Purchasing Organization Structure – Supply Chain Optimization

Purchasing Organization Structure – Supply Chain Optimization explained by professional Forex trading experts the “ForexSQ” FX trading team.

Purchasing Organization Structure – Supply Chain Optimization

Introduction

The purchasing function of any company is vitally important to the success of that company. By negotiating with vendors, a purchasing department can get the best quality items, at the best price, at the right delivery time.

In this way, a company can ensure that they have the parts available for their manufacturing process, which in turn allows the production team to produce and deliver quality items to the customer.

The way in which a purchasing department is structured is directly dependent on the way in which the company operates. Having a purchasing organization structured in the wrong manner can lead to higher costs for materials and inconsistencies for the production of finished goods, which can lead to degradation in customer satisfaction.

Small Business

For small businesses, the purchasing of materials is as important as it is for large companies. A small business operates in a lean manner, and the purchasing process may be simple, but still has to operate successfully.

A small business may have one purchasing professional who has to procure all the items required for the business. The advantage of a single purchasing professional is that they will usually have a personal relationship with vendors and can act quickly when issues arise.

However, they need to ensure that materials arrive when they are required and at the correct price.

As businesses grow, the single purchasing professional can easily become overwhelmed and this can lead to their inability to keep on top of vendors and deliveries.

It is important for small businesses to understand that a growing company needs to ensure that their purchasing department grows in step to ensure that they maintain the efficiencies that had been created.

Centralized Purchasing

Larger companies often adopt a centralized purchasing structure with all the purchasing staff reporting to purchasing executive.

The centralized purchasing organization will accommodate the purchasing requirements for the whole company. For example, if a company has seven plants across the US, the central purchasing organization will be located in one location, and purchase items for all seven plants.

There are a number of reasons why companies would choose this type of purchasing structure. By having a single purchasing organization, the company is able to leverage the total spend of the company when negotiating with vendors. This should allow the purchasing department to ascertain the best price and conditions from vendors by offering them a commitment to buy in larger volumes.

Centralized purchasing organizations also allow purchasing professionals to specialize in one area. For example, a purchasing clerk could work with vendors who provide steel products, whereas if they were in a smaller purchasing department they would have to work with vendors from many industries.

Companies often like centralized purchasing departments as it gives them a higher degree of control over the purchasing process.

By having the purchasing dispersed across the organization, then there would be a far greater number of personnel involved in the process and less control of the purchasing process.

Decentralized Purchasing

Organizations with many locations can adopt a decentralized purchasing model.

This allows each facility or a group of facilities to carry out their own purchasing. This purchasing model can be successful where the culture of the organization is such that each location acts as its own profit center, or has a business that is different from other locations.

For companies that have acquired businesses that may not be akin to their core business, then the decentralized purchasing structure would be more appropriate. Local purchasing organizations will often operate similarly to the small business model where they will have closer ties to local vendors and be able to react quickly when required.

Where facilities require the delivery of items at a moments notice, the centralized purchasing model is not appropriate.

If a stock out is imminent, and manufacturing will be halted, then a local vendor can often deliver the same day, whereas centralized purchasing will probably deal with a national vendor who will not be able to offer the same response.

Many companies have tried to adopt a mix of centralized and decentralized purchasing, where facilities have the purchasing responsibility for certain critical production items, but the central purchasing organization has the task of purchasing non-critical items or shared services items.

This article has been updated by Gary Marion, Logistics and Supply Chain Expert at The Balance.