Eskom Procurement Book 2015

PRINCIPLES OF SUPPLY CHAIN AND PROCUREMENT MANAGEMENT

1.8.1 ADVANTAGES AND DISADVANTAGES OF A CENTRALISED PROCUREMENT FUNCTION

Centralisation of the procurement function offers several advantages [10]: • The co-ordination of purchase volumes – The larger volumes that result from centralising purchases lead to favourable prices. The centralisation of the procurement function does not only lead to centralisation of sourcing of products and materials but also of the ordering process. This may lead to decreased responsiveness to manufacturing needs. Thanks to advances in technology, some organisations identify common product items between divisions or SBUs for centrally co-ordinated sourcing. This helps organisations to achieve a reduction in material costs by combining purchase volumes while at the same time recognising the operating requirements of divisions or SBUs. • The reduction of duplicated procurement effort – In decentralised procurement functions it frequently happens that individual SBUs or divisions develop their own purchasing policies, procedures and systems, leading to duplication of effort. Centralisation reduces this duplication and in turn reduces the cost of duplication. • The ability to develop and co-ordinate procurement strategy – Centralisation facilitates the development of an organisation-wide procurement strategy. Such a strategy provides operational direction and enables the organisation to align the procurement function with other functions. • The ability to co-ordinate and manage company-wide purchasing systems – The latest technology is important for the procurement function and influences how the function operates. It allows the organisation to co- ordinate the procurement requirements across the SBUs and divisions of the organisation. Centralisation prevents each division from developing its own procurement systems, which can sometimes end up being incompatible and increasing the cost of operations. • The development of purchasing expertise – Centralised procurement leads to the development of specialised knowledge and support for the individual buying units. These include expertise with regard to purchasing negotiations, international procurement, the legal aspects of procurement, training and development programmes, supplier quality programmes, purchasing research, total cost of ownership and many others. Centralised procurement can also have disadvantages. During the early stages of product development, the engineering department is deeply involved with the design, which can be difficult to achieve with remotely centralised procurement functions. Next, there is sometimes a great need to co-ordinate purchases with production schedules. This is particularly the case when low volumes are ordered frequently and the supplier organisation is expected to guarantee just-in-time deliveries. This might not be cost effective when the procurement function is centralised. Finally, a centralised procurement system may not be suitable in cases where procurement officers need to buy from the local communities. Organisations buy locally to remain in good standing with the communities in which they operate.

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