Quezon City University

CHAPTER II:

Purchasing Organization in the Enterprises

SUBMITTED BY: GROUP 2

GONZALES, JIGEN A.

LEGAL, JHAN VICTOR D.

SUBMITTED TO:

ENGR. LAMBERTO RODRIGUEZ JR., CIE

02/16/2022
 Quezon City University

TABLE OF CONTENTS
1PURCHASING………………………………………………………………………………..1

1.1 CENTRALIZEDPURCHASING………………………………………………………....2
1.2 ADVANTAGESOFCENTRALIZATION……………………………………………...2-3
1.3 DISADVANTAGESOFCENTRALIZATION…………………………………………....3
1.4 DECENTRALIZEDPURCHASING……………………………………………………...4
1.5 ADVANTAGESOFDECENTRALIZATION…………………………………………..4-5
1.6 DISADVANTAGESOFDECENTRALIZATION………………………………………...5

2 PURCHASINGCOST……………………………………………………………….…….6
3 SUPPLIER’SAPPRAISAL………………………………………………………………..7
 Quezon City University

CHAPTER 2

The Purchasing Dilemma

Large companies may have dozens of departments, each with its own
purchasing protocols. Decentralization may be an expedient choice with clear
advantages in some cases, but is it the best cost management choice for a large
business?

In cases where local sourcing is key, this level of autonomy may be preferable.
However, decentralized procurement for large organizations can be inefficient
and risky. In order to control budget and provide the resources the company
requires to operate; centralization is often the answer.

Planergy. (Centralized Purchasing vs. Decentralized)

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https://planergy.com/blog/centralized-vs-decentralized-purchasing/
Comparing Centralized and Decentralized Purchasing

Establishing purchasing protocols for a growing business is an important

decision. Before you decide whether to implement centralized or decentralized
procurement, let’s take a deep dive into the pros and cons of each model.

Centralized Purchasing

 With centralized purchasing, all records are kept at one place and under
one supervision and control.
 Thus, it is more effective for taking to meet the changing market needs.
 Centralization aids in the standardization of specifications and tends
towards lower inventory investments
 Usually, any organization having a single location must adopt centralized
purchasing as a rule.

Pros and Cons of Centralized Purchasing

With a centralized procurement system, all purchasing goes through one central

department. Department managers submit requests for approval, and the
procurement staff retains control of the budget.

Pros:

Centralized purchasing has a lot to recommend it. With a company-wide financial

picture, a comprehensive spend analysis is always at your fingertips. Your data is
clean, up-to-date, and available. You know how much money is being spent,
where the supplies are going, and who is ordering.

When all purchases require approval, maverick spending is eliminated, or at least

minimized.

Using centralized data has the advantage of allowing budget experts to compare
suppliers and make advantageous deals based on volume, even across multiple
locations.

Planergy. (Centralized Purchasing vs. Decentralized)

https://planergy.com/blog/centralized-vs-decentralized-purchasing/

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Purchases are made by specialists armed with comprehensive information about

suppliers, their history, and their competitors. They have the knowledge and skills
to negotiate better deals.

With the information stored in a centralized database, procurement managers are

better able to improve supplier risk management, ensure supplier diversity and
comply with corporate social responsibility initiatives.

Today’s e-procurement systems offer tremendous advantage over the manual

paperwork of yesteryear. The request process is at least partially automated, and
repeat orders can be fully automated, either with an inventory management
system or on a time schedule.

Cons:

Corporate procurement adds a layer of bureaucracy to every transaction, and

removes decision autonomy from local managers, which can result in job
dissatisfaction.

Supply chain issues, such as lagging processing and delivery times may occur
when a purchasing department makes strategic buying decisions over local
suppliers, or when an emergency situation arises for which, a department needs
immediate supplies.

