TOPIC 2 : PURCHASING STRUCTURE AND ORGANISATION
A. Organisation and structures in supply organisation:
Organisational structure can be defined as the pattern of relationships among positions cutting across various
departments, in the organisation and among members of the organisation. Organisation design and structure
is concerned with such elements as:
1. The definition and allocation of specific tasks
2. The grouping of related tasks into manageable functions, divisions, departments, sections or other units
3. The allocation of responsibility within the organisation and to constituent functional units.
Purchase organisation structure :
1. Vertical
2. Horizontal
B. Status of Purchasing:
1. High level
2. Middle level
3. Low level
C. Centralization Vs decentralization:
The supply function focus primarily on centralised and decentralized purchasing when building up the
structures for the organisation. Centralized purchasing encompass grouping of purchasing tasks and
specialist functions or services into one serving unit and under unified control. On the other hand
decentralized purchasing en tail division of purchasing function into sections whereby each section is
mandated to control the functions within its scope. Here each department or branch is entirely responsible
for its own buying.
(a) Centralized purchasing: The advantages of concentrating purchasing in a strong central department
with a responsibility of coordinating across functions include:
(i) Economies of scale: Centralized purchasing enables an organisation to use its purchasing power or
leverage to the best effect, since:
Consolidation of quantities can take place resulting in quantity discounts
Suppliers dealing with a central purchasing department have an incentive to compete for the
whole proportion of an undertaking’s requirements
Cheaper prices by enabling suppliers to spread overheads over longer production runs
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Specialist staff can be employed for each of the major categories of purchase
Lower administration costs e.g. it is cheaper to place and process one order for one million
shillings than ten each for one million.
(ii) Coordinating of activity:
Uniform policies can be adopted e.g. single sourcing, partnership sourcing etc.
Uniform purchasing procedures can be followed
Competitive buying between departments within the organisation is eliminated
Standardization is facilitated by the use of company’s wide specification
The determination of order quantities and delivery dates is facilitated.
Staff training and development can be undertaken on a systematic basis.
Purchasing research into sources, quantities and supplier performance is facilitated
Suppliers find it more convenient to approach one central purchasing department.
(iii) Control of activity:
The purchasing department may become either a separate cost centre i.e. a location within the
organisation in relation to which costs may be ascertained or a profit centre.
Budgetary control may be applied both to the purchasing department and to the total expenditure
on supplier.
Uniformity of purchase prices obtained by centralized purchasing assists standard costing.
Inventories can be controlled, reduced obsolescence and loss of interest on capital locked up in
excessive stocks.
Approaches such as Just-in-time and MRP ii can be implemented
Purchasing department performance can be monitored by setting objectives and comparing actual results
with pre-determined standards.
Disadvantages of centralized purchasing:
i. Centralized can result in many activities that involve expenditure and time without adding value.
ii. Centralization can foster emphasis on functional objectives with a minimum concern for overall
organisational goals.
iii. User departments will resort to informal procedures if formal purchasing procedures are too slow.
iv. Training of managers with broad perspectives and wide understanding of business may be inhibited.
v. -Employee identification with a specialist group or function can make it difficult to implement
change. It is a more rigid structure.
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vi. -Long chain of command.
vii. -Slow-decision making.
viii. -More bureaucratic.
(b)Decentralized Purchasing:
Advantages:
1. The local buyer will have better knowledge of the needs of his/her factory and local suppliers for
improved service.
2. It is more responsive to clients i.e. the user departments.
3. The buyer will be able to respond more quickly to emergency requirements.
4. Local purchase will be emphasized and this attribute will save on transport costs.
5. Local purchase will contribute to local prosperity of the local community etc.
6. Small and easy to manage.
7. Easy to instil team spirit.
8. Fast in decision making
Disadvantages:
i. -May lead to buying expensively for lack of economies of scale.
ii. -Duplication of purchases may result.
iii. -Standardization of materials and procedures may be difficult to implement.
iv. -Specialized staff training may not be possible
v. -Rivals can emerge
D. New approaches
Combined
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