Implementing Centralized Purchasing For Your Business

Centralized purchasing is key to driving cost savings when you have multiple locations or departments doing their own purchasing.

It helps your business avoid risks such as:

difficulties in monitoring and controlling spending throughout departments
challenges in managing supplier relationships
fragmented data and reporting
ineffective inventory management

Without it, there’s only one word to describe your business- chaos.

But it doesn’t always have to be that way!

In this blog, we will teach you how to go from chaos to a well-run purchasing department with a centralized purchasing strategy. We will cover centralized purchasing and how important it is to turn your business into a well-oiled machine.

If you want to reduce the time spent on processing purchase orders and save 8-10% on your vendor cost, then THIS is the centralized purchasing strategy to do it.

Bonus: We have created a template that helps you identify the cost savings opportunities by consolidating Spend using a centralized purchasing strategy. Click here to download the template for free.

Let’s dive in!

What Is Centralized Purchasing?

Centralized purchasing refers to the procurement model where the purchasing decisions and execution are centralized to a single team in your business.

This means that instead of each department or branch within your company buying its supplies and equipment, there’s one central team responsible for finding the best deals, negotiating contracts, and managing the entire procurement process in your company.

On the contrary, a central team does not make the purchasing decisions in a decentralized model. However, the individual departments/locations make their own purchasing decisions.

The most common scenario for a decentralized purchasing process is where you have multiple physical locations, and each 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 might make its own purchasing decisions.

Here are some aspects your business needs to consider before moving forward with centralized purchasing:

The size and complexity of your organization
The geographic dispersion of your operations
The level of standardization in your products and services
The culture of your organization

Let’s learn more about centralized purchasing in the next sections:

Where To Purchase From?

In a centralized purchasing environment, the supplier selection process is centralized. A single team is responsible for looking at all the purchasing needs.

For example, let’s assume that each location is purchasing office supplies from its preferred vendor.

With a centralized purchasing process, you can consolidate these purchases to a single supplier and get better pricing and terms.

What Products To Purchase?

When you have a centralized environment, the products get standardized. That simplifies the purchasing and leads 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 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, it would most likely work for another.

So by standardizing the items, you saved $3/pack and could get better pricing on the original $32/pack pricing.

Compliance

Compliance includes negotiations, contracts, etc.

For example, do you need to have three bids before you can select a new vendor?

In a decentralized environment, this process is difficult to enforce and monitor.

You can assign this responsibility to a central procurement department in a centralized environment. This not only reduces the compliance cost but also helps control maverick spending.

Purchasing Process

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, you also simplify the downstream invoicing process.

What Are The Benefits Of Centralized Purchasing?

Centralized purchasing can bring a positive impact to your company. Here are some of the benefits of centralized purchasing:

Cost savings: When you combine the buying power of your organization, it becomes easier to negotiate discounts with your vendors. Aside from that, centralized purchasing can also decrease the costs of your purchasing activities.
Improved efficiency: Centralized purchasing can simplify and streamline your procurement process. As a result, this process becomes faster and even more efficient! Because of this, you can free up time for your employees in other departments to focus on more strategic tasks.
Standardized quality: A centralized purchasing system within your business can ensure that all your departments use the same supplies and equipment. This can help to improve product quality and reduce the risk of defects.
Better supplier relationships: When you have a centralized purchasing team, building stronger relationships with suppliers becomes easier. As a result, you get better deals and improved service from your vendors!

What Are The Disadvantages Of Centralized Purchasing?

Despite of all the positive impact that centralized purchasing can offer your business, we can’t deny that there are also some fallbacks to it.

Here are some of the disadvantages of centralized purchasing:

Lack Of Flexibility

Because of centralized purchasing, other departments might feel like they have no hold or control over their own decisions. As a result, employees of that department may experience frustration.

Increased Bureaucracy

Believe it or not, the procurement process can be more complex and time-consuming with centralized procurement. This can become a pressing issue for small businesses that have unique needs.

Communication Challenges

Since there is only one central point of decision-making in centralized purchasing, chances are- there might be misunderstandings along the way.

Having this type of procurement strategy requires strong communication skills to avoid problems and errors between departments.

Where Does The Centralized Purchasing Process Make Sense?

The centralized process makes sense in the following scenarios

Strong overlap of the items purchased across multiple locations.
Some overlap between the vendors.
You can take advantage of volume in your price negotiations.
There is room to standardize the items because each location does the same thing but has non-standardized parts.

Examples Of Where Centralized Purchasing Does Not Make Sense

A centralized process doesn’t make sense if each location/business unit has its own unique needs. Look for these red flags.

Limited overlap between suppliers.
No overlap between items purchased.
Different concentrations of type of purchases, for example – materials vs. services.
Each business unit has its own P&L. If there is no central control, consolidation is a tough sell.

