Decentralized purchasing: Benefits & differences from centralized purchasing
Discover the benefits and limitations of decentralized purchasing and how it differs from centralized purchasing to choose the best option for your team.
There is no one-size-fits-all process for purchasing.
Some organizations follow the traditional procurement model, where all purchasing decisions are the domain of an internal centralized team, regardless of the procurement need.
Others choose to adopt a decentralized approach to purchasing, where department or branch leaders are responsible for sourcing and procurement duties.
Discover the benefits and limitations of the decentralized purchasing approach and how it differs from centralized purchasing so you can choose the best option for your team.
What is decentralized purchasing?
Decentralized purchasing is an approach to buying that distributes decision-making authority to department or branch leaders instead of having it entirely owned by a centralized purchasing unit.
If purchasing is decentralized to departments, the leaders of each team have the authority to make purchasing decisions as required by their department. For example, the head of marketing could procure a new social media advertising automation platform without seeking permission from a centralized procurement team.
If purchasing is decentralized to branches, the branch managers have this authority and can make purchasing decisions for all departments. The branch manager might, for example, procure a new CRM tool for their entire team independently of the needs of other branches.
It’s worth noting that decision-making authorities in organizations that follow a decentralized purchasing model must still comply with strict buying policies and guidelines.
For example, a company might require that the CIO reviews all new software purchases to ensure data security requirements are met.
Difference between centralized and decentralized purchasing
To understand decentralized purchasing, it’s helpful to look briefly at its counterpart, centralized purchasing.
Centralized purchasing is an approach to buying where a single team is responsible for sourcing and procurement on behalf of the entire organization.
A centralized purchasing department takes care of purchasing for all departments and all branches, though procurement leaders likely collaborate with department or branch leaders to ensure the products and services they buy meet the requirements of the respective team leaders.
Decentralized purchasing, on the other hand, democratizes purchasing power and hands it over to department or branch leaders.
Individuals within a business — generally senior leaders in charge of an entire branch or business unit — are granted authority to make all purchasing decisions for their respective teams.
Benefits of decentralized purchasing
Improved purchasing efficiency
The primary benefit of adopting a decentralized model is that it makes purchasing faster. Because department leaders know precisely what they require from a purchase, they can quickly identify suitable vendors and narrow them down to an ideal option.
Decentralized purchasing power means team leaders don’t need to seek permission from a procurement team that’s likely already working on several other projects. As such, new purchases don’t wait in line for review — they occur as soon as the relevant buying authority chooses their ideal supplier.
Reduced bureaucracy and red tape
The inherent red tape is one of team leaders' most significant challenges with traditional centralized procurement processes. This can disillusion department heads with the purchasing process and make them reluctant to engage in new initiatives.
For example, your VP of Sales wants to purchase a new sales engagement platform to support your existing CRM and enhance sales efficiency.
They are experts in this domain. They know exactly what they need.
But with a centralized purchasing approach, they must create a new purchase requisition, have it reviewed by the procurement team, and wait while multiple vendors are assessed and vetted.
None of this occurs within a decentralized purchasing model. The VP of Sales chooses the platform they need, follows any required internal buying policies, and signs the contract.
Department leaders have more input into sourcing requirements
Centralized purchasing is often top-down.
The procurement team sources and buys new products or services and dictates those changes to the teams they impact.
This can lead to a disconnect between purchasing outcomes and actual team requirements. Centralized buying teams may source suitable products from a cost and vendor risk standpoint, but those products may not meet the needs of the team using them.
With decentralized purchasing, department leaders have complete authority over what they buy, meaning this is a non-issue.
When purchasing authority is decentralized to branch leaders, teams can take advantage of the benefits of localized sourcing.
For instance, a chain of restaurants may be able to source key ingredients from local suppliers, enhancing product freshness and reducing delivery timeframes.
Limitations of decentralized purchasing
Difficulties with purchasing compliance
The biggest challenge with decentralized purchasing is ensuring compliance with internal policies.
On the other hand, department leaders are more likely to skirt rules or look for opportunities to avoid cumbersome activities, like performing a full assessment of all market opportunities.
As a result, a decentralized approach to purchasing can make managing procurement compliance difficult, which increases your procurement risk.
Overlapping software license purchases occur
When individual departments or branches are responsible for sourcing and purchasing software, it's common to end up with multiple licenses for similar products.
For example, managers at two locations might purchase employee scheduling software from different suppliers.
If purchasing is centralized, the procurement team buys the same platform for all branches, reducing costs and saving time on vendor management processes.
Inability to access economies of scale
One of the other benefits of centralized purchasing — which is lost when you adopt a decentralized model — is the ability to access economies of scale.
That is, as you purchase more from a given vendor, you’re better able to negotiate a more favorable per-unit price.
For example, your marketing and sales team leaders purchase CRMs to manage customer data. Each pays $20 per user for 50 users per team, adding up to $2,000 per month.
If this purchasing decision is centralized, you might be able to negotiate a price of $18 per user for 100 users, reducing your monthly commitment to $1800.
The hybrid model: The optimal balance between centralized and decentralized purchasing
Both centralized and decentralized approaches to purchasing have pros and cons.
Many purchasing departments opt for a hybrid approach to develop an optimized procurement system. Certain purchases are centralized, while others revert to a decentralized purchasing system.
For instance, you might allow purchases below a certain dollar threshold to be decentralized, taking advantage of the flexibility and efficiency of this approach. Purchases exceeding the threshold, however, need to be approved by dedicated purchasing staff or handed over to the procurement team.
Another approach is to build a hybrid purchasing model based on the purchase category.
For example, supply chain procurement — purchasing components that go into manufacturing the product you sell — may be the domain of the procurement team.
However, the SaaS purchasing process can be handled at the regional level or assigned to department stakeholders. In this instance, it may be wise to ensure that your IT leader approves all purchase orders to minimize SaaS security risks and eliminate the possibility of license overlaps.
Vendr: Your partner for SaaS purchasing
Whether you opt for hybrid, centralized, or decentralized purchasing, your team needs a dedicated platform to manage the purchasing process from sourcing to invoice payment.
Discover the best options here: 9 best procurement software solutions for 2023.
Modern businesses run on SaaS tools, meaning they need a purchasing platform that makes sense in the software context.
Vendr is the software buying platform that pays for itself, with advanced features for SaaS purchasing teams like:
- Price benchmarking to help you negotiate favorable contracts
- Personalized assistance from a team of SaaS buying experts
- Contract repository and lifecycle management capabilities
- Automated approvals workflows to maintain compliance with buying policies
Find out how much you could save on software spending today with our free savings analysis.