Realize Economies of Scale & Growth – Centralize the Purchasing Function

October 01, 2020

Organizations seek growth for many reasons. Usually greater revenues and future economies of scale are the primary drivers of growth and scale. Economies of scale can be achieved in various functions within an organization. Economies of scale can occur through centralized facilities, staffing, standardized processes, standard policies and more.

Centralization of the Purchasing or Spend Management function is essential to the realization of the financial benefits that come from scale and growth.

A well organized, well led centralized Purchasing function can provide the following financial benefits to an organization:

Shared Business Functions – Purchasing and payables functions from multiple locations can be centralized to one site.
Staff Efficiencies – Fewer employees required to staff one location rather than multiple locations.
Purchasing Leverage – Larger spend and greater purchasing leverage from the single corporate entity should get the suppliers attention and should result in reduced prices and costs beyond what local purchasing groups could achieve.
Specialization – Larger organization size allows for more specialization in staff and functions that will ultimately improve results and reduce risk. Buyers can specialize in vendors, supplies and services driving further benefits.
Facility Consolidation – Smaller, consolidated space will be required to house the centralized Purchasing organization, with shared equipment and technology.
Knowledge / Data – Greater financial and inventory benefit can occur through consolidated spend data/knowledge.
Cost Reductions – Lower supply and lower services costs will result in higher bottom-line profitability. Negotiated cost reductions should be quantified, projected, reported, and audited so that executive management fully understands the contribution of the Purchasing function.
Competitive Advantage – All of the above listed benefits should provide competitive advantage over smaller, less efficient competition. Most large organizations realize the true value of having a highly performing Purchasing function. There is considerable Purchasing research that articulates the benefits of centralization and the expectation of significant cost reductions. Centralizing the Purchasing function can reduce supply and services costs by as much as 25% in most organizations. A well led, well trained Purchasing group should bring the following benefits to for profit or non-profit organizations:
Organized Planning & Execution – A centralized Purchasing department will develop a methodical plan to address all expense categories over a prescribed period-of-time, providing confidence that all spend is being addressed.
Specialization – Centralized purchasing groups will usually organize their staff around products, supplies and services, creating a specific expertise that cannot be easily replicated in a decentralized group, thereby improving results.
Supplier vetting – Centralized Purchasing groups will typically have a robust process to ensure that suppliers are sourced to determine interest, capabilities, competitiveness, and financial strength. This process should eliminate poorly qualified suppliers that can cause problems down the road.
Supply base rationalization – Purchasing groups understand that a narrow supply base in each expense category will enhance organizational efficiency. Fewer suppliers help to keep costs to a minimum by increasing leverage and minimizing the suppliers that are maintained in the system and paid regularly.
Requirements gathering – Experienced Purchasing groups will work with the internal customer to define customer requirements. Highly functioning Purchasing groups will also challenge business requirements and suggest options based on their experience, knowing of course that the “internal customer” always has the final say.
Least total cost approach – Purchasing groups understand that price is but one factor in the overall value equation of any purchase. Pricing, quality, service level, inventory position, payment terms, discount terms, volume rebates, etc. among other requirements are also quoted and compared in RFQ’s among interested and qualified suppliers to arrive at the least total cost.
Process Focus – Every purchase, whether a supply or a service, has either an efficient or inefficient process associated with it. Effective Purchasing groups will define the most efficient acquisition, operational and payment processes for each purchase.
Risk Mitigation – Centralized purchasing policies, processes and controls provide necessary guidance to management and employees in the acquisition of supplies and services. Well-crafted purchasing policies will ultimately produce clarity through well fined expectations and will ultimately reduce organizational risk.
Improved Profitability – Cost reductions generated by a productive Purchasing team will reduce costs, and those costs will drop to the bottom line as new profits.


Executive Leadership Imperative

Change is hard. Change can be messy. Change will often result in more work and more headaches for management to deal with. But in the final analysis, executive leadership has a responsibility, they have an imperative to provide the leadership and drive the change that provides the best returns on investment for the organization.

Realizing complete economies of scale across a growing organization can provide significant, sustainable profit improvement opportunities to an organization. The new profit opportunities that come from centralizing the Purchasing function will easily provide savings in the hundreds of thousands and millions of dollars for organizations with revenues of $1B or more annually. Again, these savings fall to the bottom line as new profits.

If your organization has still not centralized the Spend Management or Purchasing function, now is the time to plan for those changes with an implementation beginning in 2021. This process requires some solid spend data from 2019 & 2020, policies, process, and controls, but can be easily accomplished by year end for groups that are finally ready to make the move to centralization.