Centralized vs. Non-Centralized Purchasing

If you are still not convinced what model is suitable for now, here is a quick comparison of key points for centralized and non-centralized purchasing models.

Centralized Purchasing

Procurement is centrally managed by a team or individual responsible for all purchasing needs.
A standardized purchasing process across the entire company.
Allow you to centralize the negotiation and get volume discounts.
It takes time to implement and get stakeholder buy-in.
Need centralized tools for purchasing to streamline the process.
It allows you to standardize parts and increase supply chain resilience.
The vendor selection process takes time, as multiple stakeholders need to be consulted.
It might be overkill when you are getting started.

Non-Centralized Purchasing

Each location or department is responsible for managing its purchasing.
Different purchasing processes across the company.
You lose volume discounts because the purchasing is not consolidated.
No stakeholder buy-in is required as each department/location/business unit can have its own process.
The process could be manual without the need for a purchasing tool.
There could be multiple versions of the same item, and you probably carry a lot of inventory.
The vendor selection process is more straightforward because the decision is made only by a limited set of people.
The process is agile and suited when you are just getting started.

How Do You Implement A Centralized Purchasing Model?

Here is a step-by-step process of how your business can implement a centralized purchasing model:

Step 1: Quantifying The Value Of Centralized Purchasing

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

Item #
Item description
Supplier name
Unit Quantity
UOM
Unit price
Location name

More information is better, but getting at least this information is a good start.

The next step is identifying opportunities for moving to a central purchasing process to help the organization.

Before getting started, identify everyday items into buckets (a.k.a categories) to make it easy for analysis.

For example – all items that are laptops are categorized as laptops.

Step 2: Identifying The Opportunity For Cost Savings

Let’s look at how you identify cost-saving potential due to centralizing the purchasing policy.

Identify Common Suppliers

A centralized purchasing process/policy is very beneficial when you have overlapping suppliers.

For example, centralizing the negotiation process is probably a good idea if you purchase laptops from Dell at multiple locations.

Here is an example of how that would look

The obvious benefit is that you would reduce the cost through better discounts due to increased volume.

Identify Common Items

We can use the same process we used for suppliers to identify the opportunities for overlapping items.

Purchased items can be divided into two 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’s sake, let’s take an example of an 8.5 x 11 paper from Amazon.com.

They both have the exact count of sheets. But one is almost a dollar more.

What if you standardize these items to $29.98 item? Then you are saving $1.02

That is an elementary example, but the idea here is to identify items that can be standardized to a standard model.

You don’t need to purchase ten different types of staplers!

2. Items that are standard but purchased from different vendors

Similarly, let’s say you purchase the same/similar items from two different vendors at two different price points.

You can standardize the vendor and item by centralizing the purchasing process, which could drive potential cost savings.

Let’s take the example of gloves.

For example – the following item is available at 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 sells the same product at half of that cost.

You can multiply the annual quantity by the price difference to quantify the total opportunity.

For example, 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 can go to the next step.

Bonus: Download the template here

Step 3: Presenting The Opportunity

In this step, you present the opportunity to get the blessing to move to a centralized model.

Let’s first identify who your stakeholders are

Identifying Your Stakeholders

This could be as simple as talking to the company’s owner or 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 essential in decision-making.

You could divide that into two buckets.

Consulted: These are your decision-makers. You need to get their agreement to move forward or get a consensus in their group.
Informed: You need to inform them about the process for buy-in, but they are not necessarily the decision-makers.

You could make these decisions based on the Spend for each location or business unit.

Getting Ready To Present The Opportunities

Now, you have 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.

1. Objectives

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:

Drive better employee experience and efficiency by centralizing the purchasing process.
Ensure better compliance with cost control.
Deliver better cost savings for the company by centralizing the purchasing volume.

2. Opportunities

This slide lists all the cost-saving opportunities you have identified so far.

Don’t present unique opportunities, instead present a consolidated view of the savings.

For example:

Vendor consolidation: $XXXX/Year

Item standardization: $XXXXX/year

Headcount reduction: $XXXXXX/year

Then, provide each example so the audience can relate to how the savings are calculated.

Be prepared to open your spreadsheet to show the math behind the numbers.

3. Challenges

Here, you want to talk about the challenges you would face and what you need to implement the centralized purchasing policy successfully.

The idea is to present the roadblocks to garner support from key executives.

Some examples

Need support for all stakeholders to drive adoption.
A centralized purchasing process requires adopting a centralized purchasing policy across the company.

4. Resource Requirements/Investments

This section will 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

Hire and build a central procurement team. We need to hire X headcount at an average $XXXX/year cost.
We need to invest in technology to quickly implement a centralized purchasing process. The expected cost is $xxxx/year.

