A centralized purchasing strategy is not ideal for all businesses.
It is designed for companies that have multiple locations and are looking to increase the maturity of their procurement processes.
In fact, it’s the exact strategy our clients have used to go from chaos to a well-run purchasing process that scales across multiple locations.
If you want to reduce the time spent on processing purchase orders, save 8-10% on your vendor cost, then THIS is the centralized purchasing strategy to do it.
Grab our centralized purchasing policy template below to see the exact steps from the strategy.
Centralized purchasing is a procurement model where the purchasing decisions and execution is centralized to a single team instead of each location making its own decision.
On the contrary, in a decentralized model, the purchasing decisions are not made by a central team. But the individual departments/locations make their own purchasing decisions.
The most common scenario for a decentralized purchasing process is the case where you have multiple physical locations and each one is making its own purchasing decision.
However, it is not uncommon to see a decentralized purchasing process even within a single location. In this case, each department within the organization might be making its own purchasing decisions.
In a centralized purchasing model, a central team is responsible for making purchasing decisions. Here are some of the activities that get centralized.
In a centralized purchasing environment, the supplier selection process is centralized. A single team is responsible to look at all the purchasing needs.
For example, let’s assume that each location is purchasing office supplies from its own preferred vendor.
With a centralized purchasing process, you can consolidate these purchases to a single supplier and get better pricing and better terms.
When you have a centralized environment, the products get standardized. That not only simplifies the purchasing, but it does also lead to better pricing due to volume discounts.
Let us explain with an example.
Let’s say each location is purchasing different types of copier papers. The paper is exactly the same except for how thick it is.
One costs $32/pack and the other costs $35/pack.
If the thin paper works for one location, most likely it would work for the other location too.
So by standardizing the items, you not only saved $3/pack but you also could get better pricing on the original $32/pack pricing.
Compliance includes negotiations, contracts, etc.
For example, do you need to have 3 bids before you can select a new vendor?
In a decentralized environment, this process is difficult to enforce and monitor.
In a centralized environment, you can assign this responsibility to a central procurement department. This not only reduces the compliance cost but also helps control maverick spending.
The purchasing process gets standardized because there is one process for purchasing and communicating with vendors.
For example, you might implement a new purchasing system that standardizes how everyone creates purchase requests. That also standardizes how a PO is sent to the vendor.
As a result, the downstream invoicing process is also simplified.
The centralized process makes sense in the following scenarios
A centralized process doesn’t make sense if each location/business unit has its own very unique needs. Look for these red flags
If you are still not convinced what model is right for now, then here is a quick comparison of key points for centralized and non-centralized purchasing models.
|Centrally managed by a team or an individual who is responsible for all purchasing needs.||Each location or department is responsible for managing its own purchasing.|
|A standardized purchasing process across the entire company.||Different purchasing processes across the company.|
|Allow you to centralize the negotiation and get volume discounts.||You lose volume discounts because the purchasing is not consolidated.|
|Takes time to implement and get stakeholder buy-in.||No stakeholder buy-in is required as each department/location/business unit can have its own process.|
|Need centralized tools for purchasing to streamline the process.||The process could be manual without the need for a purchasing tool.|
|Allows you to standardize parts and increase supply chain resilience.||There could be multiple versions of the same item and you probably carry a lot of inventory.|
|The vendor selection process takes time as multiple stakeholders need to be consulted.||The vendor selection process is easier because the decision is made only by a limited set of people|
|Might be overkill when you are getting started.||The process is agile and suited when you are just getting started.|
Here is the step-by-step process.
If you want to follow along with the steps, just download the template
The first step is to assess whether a centralized purchasing process makes sense for your company.
So let’s do some analysis
First, you need your Spend history for the last 12 months.
The ideal place to get that is from the accounting/ERP system.
You can get the Purchase order data or Invoice data for your analysis
You would need the following fields
More information is better but if you get at least this information, it is a good start.
The next step is to identify opportunities where moving to a central purchasing process would help the organization.
Before getting started, identify common items into buckets (a.k.a categories) so that it is easy for analysis.
For example – all items that are laptops are categorized as laptops.
Now let’s look at how you go about identifying cost-saving potential due to centralizing the purchasing policy.
A centralized purchasing process/policy is very beneficial when you have overlapping suppliers.
For example, If you are purchasing laptops from Dell at multiple locations then centralizing the negotiation process is probably a good idea.
Here is an example of how that would look
The obvious benefit is that you would be able to reduce the cost through better discounts due to increased volume.
