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Leveraging Centralized Purchasing for Customer Benefits

The inherent challenges on the supplier side coupled with the need for a cost effective procurement model poses major challenges for the procurement team in meeting their targets.

In today’s world customers are spread out and operate from diverse geographies and markets. Each purchasing organization of the customer adopts its own purchasing strategies, processes and systems leading to unnecessary procurement and inventory management at a local level.

One of the core beliefs of purchasing is that “Centralization provides Leverage”. To get a grip on this thought, a centralized driver is required, which can percolate thoughts to the bottom-line.

To begin with, a common commodity as per the required standards needs to be structured and managed under one umbrella. Based on the industry and the material requirement analysis, different material councils are formed - to develop strategies, manage suppliers and leverage spends among different geographies.

The centralized driver needs to list down the concern areas that need to be addressed. Typically these areas would include :-

Organization structure: Basic organization structure for procurement needs to be changed, to address the general procurement or procurement engineering functions. Major organizations do not have vertical integration.

Cost innovation: Decentralized purchasing leads to very high material costs due to low level of competitive bidding and excessive single sourcing. Without procurement engineering in place, there is no one to recommend changes in materials, suppliers, processes or design, which in turn can reduce cost.

Purchasing activity: Activity-based costing analysis can reveal that most resources were applied to administrative and not strategic tasks. It also reveals that Administrative work is not automated enough and is cost intensive.

Procurement systems: Decentralized purchasing leads to many procurement systems which fail to have any strategic goals and have heavy maintenance cost and unaligned business process.

Business Controls: Decentralized purchasing have unaligned business controls required for the system which leads to violations of business processes.

In the next blog we will discuss on a case study of a customer on how he addressed these concern areas and gained momentum in procurement activities through Centralized purchasing.


Nilesh, My view on this is that it is not that simple to generalize on the purchasing structure. If you take the example of coal for power plants.The design of the plant is done for a specific grade of coal(for e.g. depending on ash content) and the price obviously varies based on this. In this case, having a centralized procurement team negotiating with the muliple sources on behalf of the a specific power plant will only lead to some reduction in overhead costs. If you take a commodity like caustic soda or sulphuric acid, it makes sense to have centralized procurement since the product is more standarized. So at the end of the day it has always been a prudent mix of these structures that has worked.No single structure can be successful for any large global orgnizations since it is very difficult to standardize your input materials globally.So the first step before centralizing the procurement function will be standardize your input materials to a large extent.

Sathya,You are right but as far as possible standardization should be the key while negotiating such materials, when ever you are thinking of such kind of purchases, the organization needs to decide to what level of information they would like to be drilled down.In my next blog i would talking more on standardization required when dealing with centralized purchasing with a industry example.

I have been reviewing the various blogs and was wondering - this might not exactly fit - but centralised purchasing, the benefits of both SRM and SCM are well documented. However, I run a global supply chain and am faced almost daily with our clients (services supply chain)cherry picking or determining that they have a supplier for service x or y that they want us to use. I am constantly challenged with value to the client and that our proposals did not price for me to double my supply chain (no bandwidth for more headcount), issue resolve and manage all the compliance pieces. I am searching for help and can't find anything but fringe comments. I am trying to figure out - do I price the additions differently? Is it a cost of doing/getting the business? Adding suppliers dilutes my ability to leverage pricing in market, etc. Looking for great minds and thoughts on this!

This is quiet an interesting case, in this continous process where your customers are suggesting certain suppliers would help you to gain larger bandwith where the service can be better priced off, this will inturn help you to gain the customer confidence that you are giving fair oppurtunities to everyone and also help you to gain business reference, do not price it off differently initially see the nature in which direction the business is floating and is it increasing your burden of deliverables as the services should not be hampered inturn. I see to exchange more ideas you can mail me also

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