Purchasing Consortia

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Purchasing Consortia
The Emerging Collective


Contents

Definition and Terminology

A purchasing consortium can be defined as two or more independent organizations that join together, either formally or informally, or through an independent third party, for the purpose of combining their individual requirements for purchased materials, services, and capital goods to leverage more value-added pricing, service, and technology from their external suppliers than could be obtained if each firm purchased goods and services alone.

Purchasing consortium go by many names, including purchasing groups, group purchasing organizations, federal organizations of purchasing, and international purchasing organizations. However, they all have the same goals, and their differences are mainly in their structure, vertical focus, and modus operandi. In the next section we will discuss some methods of classification.

Purchasing consortia are important because, when properly managed, they work. According to Corporate Purchasing Solutions, Fortune 1000 companies have reported that purchasing through their consortiums saved them approximately 13.4%. That's significant - and proof that purchasing consortiums are not just for libraries, health care, or small government agencies.

Consortium Classifications

Purchasing consortiums, regardless of the name used to describe them, have a long legacy of serving industry micro-segments. Modern consortia can take on any form - industry-specific or not - and often go beyond just leveraging group buying power to drive negotiated prices. Many offer technology, reporting and other benefits to their participants as well. They can play an important role in the sourcing of non-strategic and non-core categories where it does not make sense to develop or maintain the expertise in house.

Cooperative purchasing is distinguished by the potentially large number of members, the potentially significant dissimilarities between group members, different cooperative product and service groups and related life cycles, and specific purchasing perspectives, among other factors. This section attempts to classify the many forms that a purchasing organization can take.

Types

There are various different approaches to quantifying consortium types in the literature, but this wiki is going to use the classifications outlined by Mary M. Aylesworth in Purchasing Consortia in the Public Sector: Models and Methods for Success as it appears to be one of the most complete classifications that can be found in the literature, even though it was written primarily for the public sector.

The reference paper discusses five structural models of purchasing collaboration, ranging from loosely structured relationships under the control of institutional purchasing managers to highly structured business models with complete autonomy.

Loose Collectives

In a loose collective, also known as a local network, one or more institutions join together to obtain better pricing, share information, and, in some cases, resources in a relatively informal relationship. There is no formal structure to the organization, which is usually not a separate entity.

Voluntary Confederations

In a voluntary confederation, or voluntary cooperative, purchasing managers carry out competitive sourcing based on needs defined by the participating institutions. These cooperatives range from relatively informal committees to highly structured groups.

Regional Purchasing Agencies

A regional purchasing agency is a centralized authority that provides services to government bodies where the government retains a degree of control and where institutions may or may not be compelled to use centrally negotiated agreements.

Member-Owned Service Bureaus

In a member-owned service bureau, two or more institutions create a separate entity to provide services to participating organizations. The board consists of representatives from member organizations and the model provides the benefits of outsourcing without giving up control of policy and direction.

For-Profit Enterprises

And, the category that needs no explanation, a for-profit enterprise is an entity in the business of selling its purchasing clout and expertise. Typically, for-profit consortiums come in one of two varieties. In the first model, the enterprise purchases goods based on the aggregate demand of its clients and then resells the goods at cost plus a profit margin. In the second model, the firm acts as an agent for its clients by negotiating price and services based on the same aggregate demand and charges a commission for its services.

SubTypes

Although the classification of types discussed in the last section is a good start, it doesn't truly cover the degree to which each of the purchasing consortiums can be customized. For each type, there are, in reality, one or more subtypes that differentiate one consortium from another. This section discusses those subtypes using the classification of Fredo Schotanus and Jan Telgen in Implications of a Classification of Forms of Cooperative Purchasing which uses a "highway matrix" with consortium intensity on one axis and consortium activity on the other axis, where intensity is dependent on whether or not it is tactically or strategically focused and where activity is dependent on the degree of member interaction and the number of projects the consortium undertakes.

Hitchhiking

Under the "highway-matrix" classification, Hitchhiker-friendly consortiums are low in intensiveness and low in activity. Hitchhiking usually involves a large organization that establishes a contract and allows other smaller organizations to use the contract. Sometimes hitchhiking relationships are restricted to purchasing related information. Hitchhiking consortiums are usually loose collectives or voluntary confederations.