Planergy. (Centralized Purchasing vs. Decentralized)

https://planergy.com/blog/centralized-vs-decentralized-purchasing/

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 Quezon City University

Decentralized Purchasing

 When manufacturing plants are widely dispersed geographically and

manufacture different products having materials decentralized
purchasing is better.
 In such a case each manufacturing unit will have their own
purchasing department
 The individual purchasing department of each plant will have
functional relationship with the corporate director.
 The director will enforce general purchasing policies for all purchase
department of their organization.

Pros and Cons of Decentralized Purchasing

With decentralized systems, each office, division, or project manager

has purchasing power to order supplies at their own discretion
without seeking approval

Pros:

Supplies are purchased by each department on demand to meet immediate and

long-term needs. Local managers are in the best position to understand the
needs of their divisions.

Order processing is fast and easy, with no wait for approval. If a need arises, it
can be sourced and filled immediately. Replacements for defective or damaged
shipments can be initiated immediately, without routing through the company
procurement process.

Cons:

Opportunities for bulk purchasing across departments, and for negotiating better
terms based on bulk are lost.

Planergy. (Centralized Purchasing vs. Decentralized)

https://planergy.com/blog/centralized-vs-decentralized-purchasing/

4
 Quezon City University

Orders are typically made by administrative staff, and not purchasing experts
who have the knowledge and skill to evaluate suppliers, consolidate orders, and
negotiate better deals.

A decentralized system often means disorganized data. Compliance issues may

arise as managers order or reorder for the greatest expediency as opposed to
strict protocol adherence.

Performing a spend analysis is far more difficult with a decentralized system.

Data in different systems is rarely standardized.

Sap MM (2021). Enterprise Structure https://www.tutorialspoint.com/sap_mm/sap_mm_enterprise_structure.htm#:~:text=A

%20purchasing%20organization%20is%20an,as%20a%20centralized%20purchasing%20organization

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Purchasing Cost

Price Analysis - a review, analysis or examination of the price proposed by a

supplier and an assessment or evaluation as to whether or not it is fair and
reasonable.

Cost Analysis - involves an examination of the individual cost elements that

collectively comprise the seller's total price. A cost analysis looks at the individual
elements of the price (labor rates, direct & indirect materials and overhead, G&A
expenses, profit/fee) and analyzes these. Overhead or indirect rates may be
verified and found reasonable by verifying such rates with the awarding agency,
in many cases. The number of hours proposed, not the price, should be
evaluated by the technical or scientific staff. The reasonableness of the percent
of fee or profit is the responsibility of the buyer. It is negotiable in most cases. An
asking price is not always a taking price.

Sap MM (2021). Enterprise Structure https://www.tutorialspoint.com/sap_mm/sap_mm_enterprise_structure.htm#:~:text=A

%20purchasing%20organization%20is%20an,as%20a%20centralized%20purchasing%20organization

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Supplier's Appraisal - An assessment of a supplier's suitability and capability to

supply specific goods or services, before awarding a contract.

Importance of Supplier’s Appraisal

 For any buyer in the supply chain environment, shopping around is no

simple matter. Depending on your industry, there may be a limited supplier
base servicing your market, and not all suppliers will be equipped to meet
the specific needs of your organization. For this reason alone, supplier
appraisal should be an integral process in your company, ensuring that
you choose the right suppliers in the first place.
 Once you build a pool of approved suppliers that satisfy your criteria, the
supplier appraisal process should continue on a cyclic basis, allowing you
to review performance and assess if each of your approved suppliers is
still the right fit two, three, four and five years down the line.

Effective Supplier Appraisal Process

Like any process in supply chain management, supplier appraisal needs a

systematic approach if it is to deliver results. The characteristics of an effective
supplier appraisal process include:
- Measurements and targets that are easily understood by both suppliers and
buyers
- KPIs that are weighted according to your company's strategic priorities
- Discussion and agreement with suppliers over measurements to be applied
- Graphical visualization of appraisal measurements and results
- A system of recognition and reward for improved performance

Sap MM (2021). Enterprise Structure https://www.tutorialspoint.com/sap_mm/sap_mm_enterprise_structure.htm#:~:text=A

%20purchasing%20organization%20is%20an,as%20a%20centralized%20purchasing%20organization