Centralized Purchasing - how does it gives benefits to organization?

Purchasing Groups (otherwise known as Centralized Purchasing) can be defined as: two or more organizations joined together (or through a third party), in order to combine needs and leverage negotiating strength. This allows the individual purchasers the contractual strength to access best prices, best services, and best technologies that they might otherwise be unable to negotiate.

Scale economies or “purchasing power”

The most obvious advantage of a purchasing group is the scale economy. The volume of the aggregated purchase demands, such as a network of businesses coming together to order supplies, gives the individual businesses access to scale economy and consequent purchasing power that they could not hope to obtain alone.

Lower prices/Greater negotiating power

By increasing the forecast purchase volume, the Purchasing Group is generally able to negotiate lower prices for the goods or services purchased with respect to what could be obtained by individual companies working alone. These savings are usually considerable, ranging from 10% to 35%.

Reduction of transaction costs

By joining a Purchasing Group, organizations can effectively simplify their procurement processes. This reduces both the per unit cost on their goods and also the per transaction costs, due to the reduced number of contracts to be negotiated, prepared and managed.

Process economies

When organizations come together they can share information about suppliers, new technologies and market knowledge, as well as past purchasing experiences. The end result is eliminating redundancy in the supply chain, as well as reduced transaction costs and achievement of far greater process economies.

Reduced workload

Since the Purchasing Group manages all stages in the lifecycle of contracts on behalf of their network, the individual businesses benefit from a significant reduction in their workload and are free to focus on their core business, which is therefore more strategic for them.

Improvement in best practices over time

The organization that manages the Purchasing Group enables their network businesses to improve their results by sharing the best practices. In fact, most of the modern organizations that handle the Purchasing Groups use industry experts for each individual product market they manage. These experts constantly search out increasingly more effective methods to improve the process, quality and efficiency of the supplier in order to guarantee an optimized process at increasingly competitive prices. This is known as improvement in the TCO – Total Cost of Ownership.


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