Key differences between centralized and decentralized procurement

Procurement is a thing that can become a blessing or a curse, depending on how you decide to manage it. We can’t tell which approach would be the best for you, but we definitely can help you understand your options here.

If you are just starting to look around for a stable approach to use, for your liking, there are three types of procurement: centralized, decentralized, and hybrid, which include the best features of each previous type. Here, we will guide you through procurement models that adhere to compliance with procurement policies, explain when to choose each of them, how they can fit or do not fit your specific case, and much more. So, stick around and let’s start.

What is centralized procurement?

Let’s first start with the most commonly used option—centralized procurement. According to APQC’s research, almost 75% of respondents use centralized purchasing. It is a preferable approach because every process is done by one team within the organization: purchasing, distributing, providing access, etc., ensuring a tactical purchasing strategy. This team is typically located within the organization’s headquarters.

What are the advantages of centralized procurement model?

This approach is popular for the number of advantages it brings. Here are some advantages of centralized procurement you can get too:

• Cost savings. Since everything is done within one team, it is easier to get bulk purchases or better negotiation power with suppliers.
• Streamlined procurement. When you standardize procurement processes across the organization, you get to have errors and administrative overhead.
• Improved visibility. A centralized system provides comprehensive oversight of procurement activities, which helps to improve budget management and compliance monitoring.
• Better supplier management. Since everything is in one place, suppliers won’t have to worry about whom they have to reach out to in case it is needed, ensuring they receive the services they need efficiently. It helps to create a strong relationship built on trust.
• Consistency. When one team is responsible for the standards, it is easier to keep everything under control.

Main disadvantages of centralized procurement

Even with these strong advantages, there is a range of disadvantages of centralized procurement that you should be prepared for in case you choose it.

• Bottlenecks and delays. If you often have peak periods or urgent procurement needs, moving every step of procurement through a single team might be a tough task, which can lead to delays.
• Geographical challenges. For companies that have international offices, having a central procurement team can be an issue. The reason is centralized team may not cover local needs effectively.
• Inflexibility. This one is about not being able to address changes on the market or sudden needs for a specific department quickly enough.
• Lack of specialized knowledge. The centralized purchasing department might not have specialized knowledge about different departments, which can cause blocks in license purchases for said departments.

What is an example of centralized purchasing?

Now that you know what the centralized procurement model is, you might want to know which companies implemented it and how it affected their workflow. So, here are some examples of centralized procurement process for you to check out:

• Walmart. Walmart uses centralized procurement, which helps it to negotiate directly with suppliers and achieve cost savings through best practices of 5–15%. As a result, it helped to keep the product quality better and improve supply chain efficiency.
• McCormick & Company. Another company that uses centralized purchasing. This approach helped them to improve costs by almost 25% and improve productivity through best practices.
• Volkswagen. This company created its own centralized online sourcing network to maintain confidentiality, make the procurement process faster, and reduce costs, which they successfully achieved.

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What is decentralized purchasing?

The next is a decentralized purchasing model. Here, all the decisions are distributed across different teams, departments, branches, and sometimes even business units within an organization. The companies that use this approach let their individual units have the autonomy to procure goods and services based on their specific needs. If you trust your teams to manage their licenses by themselves, this approach might be for you.

What are the advantages of decentralized purchasing?

Decentralized procurement can lead to challenges in compliance with procurement policies. has a bunch of advantages and disadvantages. Advantages show in its flexibility, more tailored requirements, and give teams more sense of ownership rather than simple access from someone above. Here are these and some other benefits of this approach.

• Better responsiveness. Since each team handles purchasing by itself, the response time is shorter.
• Team-specific solutions. Need a tool that will be needed by one team only? A decentralized purchasing process helps teams select suppliers and products that best fit their unique requirements.
• Accountability. Since you granted purchasing permission to specific teams/departments, it can help you get more responsible spending within your company by creating a sense of ownership and accountability.
• Better supplier relationships. Local units can build strong relationships with regional suppliers. Such an approach can help to have better service and terms.

Key disadvantages of decentralized purchasing

Decentralized procurement is not without disadvantages as well. This approach, where each team/department handles everything by themselves, can cause issues like a lack of standardization or higher prices due to the inability to get bulk licenses. Here are some more disadvantages of decentralized structure you should consider:

• Lack of standardization. There may be inconsistencies in procurement processes and standards across the organization since each department makes their independent decisions.
• Higher costs. It is not often the case, but one specific case is that you can’t buy bulk licenses. It can cause more spending if the same licenses will be needed in the future for other departments, but this time you have to get them again.
• Risks of non-compliance. Without centralized oversight, there is a higher risk of non-compliance with procurement policies and regulations.

What is an example of decentralized procurement?