Bus Rides

Bus Ride consortiums display low intensiveness but high activity under the "highway" matrix classification. Bus rides mostly involve long term hitchhiking made possible by public or private external parties or central authorities. The bidding process is based on the (expected) aggregate procurement volume and is carried out with the specific purchasing expertise of the external party. Members do not have to communicate with each other and the external party carries out most of the procurement activities. Bus Ride consortiums are usually Regional Purchasing Agencies, Member Owned Service Bureaus, or For-Profit Enterprises.

Carpooling

Carpooling consortiums are moderately intensive and moderately active and occupy the center of the "highway" matrix. Carpooling, sometimes known as external lead buying, involves outsourcing the procurement of common commodities to the member that is the most suitable organization or external party to procure the resource, as per their expertise, resources, or purchasing volume. Carpooling often requires a fairly advanced purchasing organization to be effective. Carpooling can be found in all types of consortiums all the way from loose collectives to for-profit enterprises.

Convoys

Convoy consortiums display highly intensiveness but low activity in the "highway" matrix. Conveys are more intensive forms of cooperative purchasing that are well suited to exceptional or complex purchasing projects such as telephony services. Supply risks can be shared and increased knowledge can be used to deal with uncertainties. Convoy consortiums are usually of the Voluntary Confederation, Member Owned Service Bureau, or For-Profit Enterprise variety.

F1-Teams

F1-Teams are highly intensive and highly active according to the "highway" matrix. F1-teams are usually formed by management team representatives of the cooperative purchasing organizations who meet regularly in a steering committee to select, and oversee the execution of, appropriate cooperative projects for the members. Like Bus Rides, F1-Teams are usually found in Regional Purchasing Agencies, Member Owned Service Bureaus, or For-Profit Enterprise consortiums.

Focus

In the last two sections, this wiki-paper discussed the types and sub-types of consortium commonly found in the marketplace today. What it did not discuss was the fact that each type, and sub-type, of consortium, from a market-place perspective, can have a different market focus. Its focus can be vertical, horizontal, or mixed.

Vertical

In a vertical buying consortium, all of the members are from the same industry segment, such as healthcare, high-tech, or pharmaceutical, and the consortium exists to meet the specific purchasing needs of members in the industry it serves. In such a consortium, there is usually a lot of expertise on the types of goods and services commonly needed by the members as well as their business processes. This helps the consortium make buys that are the "best fit" for the organization.

Horizontal

In a horizontal buying consortium, the members come from different industry segments. Most horizontal consortiums are specialist plays and focus on a small number of categories that are common to all companies. Furthermore, most of the categories they source will generally be commodity goods or services like telecommunications, office supplies, or accounting services.

Mixed

A mixed consortium will generally either be a vertically focussed offering, with most of its members in an around one vertical but a few members outside of the vertical who want to take advantage of the expertise that the consortium possesses in the categories that are common across more than the initial industry focus, or a horizontal category focussed offering that just happens to have a large number of members in one or more industries and also offers extended services to those members.

These consortiums generally start out as either a vertical play or a horizontal play, but as they acquire industry leading expertise in a couple of categories or attract a large number of members in one vertical, they will extend their service offerings. In the vertical situation, a mixed offering comes into play as the consortium gradually allows non-industry players to use the consortium as a horizontal offering for a few common categories where there is a cost-advantage to the consortium and its members to do so. In the horizontal situation, a mixed offering comes into play as more and more members fall into the same industry and wish to use the consortium for secondary categories that they do not want to handle in house or take to a second consortium because the expected cost savings do not justify another relationship and using the consortium will at least offer process and manpower savings.

Member Benefits

Purchasing consortia are set up to pool demand from many different companies and increase the purchasing power of each of the individual member companies. This gives them economies of scale, of process, and of information. Each member drives up the collective supply chain power in the markets in which the consortia operates, especially in the non-core commodity categories that are equivalent for each of the member companies.

Economies of Scale

The first type of benefit offered by a consortia is economy of scale. The sheer volume of purchasing demand amalgamated by a decent size consortium provides each member with economies of scale that they could not hope to obtain on their own.

