Estimating the cost effects of purchasing centralization-Empirical evidence from framework agreements in the public sector

There appears consensus among academics that purchasing centralization provides several synergy benefits, especially in terms of lower prices and economies of processes, but empirical evidence of the specific cost effects is scarce in literature. This paper presents empirical evidence of these cost effects from a purchasing centralization project using centralized framework agreements in the Finnish government. The empirical study is twofold: the cost effects of centralization are estimated by comparing the costs of centralized and decentralized tendering processes and potential price savings. The estimation of process costs is done by surveying the time spent on the tendering both for the decentralized operating model and the centralized operating model in the government and estimating the cost of those times. Potential price savings are estimated by comparing the central framework agreement prices to market prices in two selected product categories. The results on the price savings provide empirical evidence of the academic consensus that significant volume discounts are available from pooling. Additionally, the size of savings potential in process costs shows that the number of units centralizing their purchasing process does not need to be very high before economies of process already become evident. (C) 2010 Elsevier Ltd. All rights reserved.