Procurement Consortium Benefits

Procurement Consortium Benefits naturalene

Procurement Consortium Benefits

To have your organization operate properly, you must effectively manage your procurement and supply chain.

 

Without these necessary goods or services, it is impossible to accomplish your organizational mission statement.

 

Your internal role may involve many different tasks or you may be responsible for only one. Many procurement specialists are responsible for locating raw resources from suppliers to produce goods for customers. You may be involved with the marketing or advertising that is required for distribution.

 

Even providing internal IT services to maintain individualized production levels is part of the procurement and supply process.

 

Many organizations spend nearly 70% of their revenue purchasing goods and services. How much money would you save if you could shave just 1 percentage point from that number?

 

Depending on the size of your organization, each percentage point could be worth hundreds of thousands of dollars.

 

For that reason, if you are involved in some way with your company’s procurement and supply chain, then you should be thinking about the benefits of a procurement consortium.

 

What Is a Procurement Consortium and Why Does It Matter?

 

A procurement consortium is defined as having 2+ independent organizations join together for the purpose of combining their individualized requirements for goods or services to create more leverage with external suppliers. These relationships may be formal, informal, or even through independent third parties. [1]

 

Whenever you can save money, but still meet your delivery demands, then you can create more profits from your existing revenue lines. Efficient procurement can also minimize your risks, build relationships with new suppliers, or help you find new customers.

 

The goal is pretty simple:

  • To procure the right products;
  • To produce the best goods or services
  • To create at the correct quality; and
  • To deliver at the right place for the best possible cost.

 

With a procurement consortium, you create more leverage for your organization. Instead of trying to negotiate procurement rates on an individualized level, you are able to take advantage of a greater leverage and utilize free-market principles to lower your costs. Purchasing in higher quantities lowers your per-product cost, which increases your potential revenues. [2]

 

When working with a procurement consortium, much of the focus winds up being on the dollars and cents (or whatever your local currency happens to be). Saving money is only one reason why this cooperative relationship is important. Here are some additional reasons why good procurement practices should be followed.

 

It provides you with an audit trail. Good procurement practices encourage accountability. It allows all stakeholders to understand the fairness or equity in every transaction. You can prove that you are following the best practices in your industry.

 

It offers financial stability. Your organization is able to ensure that the best value possible can be achieved whenever an order is placed.

 

It can meet regulatory requirements. Some industries have specific regulatory requirements which must be followed. An industry-specific procurement consortium will ensure that you stay in compliance.

 

It maximizes your financial outlook. An annual budget may be important, but so is your 3-year plan. Do you have a 5-year plan? A 10-year plan? By improving the value of your purchasing relationships today, you can maximize the financial outlook of your organization in the future. [3]

 

When you get it right, you can leverage value-added services and technologies to your pricing benefits as well.

 

Instead of navigating this world alone, it makes sense to form relationships so that every benefit can be experienced by each organization in the relationship.

 

Additional Benefits to Expect When Working with a Purchasing Consortium

 

When effectively organized, a purchasing consortium is able to pool resources to influence supply and demand. Individual members are able to work with better economies of scale, which provides lower pricing in most instances and can lower transaction costs as well.

 

That is because only one contract needs to be negotiated.

 

It isn’t just an economy of scale that can be provided to organizations which work with a procurement consortium. There are also economies of information and economies of process that can provide benefits as well.

 

An economy of information involves the sharing and implementation of best practices within a specific industry. As demands for raw materials increase, it is up to each individual member of the consortium to implement practices that prevent premature wear and tear on the production, manufacturing, or distribution systems that are being used. By following proper practices, margins can be maintained and this makes it possible to keep pricing levels low.

 

Having access to industry best practices also allows suppliers to provide the best possible materials while members can implement consumer distribution in the most effective way. Members have access to group knowledge that they would not have staying independent that can help them make the best possible business decision in virtually any situation.

 

The economies of process go beyond the purchase or use of information. Innovative technologies, industry developments, and historical behavior all come together so that businesses can eliminate redundancies. Without excessive repetition, transaction costs can be effectively reduced.

 

There are also fewer supply risks as information is shared because of the collective organization expertise which exists within the consortium.

 

Labor costs are one of the largest components of an organizational budget. Reducing repetition within your labor force increases productivity, which can result in lower future costs in this category. [4]

 

It can also reduce the workload for an organization’s employees. Many purchasing consortiums are designed to handle the buys a business requires, which frees up in-house purchasing specialists to complete more tasks. This is especially true for those who are involved in the tactical aspects of each decision.