Lower Prices / Pooled Negotiating Power

By increasing the volume of the intended award, the consortium is generally able to negotiate (much) lower prices for the good or service being awarded than any single member company in the collective. These savings are usually significant, ranging from 10% to 35% according to the Buying Support Agency.

Lower Transaction Costs

By joining together in a consortia, organizations can (effectively) streamline procurement processes. This not only reduces unit cost, but also reduces the overall transaction costs since only one contract needs to be negotiated and implemented.

Economies of Process

The sharing of purchasing information on suppliers, new technologies, market developments, internal users, and historical spending behavior not only avoids redundancy and reduces transaction costs but creates an economy of process above and beyond what each organization could achieve on its own.

Reduced Workload

Since the consortium handles a number of buys on behalf of the organization, the organization has a (significantly) reduced workload, especially on the tactical side, and the buyers are freed up to focus on more strategic categories.

Better Practices

Individual members units are able to improve their results by sharing best practice in certain business processes, leveraging expertise in functional areas, and pooling knowledge about how to succeed in specific regions with the consortium and with each other.

Economies of Information

The consortium of the future offers the benefit of expertise more so than it offers the benefit of scale. Eventually, especially with constantly rising raw material prices, the best practices employed by a competent consortium will squeeze all of the fat out of the supplier's margins and the best price will be obtained. Once this occurs, the consortium will use its expertise to assist its members in advancing purchasing technology, reducing wasteful consumption, and improving the application of the goods and services they purchase.

Higher Quality

A consortium will have access to all of the knowledge of its members which it can tap to identify the best potential suppliers with the best potential products and services to meet the members needs. Furthermore, it can tap this knowledge base to identify new processes and emerging best practices on a regular basis to make sure it is always using the best information and processes to make its decisions.

Lower Supply Risks

A consortium, able to tap into the collective expertise of all of its members, will have a much better chance of identifying and qualifying low risk suppliers.

Member Drawbacks

Purchasing consortia are set up to pool demand from many different companies and serve the needs of the majority. This implies that it must serve the good of the many and not the few, or the one. As such, there could be some (minor) drawbacks to participating in a consortium, especially with respect to certain categories. This section discusses some of those (potential) drawbacks.

Set-up Costs

Before a process can be effectively outsourced, it has to be well understood, well documented, and well managed. Outsourcing an ineffective process will not be a success, nor will outsourcing a poorly understood one, as success depends on good change management. Thus, in addition to the initial costs of identifying a consortium, negotiating a contract, and setting up the relationship, there could also be costs associated with cleaning up processes, documenting them, and effecting the change. Its important to understand the costs up front and to only enter into an agreement if the benefits are expected to exceed the costs.

Longer lead times

Since the needs of the many outweigh the needs of the few, or the one, in a consortium, it is possible that the suppliers selected might have longer lead times. Make sure the items outsourced are those that are not required for just in time delivery, or that the consortium is capable of negotiating contracts that can be adapted to the need of each member.

Better Communication and Monitoring

As with any business process, one can not just outsource purchasing operations and expect results. One has to clearly communicate requirements and goals and consistently monitor the process to ensure consistent results. Otherwise, the value of the organizational investment might erode over time.

Reduced Flexibility

In order for a consortium to be effective, members have to agree to use whichever supplier is selected to receive the contract when the project begins. The member will be locked into the contract, and will not have full control over the terms and conditions eventually agreed upon. Furthermore, the member may not be able to break or renegotiate the contract, should the need arise, since the contract is between the supplier and the third party consortium.

Internal Resistance

There can be resistance within the organization to using a third party. This can take a variety of forms and be for a variety of reasons. There might be an internal belief that an external party could not know the company's business well enough to make the right decision, there might be a fear of intellectual property and / or confidential information loss, there might be a fear of "working with the enemy", and their might be a belief that the organization's volume is already so large and so well leveraged that a consortium will not be able to bring any additional value.

