Purchasing Department Structures
Harry Hough, PhD, founder of the American Purchasing Society
Editor’s note: Dr. Hough is a frequent contributor to this blog.
Small companies may not have a formal purchasing department. Employees can have multiple functions. The task of buying needed material and services is included with other responsibilities. In a highly controlled organization, the president may do all the purchasing. As the organization grows, the busy executive may turn some of the buying function over to a secretary or someone else. In other organizations purchasing activities are highly diffused. Foremen and office supervisors can purchase what they need for their particular areas
Eventually, a purchasing department is established. Often the purchasing supervisor has limited authority and is politically weak. Employees decide on what they want and frequently even tell the buyer where to purchase the goods or services. Wise management sooner or later realizes that this system does not minimize costs and prevents proper financial control. Then the authority of the purchasing manager is increased, and policies and procedures are established to improve purchasing operations.
It is called a decentralized system when purchasing is done by more than one department or at more than one location. The ultimate decentralized system is when every employee makes his or her own purchases. Few organizations operate in that fashion, but many big companies have local purchasing departments. Even so, there still may be a Director of Purchasing and possibly a purchasing staff at the corporate headquarters. The Director or central staff may actually purchase certain items that are used by many locations, or they may negotiate national contracts that give favorable pricing to local plants or offices when purchases are made. The Director may establish company wide policies and procedures for purchasing. The central staff may gather statistics about purchases. They analyze the data, report on activities and make recommendations to local operations and/or general management.
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With a centralized system all buying is done at one location or by one department. The centralized system has a number of significant advantages. Duplication of effort is avoided. One buyer negotiates for particular items with suppliers rather than many buyers bargaining for the same items. When purchasing people are at the local level, they must know about many products. Because their time is limited, they cannot become expert on all of them. With a centralized system, a buyer can be assigned a certain product category. The buyer becomes a specialist about that product. However, some large companies in the automotive and other industries rotate buyers so they do not become too friendly with particular suppliers. Other companies do so to provide cross training in different product categories.
One of the biggest advantages of centralized purchasing is the ability to obtain economies of scale. The buyer almost always can obtain lower prices and better terms because of higher volume. Combining all the local requirements for the same items gives the buyer tremendous negotiating strength.
Companies fluctuate from decentralized systems to centralize and back to decentralized depending on the fashion. Executives have praised the advantages of centralization and criticized it. That is because it is very difficult to successfully change from a decentralized system to a centralized one. It is difficult because people basically resist change. It is especially difficult because those who have been buying under a decentralized system fail to see how the change will help them. They only realize they will lose control of supplier selection and that they may suffer delays in receiving material that they need. They suspect that they may not get the quality they want.
Existing suppliers will also oppose the change because they fear they will lose business. Suppliers will use their sales efforts to reinforce all the fears of local management.
To change the system requires a great deal of planning. It requires a gigantic effort by the Director to convince both the national and local management of the advantages of making the change. It requires careful selection and supervision of the selected suppliers to make sure they deliver the quality expected on schedule. It should be better than previously obtained. Prices should be lower. Unless these objectives can be achieved, the new structure will likely fail.