 

The economy of process will also involve better practices that can be followed by an organization’s workforce. It provides an opportunity for managers to recognize expertise within their teams so that the best people can be put into their most functional areas. It is also an opportunity to pool knowledge within an organization to create more success from supplier to customer.

 

What Are the Different Types of Procurement Consortiums?

 

Purchasing consortiums can take on any form. They can be specific to their industry, much like the subsidiaries found within the Naturalene, Inc. family, or they can be very generalized. Many go beyond providing leveraging power to provide multiple benefits, from analytics to data mining to reporting.

 

When you find the right relationship, you can even source your categories that are not part of your organization’s strategic vision. That way you don’t need to absorb the cost of keeping non-core expertise in-house.

 

Although modern purchasing consortiums can be created under multiple classifications, there are 5 general consortium types that can be found today.

 

#1. Loose Collectives. This is a local network. Two or more organizations join together to create leverage informally when handling purchasing needs or sharing information. Some resources may be shared, but there is no formal structure to the actual relationship between the organizations.

 

#2. Voluntary Cooperatives. This type of structure creates a structural relationship between organizations so that competitive sourcing needs can be met. This type of consortium is often managed by an informal committee, but some groups may prefer to create formal structures to manage the relationship.

 

#3. Regional Agencies. This option provides a centralized authority for member organizations. It usually provides services to or through government bodies so that a degree of control is maintained, but the power of leverage is handled for all through one voice.

 

#4. Member-Owned Bureaus. With this type of structure, member organizations create a completely separate entity. These bureaus setup services to organizations that choose to participate and are often governed by a Board of Directors which consist of at least one member from the founding organizations. This provides some independence to the consortium while members still retain a certain level of control.

 

#5. For-Profit Consortiums. This structure is created by members so that it can create profits through the negotiation process. These profits may be kept within the structure of the consortium or distributed throughout the membership based on contracted rates, percentages, or some other method. The consortium may purchase goods on behalf of their members and then resell them or purchase and provide direct inventory for a commission.

 

Common Reasons Why Procurement Consortiums Are Ignored

 

Have you ever noticed that your internal conversations about finance and budgeting involve more of what is going wrong than what you are doing right?

 

It happens far too often in the modern marketplace. The C-Suite focuses on the negative to find changes that can boost the health of a budget without recognizing how much of the financial outlook is actually beneficial to the organization.

 

There is so much time dedicated to improving small windows of opportunity and few dedicated to refining what you already do very well.

 

The use of a procurement consortium is a resource that remains virtually untapped in every industry today because of this very reason. When considering maintenance, repair, or operating supplies, many organizations try to carve out their own path.

 

Sometimes it may be for a legitimate reason, such as the requirement to have an industry-specific product. For the most part, however, there are several excuses employed to avoid membership within a procurement consortium. [5]

 

Have you heard any of these reasons come up within your organization?

 

We already have it under control. There is nothing wrong with individualism. Being able to pull yourself up by the bootstraps to get something done is an admirable trait. It is also admirable to recognize moments when a little help can make you even greater. Our world is changing. Demands for authenticity and affordability are ever-increasing. Using a purchasing consortium can help you take what you do well and make you even better.

 

We don’t need the leverage. Some organizations feel like they are large enough to manage the leverage needed to create better value propositions. The bottom line here is this: are you Walmart? Are you Amazon? If not, then you can benefit from some added leverage. Even if you are the largest organization in your industry, using a procurement consortium can make you better at what you’re already doing.

 

We already get great value. Some teams feel like they excel at the negotiation table, creating good value propositions every time already. Even the best negotiators, however, cannot maximize their skills if they don’t have the purchasing power behind the person to get a great deal.

 

We don’t need the benefits. Sometimes, an organization can believe that they have already maximized their procurement benefits. Some may feel that their purchasing efforts are minimal, straightforward, and wouldn’t benefit from this type of relationship. The only reason why this excuse would work is because a business doesn’t care about saving money on what they’re already doing. Which C-Suite executive is really willing to say that?

 

We can’t afford to lose control. There’s a misconception that some businesses have which makes them think that using a procurement consortium means losing control over the purchasing process. If your competitors are paying less for raw items than you are, then you don’t have the control you think you have anyway.