To give you a better understanding of how decentralized structure works in the real world, take a look at the following examples:

• City of Arvada, Colorado (USA). The City of Arvada operates under a centralized model decentralized purchasing system. Each of the city’s 13 departments has the authority to manage its own procurement processes.
• Global pharmaceutical company. This company faced challenges with its decentralized procurement system that included higher costs, a lack of visibility, and decreased efficiency since each business unit managed its own procurement.
• Project-based international company. In a case study, a decentralized procurement structure was created to meet the specific requirements of individual locations of this company. This approach helped to use local suppliers and tailored procurement strategies that perfectly suit regional needs.

Key difference between centralized and decentralized procurement

Now you know what difference between decentralized and centralized. To sum everything up, take a look at the table below. It will help you in a shorter form to understand what each approach is about, how they work, what they require more of, and what less, etc.

Hybrid purchasing model: Why select center-led procurement?

If you are not sure about which version to implement, there are already a lot of cases of companies implementing a hybrid approach that combines both centralized and decentralized purchasing. How exactly does it work? It involves a centralized procurement team that handles strategic activities (e.g., enterprise-wide contracts negotiation and procurement policies setup) and decentralized units that manage operational purchasing locally.

Advantages of hybrid procurement

The hybrid approach has positive aspects of both centralized vs decentralized procurement models. Here are some you should consider:

• Cost effectiveness. A centralized team works with contract negotiation, which can help get bulk licenses and thus save money.
• Flexibility and responsiveness. Decentralized units can make quick decisions to meet local demands.
• Better supplier relationships. When you combine centralized management with local interactions, you create stronger and more collaborative supplier partnerships.
• Improved risk management. Since everything is managed within one team, it is easier to do risk assessment and mitigation strategies across the organization under a centralized purchasing model.

Disadvantages of hybrid procurement

Since it has combined positive sides, it also includes the disadvantages that come with these two procurement strategies. Most of these cons are about the ability to properly monitor the tasks, transitions, and overall processes between central and local teams.

• Difficulty in management. It is important to have clear communication and defined roles when managing central and local units.
• Potential process duplication. What it means is that if you don’t manage your local and central teams well enough, there may be overlapping efforts or redundant processes.
• Difficulty in implementing. When you transition to a hybrid model, you should understand that it requires significant change management and training efforts.​

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Implementation considerations

When you plan to implement either of these procurement organization models, you should understand that you can’t just set it up and it will work just fine. No. Before that, you have to do a bunch of steps to make sure everything is prepared and your employees understand how to work with it beforehand. This way, you help your company to have fewer errors and insufficiencies in the process.

Assess your organization’s current procurement structure

First thing, before you start with procurement models, you need to evaluate your current procurement process. Check out the following things:

• Organization structure. Check what type of procurement is currently in place: centralized, decentralized, or hybrid.
• Process check. Evaluate how effective the current process is (e.g., cycle times and approval workflows).
• Spend analysis. Analyze spending patterns to identify opportunities for consolidation or cost savings.
• Supplier management. Check how effective the supplier relationships and performance monitoring are.
• Tech stack usage. Review the tools and systems in place to support procurement activities.

Change management challenges

When you change the procurement process, it can cause some challenges. Here, take a look at what these challenges are and what you can do to deal with them.

Technology requirements

The right technology is also an important part of the switch. Depending on the chosen business model procurement model, different technological solutions may be appropriate.

Training and skill development needs

To make sure you don’t have issues connected to human errors in the future, you should invest in your employees’ studying. Here are some core specializations, and which model requires them the most.

Recommended training resources

If you don’t know where to start with training materials and which certifications would be the best to have, we have collected a bunch of recommendations that you can start with.

Key performance indicators for measuring success

Once you start to implement a new procurement strategy, it is recommended to set up a few KPIs to monitor how successful the new procurement models are. To help you understand which KPIs are the best to try out, you can find the most commonly used ones in the table below.

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Final thoughts: Which to select, centralized or decentralized purchasing?

To sum everything up, both centralized and decentralized procurement are good procurement models, but everything depends on your goals and your company structure. Centralized procurement is good for companies that want more centralized control over their purchasing. Here, you can standardize the processes and have bulk purchases, which is a good option if you want to save money and keep compliance in check.

The decentralized model is more for those companies that want to offer their teams more flexibility and responsiveness. This way, they offer these units to make purchasing decisions based on their specific requirements.​ A hybrid approach is a combination of both, yet most companies still prefer a centralized procurement.

Don’t forget that before implementing any of these procurement models, you should assess your company’s current procurement practices, face change management challenges smartly, set up the required software for this approach, and, of course, train your staff to avoid future errors and employee frustration.

With all that, if you take things slow and deliberate, your switch or update of the purchase process will go smoothly and easily, not just for the company but for employees and suppliers as well.