02 Types of Purchasing System

Purchasing System

 The Types of Purchasing systems are centralized and decentralized purchasing systems. A centralized system concentrates power to purchase in few hands whereas decentralization tends to distribute the same power in many hands.

It is impossible for a single system to be perfect in all situations. There are various situations like single plants with diversification in the production and multiple plants with diversification in the production, geographically scattered plants, etc. All these situations require different types of purchasing systems. So, it can be said that a purchasing system largely depends on the type of the organization and the purchasing requirements of the organization.

What are the Types of Purchasing systems ?

1. Centralized Purchasing: –

In this case, there is only one department that is responsible for purchasing. The requests from all the departments are forwarded to this department for various raw materials, tools, and equipment’s and based upon the requisition, the purchase orders are placed.

Advantages of the Centralisation System

Five benefits to centralization
  1. Concentrated Volume: Since the power to purchase is in few hands-only, all the orders accrue with the purchasing department Now, the purchasing department have a cumulated total of the purchase requisition of various departments and they procure in bulk quantity. They are now in a better position to bargain with the vendors and avail various quantity-related discounts. This is, however, not possible in the decentralized system.
  2. Avoid Duplication: Since all the orders are placed from one centralized location, duplicate orders is avoided. This saves the related ordering and the carrying cost and the inventory is also managed properly.
  3. Specialisation: The formation of a centralized purchase department is made such that different personnel handle different types of purchase requirements. The buyers concentrate only on the particular type of product they are associated with. This ensures that they have all the required knowledge of the product and they can avail better bargains for the company.
  4. Lower Transportation Costs: The bulk order are dispatched by way of large consignment order in large carrying truck capacity. If the capacity of the truck is not utilised to the full extent, then that denotes extra cost.
  5. No Competition within Units: In case of decentralization system, different departments purchase different quantum of the material for themselves. Thus, many a time, they approach the same vendor independently and bargain on their own. Thus, there arises a situation when they are unknowingly competing among themselves. Centralization provides a solution to this problem.

2. Decentralized Purchasing: –

There may be several branches, departments, or sections in the case of large firms. If these branches, departments, or sections place their own purchase orders based upon their own requirements, then that is referred to as decentralized purchasing. It is applicable in case:

  • There is a large organization having varied plants and they have a different requirement altogether.
  • Heavy and bulky material is required by the branch plants like paint, fuel, and oil products.
  • Purchases are required to be made locally to ensure better regional communal relations.

Advantages of the Decentralisation System

Five benefits to Decentralized Purchasing
  1. Full Knowledge of the Requirement: Placing or referring purchase orders to the purchasing department may arise inappropriate product purchasing. But, when the product is procured by the department itself, then the connect product is procured.
  2. Local Sourcing: In case the company is willing to promote the local business then it is more likely to procure locally in, a decentralized form. This enables easier and faster availability of the material. More shipments of small portions are made rather than one big shipment.
  3. Less Bureaucracy: Time is saved as the order gets placed much faster. There is better coordination and communication between the buyer and the seller.

Purpose of purchasing system

Small enterprises might benefit from a variety of purchasing system advantages. For instance, purchasing systems may make the purchasing process for organizations considerably simpler and more efficient. Furthermore, purchasing systems can aid in the reduction of supply costs and the prevention of inventory loss.

An online purchasing system can assist save money by reducing prices, shortening the purchase cycle, and reducing human errors. Furthermore, purchasing system data can help you manage your inventory budget and predict what supplies you’ll need in the future.

Overall, purchasing systems can help you keep track of how much money your company spends on goods and services.

Purchasing systems can assist you in the following ways

  • Make certain you only purchase what you truly require.
  • Make sure you’re getting a good deal on goods and services.
  • Budgeting for products and services should be improved.

Conclusion:

Understanding how and when to use each type of purchase order is an essential part of any mid-sized organization’s effective financial management strategy. It can also help scaling companies establish effective policies early on while building relationships with their suppliers.

Related Links on Purchasing System:-

Functions, Responsibility, and Importance of Purchasing Department in an Organization

Top 6 methods of purchasing materials

purchasing management: meaning, definition, and objectives

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