We can use the same process we used for suppliers to identify the opportunities for overlapping items.
This can be broken down into 2 subcategories
1. Items that are non-standard but can be standardized.
These are the items that are non-standard across locations. Let’s take a simple example of copy paper. There are different types of paper.
For simplicity sake, let’s take an example of 8.5 x 11 paper from Amazon.com
They both have the same count of sheets. But one is almost a dollar more.
What if you standardize these items to let say the $29.98 item, then you are saving $1.02
Now that is a very simple example but the idea here is to identify items that can be standardized to a common model.
You don’t need to purchase 10 different types of staplers!
2. Items that are standard but purchased from different vendors
In a similar fashion, let’s say you purchase the same/similar items from two different vendors at two different price points.
By centralizing the purchasing process, you can standardize on the vendor and item that could drive potential cost savings.
Let’s take the example of gloves.
For example – the following item is available at both Amazon.com and Safety Company (You can replace it with your vendors).
The same item is available at different price points. Amazon sells it at 25 cents per piece and Safety company is selling the same product at half of that cost.
To quantify the total opportunity, you can multiply the annual quantity by the price difference.
For example, if you purchase 10,000 gloves in a year across all locations. You can save $1,248/year on this single item.
Now compile all the opportunities like this
Once you have consolidated the opportunities, you are ready to go to the next step.
In this step, you are presenting the opportunity to the stakeholders to get the blessing to move to a centralized model.
Let’s first identify who your stakeholders are
This could be as simple as talking to the owner of the company or it could be as complex as talking to different operations heads.
Whatever the size of your company, document the list of your stakeholders as follows:
Name: The name of the person
Title: What is their official title.
Why they care: This is your assumption on why they care about whether the purchasing is centralized or not.
Role in decision making: The idea is to identify which stakeholders are important in decision making.
You could divide that into two buckets
You could make these decisions based on the Spend for each location or different business units.
Now you identified the stakeholders and you have identified the opportunities.
Now it is time to call the stakeholder and present your findings.
Here is what to include in the presentation.
We recommend not starting with cost savings though that is one of the objectives.
Depending on your audience you can adjust the objectives. For example:
This slide lists all the cost-saving opportunities you have identified so far.
Don’t present individual opportunities, rather present a consolidated view of the savings.
Vendor consolidation: $XXXX/Year
Item standardization: $XXXXX/year
Headcount reduction: $XXXXXX/year
Then provide an example of each so that the audience can relate to how the savings are calculated.
Be prepared to open your spreadsheet to show the math behind the numbers.
Here you want to talk about the challenges you would face and what you need for the successful implementation of the centralized purchasing policy.
The idea is to present the roadblocks so that you can garner support from key executives.
4. Resource Requirements/Investments
In this section, you are going to cover the resource requirements for centralizing the purchasing process.
If you can quantify the resources, that is always better than saying I need resources!
Here are some examples
5. High-level business case
You can get fancy if you like but a simple payback period would do the job.
Here is a screenshot from the template
Assuming that you got the go-ahead to move to a central purchasing model. The final step in the process is to come up with an operational model to implement a central purchasing policy.
In the previous step, we talked about the resources required to implement a central purchasing policy. This step is the execution plan.
If you have not done this already, set up a purchasing policy so that everyone is aware of how the new purchasing process is going to work.
If you don’t have a purchasing policy, download our template and get started with that.
Here are the key sections that are covered in the purchasing policy template:
We have already covered this topic in detail, feel free to read more on “Purchasing Policy For CFO’s”
The main idea here is that the purchasing policy should cover the new process, especially the following
Once the policy is in place, you need to communicate the new policy to your employees.
You can’t assume that employees would read the purchasing policy.
Create a one-pager/cheat sheet that talks about the key focus areas for the new purchasing policy. For example:
Few suggestions on communicating the policy.
Ask your stakeholders to send the communication out to their team. They can use the one-pager you have created or create their own summary of the changes.
Ask your stakeholders to encourage the employees to reach out to the purchasing team with any questions.
If you have a company-wide communication channel, for example, an intranet site or weekly newsletter then you can use that channel to communicate out the new policy.
Publish the one-pager there along with the main policy.
In some cases, you probably need to take a focussed approach to communication.
There are always employees/teams who would not follow the policy.
It could be that they need more information or they just don’t like to follow rules!
Use the 80/20 rule here, focus on the 20% of the stakeholders that are going to contribute to 80% of the spend.
