Collective purchasing... Possible reality or a dream

When I was asked to write some words on this subject I was undecided whether to wax eloquent on the benefits that common procurement entails or to present an unexaggerated practical account of the same with both problems and possible solutions.

Since I chose the latter you may find my writing rather brief and abrupt. I however hope that this may help those of us who have decided to give this a good try , succeed and reap the benefits…

For years procurement professionals from various industries, even countries have toyed with the idea of collective purchasing enticed with the obvious advantages such a process seemed to offer.

Many have also embarked on this with great enthusiasm only to give up half way.

What does collective purchasing really involve

The way I see it collective purchasing is about a group of people /organizations having common buying interests that work out ways of pooling their requirements thus generating economies of scale to their suppliers that flow back to them in form of better component costs.

What does it take to make this work

While the definition of collective purchasing is rather simplistic the working mechanism to make this really work is more complex.

Companies that look at this concept have different suppliers , who have often been with them for years , they have different volumes, specifications and more importantly different cultures. There is also an unavoidable sense of mistrust that is always present when the representatives of organizations have to open up their procurement systems to literal strangers.

The factors that generally work against this are

  • Fear of competition : This is a natural fall out as often companies with similar requirements are often competitors. This makes them reluctant to enter into discussions about their current suppliers, terms of supply and prices
  • Price gap reduction : It is a very real fact that after a group of buyers get into collective purchasing the price gap reduces or becomes zero. Thus buyers with higher volumes lose the price advantage
  • Teething issues with a new set of suppliers : often Change over to new suppliers is not smooth and settling back to the earlier rhythm take some patience and energy. Often there is too much working pressures to pay heed to this and we tend to let this initiative die a natural death

Now knowing the most possible reasons for failure should also give some insights on avoiding these and making the concept of collective purchasing reality.

  • Overcoming fear of competition : Today we see innumerable instances of competitors meeting and discussing mutual concerns across tables. Automotive industry is a live example so are industries of Steel, Oil, real estate, Transport and many others.This is more of a necessity now owing to the fact that business dynamics change often and are often influenced by relationships among nations/countries. New laws, trade barriers, free trade commitments ,taxes all have to be contended with . These cannot be handled by any one organization solo. A common forum reached between members of a particular industries, though competitors , helps to present issues in a better manner
  • Price gap reduction : This is a taboo subject generally but is finally the one that has the most destructive power in smashing the fragile coalition organizations into common purchasing efforts often cobble up. The best way to nullify this is to face the facts squarely. Common purchasing the way I see it is not about charity or giving away the competitive advantage one company may have over others due to higher volumes. The fact has to be acknowledged that the price differential may still have to be maintained in an appropriate manner. What matters is the base price for ALL participants of common purchasing moves down as compared to what it was in the earlier scattered form of buying. There are of course other advantages that come up like having common standards facing cost rise pressures together
  • Teething issues : are to be expected in any change and the only way to manage these is to get into the details , micromanage till comfort levels get established . Yes a lot of patience is an important need also

However all of the above are but observations. How great an effect any factor has on this coalition of organizations would largely depend on the type of organizations that participate in this effort.

However as nothing tried is nothing gained ,with the above insights and a large amount of trust there is no reason that an intelligently planned collective buy effort needs to fail.

Shirish Divgi
MD, Milacron

The Islamic Republic of Iran Business Guide

Edition 2011

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