Under centralized purchasing, purchases are made at one central point for the whole organisation and material is issued to respective departments or jobs as and when needed. Centralized purchasing is suitable in cases where the organisation runs one plant. It will bring about economies of purchasing and buying in small lots will be avoided.
It ensures consistent buying policies in future and purchasing powers are concentrated in the hands of one person, the in charge of purchasing department. This type of purchasing is very helpful in quick implementation of decisions regarding purchasing.
It also ensures bulk buying which ensures favourable prices. The staff requirements under this type are limited and specialists in buying may be appointed. Centralised purchasing is further helpful to the vendors since their selling costs are reduced as they can easily co-ordinate and supply goods to a single buyer instead of large number of buyers.
The most important benefit which can be drawn from centralised buying is that it keeps the inventories in control and checks the wasteful investment in materials and equipment etc. thereby ensuring overall economy in purchasing.
Other advantages of this model of purchasing are:
- The service of an efficient, specialized and experienced purchase executive can be obtained.
- Economy in recording and systematic accounting of materials.
- Transportation costs can be reduced through purchase of bulk quantity of materials.
- Centralized purchasing avoids reckless purchases.
- Centralized purchasing discourages duplication of efforts.
Centralized purchasing suffers from certain drawbacks explained below:
1. It has been observed that under this method supply of materials to different departments is delayed. Material requisitions are received from various departments and jobs, and distribution point is one, this leads to delays in sending materials to the respective jobs.
2. There can be misunderstanding between the department requiring the material and the purchasing department which may lead to wrong purchases by the buying department.
3. in case of an organisation where different types of materials are used, centralized purchasing is not suitable, it would be difficult to maintain accounts with regard to purchase and issue of materials.
4. High initial investment has to be made in purchasing.
5. Centralized purchasing is not suitable, if branches are located at different geographical locations.
6. In case of an emergency, materials cannot be purchased from local suppliers.
7. Defective materials cannot be replaced timely.