 

When you are using a procurement consortium, the best benefit is this: every cost savings success you experience will go directly to your budget’s bottom line. If you’re looking for ways to improve your budget, then the advantages of using a procurement consortium must be considered.

 

It’s really that simple.

 

How to Get the Most Out of a Purchasing Consortium

 

“We haven’t seen any benefits from using a purchasing consortium. In some instances, our purchasing values have gone up instead of down. This isn’t working for us.”

 

Does this sound familiar?

 

Organizations that do not have defined goals or cannot qualify their deliverables or objectives will struggle to see value in a purchasing consortium. Analytics and metrics must be created to understand the progress which a purchasing consortium can help an organization achieve.

 

If your organization has not defined success, then how will you ever know if it has been achieved?

 

To get the most out of a purchasing consortium relationship, you must have systems in place that can track your metrics and measurements. Before you get started, ask the purchasing consortium to send you data that will give you an idea of how you can progress toward success. That way you can see what immediate benefits can come your way. [6]

 

Then you will want to discuss with the purchasing consortium about negotiating incentives for their suppliers to deliver with consistency. There should be contracts in placed already that provide rewards for an excellent performance and penalties for those which do not meet expectations.
It is also important to know what the current and future costs of doing business with the purchasing consortium will be. Not only will this allow you to see the expected savings and when they should arrive, it will also let you see what will happen to your budget right away. Some categories may be more valuable within the consortium than others for some organizations.

 

Although it can be tempting to go “all-in” when there are potential cost-savings on the line, it is a better practice to pick off the easiest wins first. Save immediately on the items you need so you can experience an immediate return. Not only will immediate savings provide instant gratification, but it can also generate more support from within the organization to expand the relationship with the consortium.

 

You will also want to look for these best practices within the relationship that a purchasing consortium is offering.

 

#1. There must be support from the top down. Support at all organization levels is mandatory for success to be experienced. If your organization isn’t experiencing support from your C-Suite from the very beginning when looking at the benefits of a purchasing consortium, then it will be difficult to find ongoing success if this relationship is formed.

 

#2. There must be 100% commitment. This unspoken rule is in place because all members of a procurement consortium are affected when one business is not pulling their full weight in the commitment category. The contracts being used within the consortium should be used by everyone. Attempting to look at other potential suppliers or trying to negotiate additional agreements can undermine the efforts of everyone else.

 

#3. There must be a complete vision. Far too often, only price is evaluated when considering the benefits of a procurement consortium. Quality, service, delivery, and even a provided warranty must also be part of the evaluation process. That allows organizations to determine what the best possible value happens to be. Sometimes, a product that offers more benefits or a longer warranty is worth a small price increase.

 

#4. There must be due diligence. Not every consortium holds themselves to the same standards. It is necessary for each organization to perform their due diligence before signing an agreement, making a purchase, or joining a group to ensure that it will meet their needs. Discovering problems afterward is often blamed on the consortium, but is really evidence that this best practice was not followed.

 

There are numerous ways an organization can evaluate the quality and effectiveness of a procurement consortium. Simple data, such as historical invoices, order summaries, or exception reports can provide the information that is necessary to get the C-Suite on-board with the idea of consortium membership.

 

Reporting for current orders, cost-savings reports, and price charges are common evaluation methods employed as well.

 

Are There Limitations to the Benefits of a Purchasing Consortium?

 

There are many benefits that come when joining a purchasing consortium. Depending on how the consortium is structured, some organizations may see limited gains at best while others thrive.

 

This typically happens when working with SMEs directly. Small- to medium-sized businesses that create deals with one another will see limited benefits when joining a purchasing consortium. That is because of the nature of their business. Niche products or services that are created in limited inventories will have limited volume cost savings advantages.

 

Some specific situations that can sometimes happen may also affect the success that organizations may see with a purchasing consortium.