Fortunately, each of these fears can be tackled with education. A knowledgeable consortium will be able to demonstrate sufficient knowledge in the respective categories to quell any rational fear, a good consortium will have procedures, processes, and technologies in place to protect its members' confidential information better than they are capable of protecting it themselves, "working with the enemy" ensures that the enemy does not get a better deal than the organization does, and the benefits of a good consortium go well beyond just cost savings. It takes advantage of the unique purchasing power and special commodity knowledge possessed by each member to benefit the consortium as a whole.

Supplier Resistance

Sometimes suppliers might not want to deal with a consortium. This is especially true if they are currently extracting high margins from a customer base of small, disparate customers. A consortium would force them to be (much) more competitive and efficient, and in the eyes of the salesman, significantly cut his commission. Of course, this is not necessarily true, since a consortium can represent a much bigger sales opportunity, and even at a smaller margin, could still mean a higher commission for the salesman who successfully negotiates the larger contract.

Some suppliers will even go so far as to refuse their business to the organization if it switches to a consortium. Unless the product or service truly is a one-of-a-kind product or service that is currently not being offered by another supplier, and this is rarely the case, this should not be a concern. If the supplier is truly providing the organization with the best value they could get, then the supplier should be confident that it will also be capable of providing other consortium members with the best value they can get, and see it as an opportunity to win more business.

Loss of Supplier Relationships

Since the contract is between a third party and the supplier, there is a good chance that a new supplier will be selected, which would mean the loss of the current supplier relationships. Furthermore, even if the organization's current supplier is selected, the relationship could still be weakened with the new arrangement.

Common Fears

When attempting to select a consortium, chances are good that there will be some resistance. This is often do to innate fears held by the dissenters. They will not always be rational fears, but it is important to understand, rational or not, what the fears are so that arguments can be devised that will both combat the fears while educating the dissenters as to the benefits a consortium could bring.

Anti-Trust Regulations

Those opposed to pooling purchases will often say that purchasing consortiums are a concentration of market power that reduces competition, stifles innovation and creates barriers to market entry. Some will go even further and suggest that such consortiums violate anti-trust regulations.

While exclusive dealing, sole-source contracting, quantity or market share discounts and similar practices are occasionally anticompetitive, the conditions for competitive harm necessary under the law are rarely satisfied.

Consortium is too small

If the consortium is new, and membership is small, dissenters will explain that there are not enough members to bring enough additional buying power to the table to make enough of a difference to make it worthwhile.

Consortium is too large

If the consortium is well established, and has a lot of members, detractors may say that the consortium is too large, that the needs of the organization will not be met because they will be lost in the collective, or that the size of the consortium will make the purchasing process burdensome and inefficiently slow.

Consortium is too diverse

If the consortium is open-enrollment, it could bring together buyers with widely diverse needs and philosophies. Detractors will insist that this will only result in untenable complexity and disfunction.

Consortium benefits the competition

The largest and most obvious point of a consortium purchasing model is the collaboration and partnership involved, often with rival companies, the competition, or the so-called enemy. Dissenters will insist that it will help the competition while hurting the organization.

Loss of Competency

It is quite possible that some of the competencies that are possibly less obvious in normal procurement activities be lost when purchasing work is effectively outsourced. Dissenters will insist that critical competency and the benefits it offers will be the first to go.

Consortium Selection

Getting the most out of a consortium is highly dependent on selecting the right consortium. This section outlines some criteria that should be considered by an organization in their quest to find the right consortium as well as some questions that every organization should ask.

Criteria

This section overviews some of the criteria that should be considered in a quest to find the perfect partner.

The Right Fit

A good consortium targets products and services that fit well with the majority of its members and prioritizes the projects appropriately. It makes an effort to understand the culture of each member and the needs the member is bringing to the consortium. It makes sure the types of products and services commonly sourced by the consortium match the types of products and services the members are looking to source.

The Right Buys

A good consortium, after identifying the right projects, seeks out suppliers that supply the products and services that are most appropriate to its members during the early stages of a sourcing project. Furthermore, the consortium seeks out those projects which are commodity in nature, since purchase volume is unlikely to govern, or even impact, the purchase price when the product is highly technical.

After all, if the buy is highly technical, strategic relationships with suppliers are often beneficial, and this can be hard to accomplish through a consortium. Make sure the consortium has a history of buying products and services that meet its member needs. Make sure to spend sufficient time on due diligence and to talk to current members.