If you got that 20% covered, you would start realizing the benefits of centralized purchasing.
Once you got these 20% working with you, you can focus on the other non-conformance issues.
If you need to hire a team to centralize the purchasing process, you need to come up with a hiring plan.
If you already have a team, skip to the next section.
Here are the key skills you would need in your next hire
Empathy: Yes, that seems obvious, but it would be surprised how many procurement professionals don’t have empathy towards their stakeholders.
All they care about is cost savings. Cost savings come as a result of working closely with your stakeholders and for that you need empathy.
Negotiation: The next important skill is the ability to negotiate the cost with your suppliers.
Some sourcing professionals take the “hammer approach” to negotiation. I.e. Supplier needs to reduce the cost and I don’t care how they do it.
The other approach is “collaborative negotiation”. In this approach, you still get to the end result but here are you considering the needs of the other party too and coming up with a win-win solution.
Please don’t mistake win-win for a compromise. There are a lot of good books you can read on procurement. Here are our top recommended procurement books.
Analytical skills: The procurement team should have the skills to take the raw data and slice and dice it in a way to identify saving opportunities.
For example, doing a Pareto analysis on your top spend items.
Or building a should cost model so that you know what you should be paying for a certain product or service.
A should cost model not only requires analytical skills but also the ability to research the market to identify the cost components.
If you would like to read more on how to build a procurement team, we have covered this topic in detail.
More on this topic, read how to build a procurement team
Do you need automation to make the centralized process more efficient?
It depends on how complex your purchasing process is.
We help companies with the automation of the purchasing process so our opinion is biased.
Here are some of the questions you can answer to figure out if you need automation.
Does the current process support a centralized purchasing model?
If all you do is create purchase orders on spreadsheets, then yes that process is not going to scale.
However, if you have some level of automation, then you might be able to scale the current process.
Do you have a way to implement negotiated price?
One of the main benefits of the centralized purchasing policy is that you can now consolidate the purchasing volume and get better pricing discounts.
But if you have no way to ensure that employees purchase from those vendors, you would not be able to reap the reward of cost savings.
Do you have a way to implement a streamlined process across the company?
You can think of this as – do you have a process so that everyone is going to create purchase orders for their purchase.
Does the current invoicing process scale? In other words, do you have a process to ensure that all your suppliers submit invoices to a central place?
If you would like to see how ProcureDesk can help with centralizing the purchasing policy, click here to schedule a demo with one of our Procure to Pay expert.
The last step is to identify the high-level timelines for the implementation of the new centralized purchasing policy.
You can think of this as an execution plan for the vision you have painted to the stakeholders.
We recommend that you break down the timelines in the following sections
Design & Hiring
This section includes the design of the policy as well hiring required to support the centralized purchasing process.
Our experience shows that it takes more time to align the purchasing process across multiple entities.
Factor in few weeks to get feedback, make changes to the policy, and then getting the final alignment on the policy.
All stakeholders across different entities need to be aligned to a common policy for this to work.
Factor in 8-12 weeks for hiring and onboarding in case of an external hire.
For an internal hire, this process could be as short as 4-6 weeks.
The implementation step includes operationalizing the policy. This includes executing the communication plan, setting up processes to support the centralized policy.
If procurement technology is part of your initial rollout that needs to be part of your implementation plan.
Our recommendation is to get some wins first and then spend time automating the process.
That way, stakeholders are bought in because they see the results and you can use that momentum to ask for investment in technology.
By result alignment, we mean the process to validate the savings with the different stakeholders.
Let’s say you implemented the centralized purchasing process. Your team negotiated a central contract that resulted in 10% cost savings.
Do all departments, business units agree with those savings?
So the idea of results alignment is to make sure that the different departments agree with the results delivered by the team.
Usually, this alignment needs to be done with the finance team but it is important for businesses to buy in the value delivered by this process.
We recommend you do this after the first significant cost savings negotiation.
The sooner you do this, the sooner they buy in the process.
The biggest issue with implementing a centralized purchasing policy is compliance with that policy.
It’s not always the case that employees don’t want to follow the policy.
Sometimes they don’t even know who the preferred vendors are and what the process is.
So instead of constant communication about the policy, try building the policy in the tool and drive people towards the tool.
We recommend automating the approval process as well as building catalogs so that the users can easily find what they need to purchase.
Every growing business needs a centralized purchasing policy so that you can leverage the combined value to get better cost savings.
Our clients have used this approach to
So go ahead and download the template and use this approach to get started on implementing a centralized purchasing policy.