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December 17, 2004 • Vol.26 Issue 51
Page(s) 1 in print issue

Purchasing Decisions At The SME
The Bottom Line Is The Bottom Line
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When it comes to making purchasing decisions at the typical small to medium-sized enterprise, there are two choices: a centralized model, where a purchasing department handles all spending, or decentralized, where several people throughout the company have purchasing authority.

Every SME has some kind of purchasing arrangement in place. But it is always good to review any process to be sure it still is functional and has not outlived its usefulness.



Centralization

Many companies and public organizations have centralized purchasing processes. The purchasing department handles bids, verifies compliance to corporate-wide standards, and assures that the SME gets any bulk buying discounts and other economies of scale.

"We started an initiative to standardize our technology and packaging processes five years ago," says Juan Castro, director of procurement for Mission Foods. Mission is the world's largest tortilla and corn flour manufacturer.

"The real driver was that we were able to rationalize our vendor base to their core competence. We got lower costs on that exchange," Castro says. "Savings was a byproduct of the standardization."

Bill Sneddon, vice president of operations for Inner Wireless, says that having a centralized purchasing scheme gives his company control of its buying.

"People are not just out there making their own buying decisions," Sneddon explains. He finds that especially important when it comes to hardware platforms.



Decentralization

Decentralized purchasing usually means that each department or division has its own purchasing authority. Sometimes there are guidelines for the types of systems that are approved ("systems must be Windows- based," for instance), and sometimes there are none. Most often, local managers are given purchasing authority up to a certain dollar limit, say, $10,000 or $50,000.

No less sophisticated group than the Harvard Medical School uses decentralized purchasing. The school says that clients may use organizations, such as the Technology Product Center, with which the school has a purchasing agreement, or an outside vendor. "The most important aspect of purchasing is to be sure the products are supported by the IT department," HMS says. IBM, for example, has been chosen as Harvard's prime vendor for personal computers, both desktops and laptops.

There are other arguments for allowing decentralized purchasing. In many cases, it is more responsive to time-sensitive needs. A department that requires a specific software package or computing device can go online or to the local Staples store and have it up and running in less time than it would take to fill out the requisition paper-work. In addition, smaller companies often cringe at the salary requirements of a purchasing department.

However, decentralized purchasers typically lose the benefits of sealed-bid contracts, and the ad-hoc buying practices may cost the company the benefits of long-term price agreements. (Centralized purchasing gives its biggest return on common items and items purchased in bulk.)



A Hybrid Approach

Some companies use, and profit from, a hybrid approach. "eBay and the information on the Web have done wonders for purchasing," says Lonnie Martin, CEO of telco equipment manufacturer White Rock Networks.

"We are one location and run our purchasing on a system. But sometimes engineering or manufacturing goes out on their own," he continues. They might want a piece of test equipment or computer for the lab, and the engineers frequently find it used at a fraction of the normal price. Sometimes they find it on the Internet, sometimes from word-of-mouth.

"It's useful to have other eyes to dig deep where you might not expect to find things. They know where to look," Martin says.

"To be good company people, employees should always try to save the company money," Martin adds. In many cases, the final purchase order comes through the central system, but everyone knows who the real buyer was.



Bottom Line

One of the most thorough studies of centralized vs. decentralized purchasing, done by the California Association of School Business Officials Purchasing R&D Committee, found that the choice tends to be a matter of budget size. Of the 90 districts and county offices participating in the study, 64 (71%) use centralized purchasing and 26 (29%) have decentralized purchasing. The average budget for centralized districts is $67.6 million, while the average for decentralized is less than one-sixth of that, or $10.3 million.

There are intangible factors, however, for an SME. One is the benefit of buying locally. Many SMEs rely on a local community for their customer base and they are expected to purchase locally as part of being a good community citizen. However, the bottom line usually is the bottom line.

The School Business Officials study found that decentralized districts, on average, could cut their supply costs by over 21% if they had paid the average price (not best price) paid by centralized districts. The average decentralized district could potentially save over $169,000 annually, enough to fund a modest centralized purchasing operation, the study concluded.

For many SMEs, the practical answer is a combination of the two systems. Stock items and big purchases are handled by a central purchasing group. However, emergency purchases or specific items can be ordered or specified by a department or group.

At Carnegie Mellon University, buying decisions are made by the faculty and staff in the schools and departments. The University notes the widely varied nature of activities at the school and the wide geographic spread of its locations. "All of the commitment activity cannot be performed efficiently by either a completely centralized procurement office or by a completely decentralized operation," a school representative says.

"We found centralization works best during our re-engineering. It's not just ordering, but strategic procurement that makes the difference," Mission Foods' Castro concludes.

by Curt Harler

View the chart that accompanies this article.
(NOTE: These pages are PDF (Portable Document Format) files. You will need Adobe Acrobat to view these pages. Download Adobe Acrobat Reader)
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