Anti-Trust Counter Measures

Unless the consortium represents a significant portion of the demand for a commodity, or a significant number of customers in a vertical, or uses anti-competitive contracting processes, the chances of a consortium actually violating any anti-trust laws are small. Still, there are anti-trust laws in existence and before an organization selects a consortium, it should ensure that the consortium is familiar with (1) The Sherman Act, (2) The Robinson-Patman Act, and (3) The FTC Anti Trust Safety-Zone for Collaborative Purchasing acts and the consortium, or its legal team, can clearly explain to the organization, or its legal team, why the consortium's practices do not infringe on any of these acts. The consortium should also be clear as to why its processes will ensure that it does not infringe on these acts in the future. In addition, to ensure fairness and transparency in the (public) procurement process, many states have enacted legislation to ensure that proper procurement procedures and safeguards are in place. Make sure the consortium is aware of the laws of any state it, or its members, operate in and that it has processes and procedures in place to ensure that it does not violate any of the laws of any state it, or its members, do business in.

Protection of Confidential Information

Each member, along with each supplier, will have confidential information that will need to be shared with the consortium in order for it to determine volumes, requirements, and the factors that are important in supplier selection. It is thus important to make sure that the consortium has the safeguards and processes in place to make sure that all confidential information it receives will be adequately secured and accessible only by the consortium resources authorized to view it.

Communication and Commitment

A good consortium communicates with its members regularly, commits to providing them the best service it can muster, and establishes policies, procedures, and expectations for regular group engagement. Furthermore, the better consortiums will increase return on investment (ROI) through increased knowledge and understanding of how certain commodity or spend areas work by communicating and collaborating with other companies with more experience in that commodity or spend area.

Critical Mass

A good consortium will have achieved the critical mass in membership, experience, and sourcing process success necessary to ensure that it's effort will be at least as successful as the efforts of any member in any category it sources.

Core interest groups

A great consortium will have advisory and interest groups composed of procurement and technical experts from its members for each of the products and services it sources and consult with them regularly to insure that its market intelligence and best practices are always up to date.

Standards and Best Practices

A good consortium will have standards and best practices in place that guide its operation. These best practices will include a due-diligence model that covers each project the consortium undertakes from initiation through the post-mortem follow-up evaluation. The end result of this due diligence process should be a detailed report that includes a statement of the improvement opportunity that was expected, the available alternatives considered and dismissed, the recommendations and ultimate conclusion, the implementation schedule and implementation team matrix, quarterly progress reports, and the final evaluation.

Market Intelligence Process

Before the solicitation is issued, a good consortium will designate an appropriate lead buyer and assign that buyer qualified procurement and technical support, invite procurement and technical specialists from the members to participate, survey members to determine buying pattern history and demand, determine the requirements in detail (including required lead times, service, maintenance, and value added services), and circulate initial specification drafts to members for comments and suggestions.

Solicitation and RFx

A good consortium will utilize the right competitive negotiation processes and life cycle cost analysis models, create a bid list that takes all member input into account, and advertise and conduct each of the events the consortium undertakes in accordance with all applicable laws.

Negotiating

The consortium will utilize a process based on free and open competition, invite the purchasing and technical experts from the members to participate in the evaluations of the initial responses, negotiate terms that conform to the requirements of all members and all laws that are in effect, and carefully evaluate the ability of a bidder to service all members.

Contract Award and Administration

The consortium will have a history of promptly notifying all members of the award and providing complete copies of the contract, providing written guidelines for contract administration, allowing each member to handle routine administration, establishing a contractor performance reporting system that can be used by all members, and requiring contractors to provider periodic contract sales reports.

Performance Measures

A good consortium will define performance metrics for each project and measure them regularly. Some measures it might use to measure savings include:

  • group price compared to price paid by individual institutions
  • group price compared to list price
  • group price compared to prices paid by other organizations
  • group price compared to last price paid
  • year-to-year group price variances compared to published indices

Supplier Education

A good consortium educates its suppliers to the many benefits they can obtain through cooperation with the consortium. For example, the aggregation of expenditure makes a single tender an easy forum for the supplier to select the materials and quantities they want to bid on and "hungry" suppliers can gain a substantial amount of business that they may not normally be able to even bid on.

