Centralized & Decentralized Purchase | Suitability | Merits & Demerits | Differences

What are Centralized & Decentralized Purchases?

Centralized Purchase refers to purchasing of all the requirements under the central point of the organization. Like wise, Decentralized Purchase refers to purchasing of requirements of each production centre in an organization.

Centralized and Decentralized Purchase

Centralized and Decentralized Purchase

Important points to be considered

There is no hard and fast rule to follow either centralized purchase system or decentralized purchase system. But, the management should consider the following points before deciding either centralized purchase or decentralized purchase for their purchase department.

1. The distance between the production centre and the storage.

2. The nature of materials used i.e. bulky, heavy, fragile etc.

3. The cost of transport.

4. Policy of the company with regard to the materials purchase.

Suitability of Centralized Purchase

1. One or more production centers or plants are closely located.

2. The plant uses one basic raw material or production centers for the production of standard products.

Suitability of Decentralized Purchase

1. Production centers are located distantly.

2. The plants for producing different products produce different raw materials.

Both centralized and decentralized purchase system have its own merits and demerits. Hence, the suitability of purchase system differs from one company to another.

Merits of Centralized Purchase

The following are the merits of centralized purchase.

1. Better materials control

2. Better layout of storage space.

3. Utilization of high technical skill.

4. Minimum finance required.

5. Better supervision of materials usage.

6. Less clerical work.

7. No duplication of purchase.

8. Better facility for stores audit.

9. Quick stocktaking.

10. Lower cost of insurance.

Demerits of Centralized Purchase

The following are the demerits of centralized purchase.

1. High cost of internal transport.

2. Non-availability of materials for production in time.

3. Greater risk of obsolescence.

Merits of Decentralized Purchase

The following are the merits of decentralized purchase.

1. Less cost of internal transport.

2. Timely availability of materials.

3. Lower chance of obsolescence.

Demerits of Decentralized Purchase

The following are the demerits of decentralized purchase.

1. Poor layout of space.

2. More finance required.

3. Less technical skill is obtained.

4. More clerical work.

5. Duplicate purchase of materials.

6. Slow in stock taking process.

7. High cost of insurance.

Differences between Centralized Purchase & Decentralized Purchase

The list of differences between centralized purchase and decentralized purchase is given below.

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