Centralized vs Decentralized Purchase
In organizations having many production centers which are situated at distant places, it may be an important issue to decide whether for the purpose of purchasing for all the production centers, there should be only one purchase department or for each production centre, there should be one purchase department. Upon the following factors the decision shall primarily depend:- a. the distance between the production centers & the central godown, b. the nature of the materials used i.e. whether the material is bulky, heavy, fragile etc. , c. the cost & risk involved in transport,
d. the firm’s policy in this respect; & secondarily upon the comparative advantage & disadvantage of the two systems. Where for the purpose of purchasing for all, there is one purchase department; in that case it is referred to as centralized purchase. When, on the other hand, when for each production center, there is a purchase department, it is referred as decentralized purchase. The comparative advantage & the disadvantages of the two systems are as below: See Chart on Page 3 Thus, (a) Centralized purchase is suitable where-
1. One or several plants are closely situated.
2. For production of standard products, one basic raw material is used by the plant or plants. 3. (b) Decentralized purchase is suitable where,
1. Several plants are distantly situated.
2. For production of different materials, plants use different raw materials. The above cannot be the firm conclusion, because centralized purchase may benefit plants which are distinctly situated but use very costly but light materials, the reason behind this is that, negligible cost of transport is there & better control on material cost can be achieved. Online Live Tutor Risk in transport, Efficiency, Terms of Purchase: We have the best tutors in Economics in the industry. Our tutors can break down a complex Risk in transport, Efficiency, Terms of Purchase problem...
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