Evaluation Questions

The article Buying Smarter on the GovPro.com site has a great set of questions that every organization should ask when exploring collaborative opportunities. They are:

  • What does it mean to collaborate?
  • What are the rules of engagement?
  • What is the level of commitment? How much information can/should I share?
  • How do I know that I can trust my colleagues?
  • Do I have support from the administration to make decisions that impact my group/department?
  • How do we measure member loyalty?
  • How much additional time and resources need to be allocated to the group?
  • Who is going to organize meetings and execute action items?
  • How are decisions going to be made?
  • What/who is the governing body?
  • My institution is small in comparison to others. Does this mean we have less influence on decisions?
  • How much is this going to cost?
  • Can we do better as a standalone institution?
  • We compete for the same resources. How can we possibly collaborate with our competitors?
  • What can be done to promote collaboration among competitors?
  • We belong to other associations. Why would we want to join/start another one?
  • How will the group ensure participation in collaborative projects?
  • Does my entity need to participate in all projects undertaken?
  • How will the group deal with noncompliance issues?
  • Is the mission of the group in alignment with my entity's mission and value system?

Member Best Practices

This section discusses various best practices that should be employed by a member to obtain maximum benefit from its consortium participation.

Top-down Support

Even though support at all levels of the organization is essential to success, it's important to secure top-down support early on in the selection process. This will help to ward off internal resistance to shifting part of the organization's purchasing operation to the consortium and help to insure the support required for the necessary resources to make the project a success is there.

Full Commitment

The success of a consortium is very dependent on the commitment of its members. This often goes beyond just a tacit agreement to use the contract negotiated by the consortium but to supporting the consortium from project inception to process completion. It's important for each member to continually provide the consortium input and feedback on desired categories, potential suppliers, opportunities for savings, success of the negotiated agreements, and actual savings achieved. Thus, each member must be fully behind the consortium from day one.

Active Participation and Proposal Initiation

Look for a consortium that encourages member participation and one that will allow any organization whose spend compromises a significant portion of the spend to have one of their members as part of the project team. In addition, members must be sure to "sell" the consortium successes within their organization to gain support for the effort and maximize their investment.

Look Past Price

Price is important, but so is timely delivery, quality, warranty, and service. It's important to select a consortium that has the ultimate goal of the best overall buy, and to accept an award that might not be the lowest cost if it represents the highest overall value. It's also important to insure performance is a significant component of every consortium award. After all, the lowest cost product is useless if it does not arrive at the production line when it is needed.

Due Diligence

It's important that the organization does its homework on the consortium before signing on the dotted line. Be sure to quantify the expected cost and process savings and insure that they will exceed the costs and drawbacks of working with the consortium. Make sure that the organization will be provided with detailed reporting for current orders, historical orders, invoice summaries, price charges, exception reporting, and cost savings. Track this data and make sure that the consortium continues to perform over time and make sure the benefits materialize before renewing the initial agreement.

Getting the Most Out of Your Consortium

The Supply and Demand Chain Executive article Not Your Grandfather's GPO has some great tips for getting the most out of the consortium your organization belongs to.

Start by knowing what the organization's goals are and qualify the objectives and deliverables. This will ensure that consortium is evaluated properly using the criteria above. Then define how success will be measured. Make sure there are systems in place to track the measurements and that the consortium is willing and able to provide a prospective member with all of the data needed to evaluate the consortium's success.

Look for consortiums that are willing to negotiate incentives for suppliers to deliver. The contracts should contain excellent performance bonuses or poor performance penalties, especially if they are for materials needed to keep the organization's production lines going or for services. Finally, before the organization signs on the dotted line, it should fully understand what its costs will be up front and in the future and insure that the expected cost of doing business with the consortium is, at the very least, less than the expected savings.

Once the consortium is selected, it's important that the organization understands where the consortium should fall in its mix of cost reduction strategies. For example, if the organization is decentralized and does not want to add head-count at the corporate level, the consortium could provide an opportunity to leverage spend with minimal additional resource allocation. A centralized organization could focus on leveraging the areas of its spend that provide the greatest return and let the consortium take responsibility for less strategic areas of spend.