 

  • Non-Specific Contracts. A purchasing consortium must create contracts that have specific language within them. This prevents suppliers from being able to provide inadequate services because there is clear information about who the actual customer happens to be.
  • Spending Changes. In a purchasing consortium, members will have varying levels of spending. If there are not safeguards in place to prevent leverage changes should the larger spenders leave, then the cost-saving benefits can be reduced. There must be protections against major service issues, mergers, and other organizational changes which may occur.
  • Service Areas. Some organizations will have multiple delivery sites which need to be managed. Others may have one job site that is used as a primary point of delivery. Each has different commercial implications which must be managed so that the benefits of working with a procurement consortium can be maintained.
  • There must also be protections in place to prevent organizations from going outside of the consortium supply chain to obtain related items or inventory. Having a restrictive or limited scope of influence will often cause consortium members to look for a higher quality of scale. [7]

 

It is important to introduce rebates into the relationship that organizations have with a procurement consortium. Since a percentage of the turnover is often paid to the consortium, that cost-savings can be an incentive to encourage additional expenditures by enhancing the savings an organization can receive. Larger organizations tend to receive a greater rebate, which can lead to smaller businesses feeling like they aren’t getting a fair deal.

 

How to Join a Purchasing Consortium

 

There are two basic ways that your organization can join a purchasing consortium today: you can create one with like-minded organizations or you can join an existing consortium in some way.

 

If you are creating your own consortium, you can choose to stay within your industry or use a multi-industry approach. You may be required to setup specific criteria for the consortium structure to follow or seek out networking relationships if you are looking for an informal structure to use.

 

Joining a consortium can also be as easy as working with an organization like Naturalene, Inc. Our network allows you to make purchases or create custom products, even if they need to be designed and manufactured, at lower rates than if you were attempting to negotiate pricing or delivery on your own. You stay in control because you only place orders whenever there are purchasing needs.

 

You benefit because we handle the order process, from design to delivery, while experiencing cost-savings. We follow a for-profit structure so we can remain an independent force within our industry. You’ll find our pricing is fair and competitive while you gain access to more assets or resources for your organization.

 

We recognize that there are several factors that must be recognized and followed for success to be found consistently. That is why our team focuses on these key points.

 

#1. A careful selection of service providers. Our suppliers are hand-vetted by our team, chosen because of their history and reputation for providing high-quality services at fair pricing levels. When evaluating price, we also look at the financial stability of the provider to present an opportunity with the lowest risk possible.

 

#2. Goals and measurements that are clearly defined. Our suppliers must be able to meet specific requirements that we set forth from our first moment of contact. We consistently evaluate these requirements and update them as necessary based on feedback, team evaluation, and other factors. If suppliers are unable to meet our metrics, then we look for new suppliers.

 

#3. Contracts must be clearly defined. It can be tempting to jump at the first good deal that you see, but that doesn’t mean it is the best possible deal that is out there. Our team executes the master contracts with our supply chain in such a way that all can benefit based on their individualized organizational needs. We also track the fulfillment process for every order placed, including stock or customized orders, to ensure that you receive the service, product, or equipment asset in the manner that was anticipated.

 

#4. We involve the suppliers. Many consortiums create a basic structure that encourage orders so that profits can be obtained. Just enough is done to deliver a product without worrying about the service experience. That is why our team involves the suppliers. We take advantage of their expertise so that you can benefit from it whenever you need something to get your next project completed on time.

 

#5. We manage trust. Every business has their own mission statement and an internal philosophy that is followed to reach a successful outcome. Our team manages trust by establishing a network of similar philosophies without questioning values, needs, or motives on the organizational level. This encourages a greater level of cooperation because we all see the world in similar ways.

 

The benefits of a procurement consortium are clear. By working together, we help one another. That often means cost savings, but it can also mean a whole lot more.

 

Although there will always be the occasional exception to the rule, opportunity awaits. It’s up to your organization to grab it today.

[1] NACRO. “Saving Money Through Smarter Spending: Procurement Consortia Explained.” National Council for Voluntary Organizations.

[2] Grayson, Jr. C. Jackson. “Let’s Get Back to the Competitive Market System.” Harvard Business Review. November 1873.

[3] Chait, David. “5 Tips for Continuous Strategic Planning.” Entrepreneur. February 11, 2016.

[4] Holtzman, Mark P. “Establish a Direct Labor Budget as Part of Your Master Budget.” Dummies: A Wiley Brand.

[5] Busch, John. “The Five Worst Reasons Not to Join a Purchasing Consortium.” Spend Matters. October 11, 2011.

[6] Macie, Kathleen E. CPM. “The Purchasing Consortium – Is It Right For My Company?” Institute for Supply Management. 80th Annual International Conference Proceedings.

[7]5 Reasons Why Consortia Buying is a Poor Solution for Indirects.” Proxima. September 8, 2011.

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