5. High-level business case

You can get fancy, but a simple payback period would do the job.

Here is a screenshot from the template

Step 4: Implementation Model – How You Plan On Implementing The Purchasing Policy.

I assume you got the go-ahead to move to a central purchasing model. The final step in the process is to develop an operational model to implement a central purchasing policy.

We discussed the resources required to implement a central purchasing policy in the previous step. This step is the execution plan.

Purchasing Policy

If you have not done this already, set up a purchasing policy so that everyone is aware of how the new purchasing process will work.

If you don’t have a purchasing policy, download our template and get started with that.

Download purchasing policy template

Here are the key sections that are covered in the purchasing policy template:

We have covered this topic in detail; please read more on “Purchasing Policy For CFO’s.”

The main idea is that the purchasing policy should cover the new process, especially the following.

How the new suppliers would be set up, and what is the vendor selection process. Define the role of a central purchasing department in vendor selection and vendor relationship management.
How centralizing purchasing would work. Primarily, what is the approval process? Who needs to approve the requisitions before purchasing can create the purchase order?
How employees can engage with the central procurement team. If you have certain thresholds for the central purchasing team, this is a good place to define that.
It is also essential to cover the process for suppliers to send invoices to the AP (Accounts Payable) team.

Communication

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 discussing the key focus areas for the new purchasing policy. For example:

Approvals
Purchase process
Invoices process

There are a few suggestions for communicating the policy.

Stakeholders

Ask your stakeholders to send the communication out to their team. They can use the one-pager you created or create a summary of the changes.

Ask your stakeholders to encourage the employees to contact the purchasing team with questions.

Internal Communication

If you have a company-wide communication channel, such as an intranet site or weekly newsletter, you can use that channel to communicate the new policy.

Publish the one-pager there, along with the primary policy.

Focused Communication

Sometimes, you probably need to take a focused approach to communication.

There are always employees/teams who would not follow the policy.

It could be that they need more information or don’t like following the rules!

Use the 80/20 rule here; focus on the 20% of the stakeholders contributing to 80% of the spending.

If you got that 20% covered, you would start realizing the benefits of centralized purchasing.

Once you get these 20% working with you, you can focus on the other non-conformance issues.

Hiring Plan

If you need to hire a team to centralize the purchasing process, you need to develop a hiring plan.

If you already have a team, skip to the next section.

Here are the essential skills you would need in your next hire

Empathy

Yes, that seems obvious, but it would be surprising how many procurement professionals don’t empathize with their stakeholders.

All they care about is cost savings. Cost savings come from working closely with your stakeholders, and for that, you need empathy.

Negotiation

The next critical skill is negotiating 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 result, but here you are considering the other party’s needs and creating 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 to identify saving opportunities.

For example, do a Pareto analysis on your top spend items.

Or build a cost model to know what you should pay for a particular product or service.

A cost model requires analytical skills and the ability to research the market to identify the cost components.

If you want to read more on building a procurement team, we have covered this topic in detail.

More on this topic read how to build a procurement team

Technology/Automation

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 questions you can answer to determine 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 will not scale.

However, if you have some level of automation, you might be able to scale the current process.

Do you have a way to implement a 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 cannot ensure employees purchase from those vendors, you will not 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 will 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?

Are you curious to see how a procurement solution can help you improve the procurement process for your company? Click here to see it in action

High-level Timelines

The last step is to identify the high-level timelines for implementing the new centralized purchasing policy.

You can think of this as an execution plan for your vision 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 aligning the purchasing process across multiple entities takes longer.

Factor in a few weeks to get feedback, make changes to the policy, and then get the final alignment on the policy.

All stakeholders across different entities must be aligned to a standard policy for this to work.

Factor in 8-12 weeks for hiring and onboarding in case of an external hire.

This process could be as short as 4-6 weeks for an internal hire.

Implementation

The implementation step includes operationalizing the policy. This includes executing the communication plan and 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.

Results alignment

By result alignment, we mean validating 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 and 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 must be done with the finance team, but businesses must 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.

Technology Implementation

The biggest issue with implementing a centralized purchasing policy is compliance.

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 the process.

So, instead of constant communication about the policy, try building the policy in the tool and driving people towards the tool.

We recommend automating the approval process and building catalogs so users can easily find what they need to purchase.

The Bottomline

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

Control spending by ensuring that all purchasing requests are reviewed correctly.
The streamlined process reduced the time spent processing purchase orders by 30-50%.
Save 5-10% on their annual spending by negotiating better cost savings by aggregating volume.

So go ahead and download the template and use this approach to implement a centralized purchasing policy.

Download Centralized Policy Template

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Implementing A Centralized Purchasing Policy For Your Business