Once an organization has identified the categories where the consortium can be of value, it should follow the age-old adage and "start with the low hanging fruit". This will help it to realize an early return on investment, gain support within the organization for the effort (to combat any remaining internal resistance), and get familiar with the consortium and its processes. This will help it to play a larger role in future projects and provide input on the more challenging categories once the "low hanging fruit" has been picked.

Purchasing consortiums are part of a comprehensive approach to managing an organization's indirect spend. Depending on the size, industry, and strategic focus certain categories just make sense to let someone else manage. In addition, at the SKU level, group purchasing organizations deliver value through leveraged rates available to their members in categories that are not core to their business. (Quave Burton, Leveraged Sourcing Network (LSN), Not Your Grandfather's GPO)

The fact of the matter is that a purchasing consortium can be leveraged to tackle less strategic categories, like office suppliers, office equipment, or telecommunications, freeing up organizational buyers to tackle more of the strategic, larger spends. Even for companies with world-class procurement capabilities, consortiums can play an important role for non-strategic or non-core categories where it does not make sense to develop the expertise in house.

Furthermore, as per the Latest Trend in SCM: Outsourcing Procurement article, one should consider doing a spending baseline project before committing to the consortium. This will allow one to determine if the estimated cost savings will cover the membership and management costs of being part of the consortium.

Consortium Success Factors

Whereas most of the report discussed purchasing consortiums from a potential member's perspective, this section outlines some of the factors that are required for the consortium to succeed.

The Right Members

There are many requirements for a successful consortium, but one of the most important requirements is to have the right members. The members should share common values and interests, similar external challenges, geographical proximity and a desire for group success. This will help to ensure that the members get the benefits they are looking for, which is one of the fundamental keys to continued success of the consortium.

Careful selection of suppliers and service providers

Consortiums need to identify those suppliers and service providers that are capable of meeting the demand at the required level of quality and service. They also need to insure that the suppliers and service providers are financially stable, not on restricted party lists, and low risk to their member organizations.

Defined Goals and Performance Measures

The consortium should have general goals for each of its members and specific goals for each of its projects. These goals should be based on measurable metrics and performance measures should be taken on a regular basis.

In addition, it should also have the goal of being a good customer. In order for a consortium to ultimately succeed, it's suppliers must benefit as well. If the best suppliers refuse to work with the consortium, it will not be able to provide the best values to its members, and they will likely leave. This means that the extracted margin reductions should come with an increased volume in the award. The supplier should still be able to make a fair profit at the end of the day. The consortium should take steps to alleviate suppliers' concern by reducing the supplier's cost of sale, committing to award volumes significant enough to make the contract attractive, and signing up for reasonable length contract terms, especially on commodity categories that don't usually fluctuate very much.

Process and Contract Management

As alluded to in the section on selection criteria, a consortium needs a good, well thought-out, process for each project that spans the project from inception through the post-mortem analysis and really good contract creation and management procedures. For most categories of moderate complexity, each of the buyers might have slightly different needs. In this situation, the consortium needs to be able to execute a master contract that can be tailored, through addendums, to the individual needs of each member. It also needs the ability to track fulfillment against each individual member need to insure that members are receiving the service they bargained for.

Supplier Involvement

Suppliers can provide market information, track order cycles and consumption rates, provide supply cost data and recommend affordable alternatives. In some industries, suppliers are the best source of expertise and can often offer up suggestions on how to improve the purchase and use the process to help users reduce waste. A good consortium will take advantage of the knowledge and capabilities of its suppliers.

In the consortium lies the potential to create a new dimension of partnership-based strategic alliance that can go beyond a simple collaboration between a buyer and a seller. Through supplier involvement, the consortium can enable many-to-many collaborations between multiple buyers and sellers that can identify and promote supply market expertise and best practices beyond what any organization will be able to develop on its own.

The Right Contracts

The purchasing consortium selects the right contract for the category, whether it is a definite quantity and delivery, indefinite quantity and delivery, or piggyback contract. In a definite quantity and delivery contract, the consortium identifies all members, their respective requirements, and fixed demands. In an indefinite quantity and delivery contract, the consortium again identifies all members and their respective requirement, but demands are not defined. In a piggyback contract, the consortium negotiates a contract for the subset of members that are currently requesting it, but the contract includes a clause that allows other members to join the contract at any time before expiration.

