity of types of materials (or markets). Specialisation of buyers is accomplished on the basis of material (or market) classifications. Most firms find that their sites do use a number of the same classifications of materials.
b. Site department size: As a general rule, centralisation is more advantageous when a firm’s individual site Procurement departments are not large. If site procurement operations are large, a high degree of buyer specialisation may already have been achieved. Similarly, the benefits to be gained from consolidating requirements of large departments are less significant than those gained from consolidating the requirements of small sites. This is not to say that consolidation of large departments does not yield benefits. The benefits, however, are not as significant as in the case of small departments, and they are frequently outweighed by the offsetting disadvantages.
c. Geographic dispersion of sites: The closer a firm’s sites are situated geographically, the easier centralisation becomes. Conversely, if much centralised buying is done, and the more widely the sites are dispersed, the more serious the disadvantages of centralisation become as the problems of communication and coordination will be more difficult to handle.
|Please read about ‘centralisation/decentralisation’ on pages 58 – 61 from your textbook Procurement Principles and Management, 10th edn, England: Prentice-Hall, Pearson Education Limited by Baily, P, Farmer, D, Crocker, B, Jessop, D and Jones, D (2008).|
|Question to activity 2.2
||Suggested answer to activity 2.2