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MRSC has joined with Toni Nelson, Small Cities Specialist, State Auditor's Office, Gayla Gjertsen, Finance Director, City of Tumwater, and Mike Bailey, Administrator of Finance and Information Services, City of Renton, to bring you the "Finance Advisor" column. The "Finance Advisor" will feature a new article each month with timely local government finance information and advice you can use.*
Centralized Purchasing or Decentralized Purchasing - That is the Question
April 2006
By Mike Bailey, Administrator of Finance and
Information Services, City of Renton
(with help from my
friends *)
I’ve worked in cities that had very centralized purchasing (Everett, Lynnwood) and cities that had decentralized purchasing (Wenatchee, Renton) and I’ve been asked which is best.
The answer is – “it depends.”
Traditionally, centralized purchasing environments have existed for many of the same reasons that other parts of our bureaucracies were created – to standardize procedures and limit the abilities of individuals to “do their own thing.” (See Reinventing Government for a great discussion of this topic) Most purchasing managers will also make the case with regard to lower prices from concentrated buying power, better negotiation of agreements and other positive attributes.
At the same time, managers in a decentralized purchasing environment will advise that the lack of “red tape” enables them to do their jobs more efficiently and therefore it is the more cost effective model. They will point to being able to get what they need when they need it without waiting for another agency to acquire it for them, as the prime example.
Let’s look briefly at the strengths and weaknesses of each system. This will help you to decide which would work best in your environment.
Centralized Purchasing
Usually a part of the finance or public works function, a central purchasing office typically involves a professional purchasing agent. The credentials include a Certified Public Purchasing Official (CPPO) or a Certified Purchasing Manager (CPM). This person has both academic and practical accomplishments that relate to their ability to manage a procurement function well. This is a plus and doesn’t always exist in a decentralized system.
The central purchasing agent will organize the buying process to maximize the buying power for the city. He/she will help assure conformance to state requirements (and federal in some cases). They will typically do this by advocating for a purchasing policy that interprets how your agency will conduct the procurement process within the laws. This becomes the guidance provided to others working in the entity. The purchasing office is directly involved in observing how this guidance is followed, which helps result in conformance with all the related rules, laws and regulations.
In Everett and Lynnwood we had central purchasing division within the finance department. Lead by a procurement professional, these offices not only acquired goods and services, but they also drafted RFPs, managed small works rosters, assisted with risk management and insurance services, provided oversight on the mail room and copy center, managed the central stores warehouse, and gave advice on specifications to get better bids. They also helped provide leadership and guidance in many other related areas. One in particular (that is often difficult to manage) is the oversight of expiring contracts and the need to conduct a timely process to re-test the marketplace. Managing contracts for goods and services is often a “loose end” in a decentralized system.
Decentralized Purchasing
I have to emphasize that this is not the absence of a system, but is instead a system designed to work through the efforts of numerous persons each independently involved in buying goods and services on behalf of the organization. The only way this can happen with any consistency is to have a solid purchasing policy in place with detailed procedures to help guide the process of buying and inventorying public goods.
Today’s financial systems often have a sophisticated purchasing (purchase order) module. They are capable of electronically routing purchase orders and assuring the right level of concurrence within the organization for the purchase of goods. This can be based on the nature of the commodity or the amount of expenditure. They can track the total expended by the agency for a particular commodity and advise when certain levels are attained. Given this level of sophistication, it is possible for an efficient purchasing system to occur within a decentralized environment. However, decentralized can also often be code language for little or no oversight of the purchasing function. This is not good!
In Wenatchee (in the early 1990’s), we had a paper system. It consisted of departments calling the finance office to get a “PO number.” When called, we would write the vendor name, the estimated amount to be spent and the account number down in our system as an encumbrance. This served to provide authority for the purchase as well as a list of “encumbrances” for financial tracking. It was very unsophisticated and some could suggest not really much of a system. It did, however, give us a heads-up when a purchase was about to be made and allowed us to do some unofficial coordination of a given commodity.
In Renton, the PO system is automated and the expenditure limits are clearly understood. Most the significant buying occurs against the “state contracts” or within the larger departments which have more sophisticated procurement processes. These larger departments conduct their own bid process and the financial system is used to keep track of commitments and purchase orders. We are reviewing the system to be sure it is efficient and meeting the various needs around the city.
A Question of Degree
The question is not so much one of centralized versus decentralized, but the degree of centralization. Almost all public entities make a least some entity-wide purchasing decisions for such things as fuel, office supplies, technology and the like. Responsibilities for these types of purchases can be shared by finance, public works and others.
The development of a good purchasing policy is fundamental to success for the organization as a whole regardless of your degree of centralization. The central purchasing office helps develop and implement the policy and facilitates the process of acquiring and inventorying the types of goods that you need to efficiently get your work done. In a decentralized system, where a central purchasing office does not exist, it is important to understand where the responsibilities lie. This can also be clarified by the purchasing policy, but who will lead the development (and enforcement) of purchasing policies in a decentralized system? In fact, it may be more difficult to provide the right amount of focus on this important part of local government administration if the responsibility for the function is vague.
*Thank you to Gayla Gjertsen, Nancy Woods, Toni Nelson and Judy Cox.
Mike Bailey is currently the Administrator of Finance and Information Services for the city of Renton. Previously, he worked as the Director of Finance for the city of Lynnwood for six years. Mr. Bailey also served as president of the Washington Finance Officers Association and is the Vice Chair of the GFOA Budget Committee. An experienced CPA and GFOA budget reviewer, Mr. Bailey co-founded the annual Budget and Fiscal Management Workshops held each summer. Mr. Bailey conducts numerous workshops and has authored various articles on local government finance, including Effective Budgeting in Washington State Cities published by the Association of Washington Cities.
*The Articles appearing in the "Finance Advisor" column represent the opinions of the authors and do not necessarily reflect those of the Municipal Research & Services Center.