Matching Philosophies

It's important that each member in the consortium have similar philosophies. Each actor in a consortium will have a discrete set of motives, values and needs influencing not only their actions, but their perceptions of other members. If the members have substantially different philosophies about the role of the consortium, such diversity will give rise to a complex and potentially conflicting value set within the group that will limit the effectiveness of the consortium.

Trust and Cooperation

In order for a consortium to be successful, full commitment to the consortium from each member is required along with an innate trust that the decision made by the consortium is the right one for the consortium and for each member. Each member must be willing to accept the final outcome when the project begins and cooperate with the designated project members in the selection process as required.

A Selected Bibliography

Allocating Savings in Purchasing Consortia: Analyzing Solutions from a Game Theoretic Perspective Govert Heijboer, March 2002

Applications of Outsourcing Theory to Collaborative Purchasing & Licensing Christine Urquhart, 2003

Buyer-Supplier Relationships in Small Firms: The Use of Social Factors to Manage Relationships Luke Pittaway & W. John Morrissey, 2004

Buying Smarter Catherine Radwan

Consortia, Buying Groups and Trends in Demand Aggregation Keven Gray, Corporate United, 2003

Consortium Purchasing David Hawthorn

Creating Corporate Advantage in Purchasing Frank Rozemeijer, December 2000

Cooperative Purchasing Micro-Evolutions: A Longitudinal International Study Fredo Schotanus, Elmer Bakker, Helen Walker, and Michael EBig

Demystifying Group Purchasing Organizations Charles Dominick

Desperately Seeking Synergy by Michael Goold & Andrew Campbell, 1998

Group Purchasing: Can Your Business Play Nice With Others? David R. Butcher

Group purchasing helps leverage decentralized spend Wayne Forrest

Group Purchasing, Nonlinear Tariffs, & Oligopoly Howard P. Marvel & Huanxing Yang, October 2006

Group Purchasing Organization Wikipedia

Group Purchasing Organization (GPO) Purchasing Agreements and Antitrust Law Herbert Hovenkamp, January 2004

Group Purchasing Organizations Charles Dominick

How a Group Purchasing Organization Can Save Your Business Money Ken Hamilton

Implications of a Classification of Forms of Cooperative Purchasing Fredo Schotanus & Jan Telgan

Latest Trend in SCM: Outsourcing Procurement Erika Morphy

Learning from GPOs Jason Busch

Managing purchasing coordination: How to build an effective intra-company relationship Frank A. Rozemeijer, Arjan van Weele, & Mathieu Weggeman

Not Your Grandfather's GPO Julie Murphree

Purchasing Consortia as Symbiotic Relationships: Developing the Concept of "Consortium Sourcing" Michael Essig, 2000

Purchasing Consortia: How to Make Friends and Save Money Denis Blight

Purchasing Consortia in the Public Sector: Models and Methods for Success Mary M. Aylesworth

Purchasing Consortiums: Horizontal Alliances Among Firms Buying Common Goods and Services ... What? Who? Why? How? - Executive Summary Thomas E. Hendrick, 1997

Purchasing Must Become Supply Management - Twenty Years Later and Counting by Pierre Mitchell, March 2003

Reducing the Costs of Purchased Services ISM, 2004

Shared Pain & Payoffs Angela Pascopella

Strategic Sourcing and Consortium Purchasing: Navigating the Regulatory Waves E&I

Strength in Numbers: An Introduction to Cooperative Procurements NASPO, February 2006

Supply Management Executives are Discovering Fresh Value in Group Purchasing Organizations Julie Murphree, August 2006

Top 10 To-Do's for Mid-Market Manufacturers Managing Supply Katrina C. Arabe

Why it's vital to improve your purchasing practice Buying Support Agency

Why Shouldn't Your Business Benefit From Best Practice Buying? Matthew Roper

Authors

Michael Lamoureux, PhD of Sourcing Innovation

Editor

David Bush - Iasta, Pro to Know

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