Centralized procurement is the process of centrally managing the purchasing for distributed locations. In a centralized procurement model, there is one procurement team for all locations.
Suppose you are a manufacturing company with ten different locations. Instead of each location managing its purchasing, you can have a central team manage the purchasing for all locations.
Centralized procurement is a recommended model for companies purchasing similar products across different locations or business units.
Companies that successfully implement the centralized procurement model benefit from reduced cost, increased efficiency, and lower overall operations cost.
If you are looking to implement a centralized procurement model, there are three prerequisites for a successful implementation:
The first and foremost requirement for a centralized procurement model is the buy-in from management and all locations. The typical challenge with a centralized procurement model is the different locations might not agree to a centralized model.
Even if you have implemented a centralized procurement model, each location continues to manage its purchasing. They might have their own set of preferred suppliers even when all locations are purchasing similar products.
Once you have the buy-in from management, the rest is to manage the logistics of the centralized procurement model.
Next, you need a centralized procurement team to manage the purchasing across different locations.
There are different ways to structure the team. You could have a category-based approach where one person manages a category across all locations.
Alternatively, you can have a location-wise approach where one person manages one location.
There are pros and cons to both approaches. We recommend you read about building a procurement team to determine the best approach.
Next, you need a purchasing system to route all purchasing requests to the central team.
You can have a manual purchasing process for the employees to request a purchase, but with multiple locations, it is often painful to manually manage the process.
With a purchasing system, you can set up a workflow so that the purchase request gets routed to different team members based on the specialization. For example, all IT-related requests are routed to the IT category manager.
The system improves the efficiency of the entire procurement process.
The main advantage of a centralized procurement model is cost savings. The procurement team can negotiate a better volume discount by consolidating the purchase volume across different locations.
The cost savings vary by category and volume, but on average, procurement teams can save anywhere between 5-8% of the negotiated Spend through a centralized procurement model.
A centralized procurement model increases procurement efficiency across the organization.
Rather than each location doing its procurement, a central team manages it.
It saves time, and you need less headcount to manage procurement.
The model is efficient and lowers overall operating expenses.
A centralized procurement model provides better Spend visibility for the organization.
When you don’t have a centralized model, the purchasing data lives in different locations, which makes it difficult to generate Spend analysis reports.
With a central procurement model, the procurement team can easily aggregate the data from different locations into a single Spend dashboard.