Centralised Versus Devolved Procurement

What is it?

An important consideration for organisations is to decide how they should organise their procurement activities. Whether to adopt a centralised approach or a more devolved (decentralised) arrangement is a fundamental concern.

In a fully centralised approach one team or department controls all procurement activity across the whole organisation.  This enables spend to be standardised and consolidated, thus increasing leverage over suppliers, and allowing the supply base to be rationalised, leading to stronger relationships with fewer suppliers. Centralised sourcing strategies can be devised, thus ensuring consistency across the organisation, and auditing is easier to achieve, which leads to better compliance. It is a resource-efficient approach with clear responsibilities and the ability to develop expertise.

There are potential downsides to a centralised approach, however. The ordering process can become too bureaucratic and too slow with long lines of communication. Delivery times to the operating units can also be longer, local needs may not be taken into account and the returns process may be complicated. It can also be inflexible, with slower decision-making and poor response to changing requirements or emergency situations.

It is for these reasons that organisations may wish to adopt a devolved procurement structure, whereby all procurement activity is the responsibility of individual operating units. This leads to shorter lines of communication with suppliers, faster response times and more focus on the needs of the operating unit. However, organisational spend is fragmented with little opportunity for economies of scale. There is also less consistency and control over procurement activities, with consequent loss of efficiency and potential for unethical behaviour.

In reality many organisations adopt a hybrid approach to procurement. Typically, items that are in common use across the whole organisation are procured using a centralised arrangement, whereas individual operating units are responsible for the devolved buying of unique items which are not required elsewhere. The idea behind this hybrid approach is to marry the efficiency and control of the centralised approach to the agility and speed of the devolved arrangement.

What does it look like?

How does it work in practice?

The government of Kenya has adopted a predominantly centralised approach to procurement. Although public health services have been devolved to the county level (47 counties), procurement is retained centrally within Kenya Medical Supplies Authority (KEMSA), which also provides warehousing and distribution services. Framework contracts with approved suppliers exist and 70% to 80% of county-level demand is fulfilled by KEMSA. This enables the achievement of competitive pricing and high quality standards.

In recognition of the relatively long lead times of this centralised approach (4 to 6 weeks), a faith-based equivalent organisation, Mission for Essential Drugs and Supplies (MEDS), which is endorsed by the Ministry of Health, is used as a back-up in the event of lack of availability or emergency situations. Individual hospitals are also allowed to buy directly from approved suppliers in emergency situations, but this process is strictly controlled by KEMSA.

It makes sense for a large organisation that has considerable spend across multiple operating units with common requirements to adopt a centralised approach to procurement.

The government of South Africa has a centralised approach to the procurement of pharmaceuticals, which are mainly sourced through national framework contracts by the Affordable Medicines Directorate within the National Department of Health. This has led to effective sourcing practice and impressive cost reductions. The procurement of other medical supplies (e.g. equipment and consumables), on the other hand, has a hybrid arrangement. The National Treasury CPO Office is accountable for national sourcing whereas regional sourcing is undertaken by the Supply Chain and Procurement Team within each Provincial Treasury.

This has led to communication issues and problems of fragmentation in relation to specifications, demand planning, sourcing strategies and contract management. In contrast to pharmaceuticals, the private sector would appear to be achieving lower costs on medical equipment and consumables than the public sector. This problem has been recognised by the government and steps are being taken to improve the situation.

The government of Nigeria has a more devolved procurement structure. The Federal Ministry of Health only procures for a small number of federal hospitals and some donor programmes. The majority of health procurement is undertaken at the state level (36 states), each having its own department of health and procurement unit. This is consistent with the federal status of Nigeria and the autonomous role of the states. The procurement model varies by state, with each one managing its own demand (quantities and specifications) and supply separately, as well as having its own framework contracts with suppliers. Control is retained by the states and there is no delegation to the hospital level.