Consortium buying – or simply group purchasing – is essentially the practice of two or more separate organizations coming together to purchase something cooperatively, and in the process enjoying benefits such as bulk purchase pricing, volume-based collective bargaining power, and other advantages that would not be available to them had they made the purchases individually. Although consortium buying has yet to gain widespread popularity among businesses, there exists many buying groups and purchasing cooperatives in businesses such as franchised restaurants, hospitals and even local governments.
These buying alliances – which are effectively collaborative purchasing arrangements – are becoming increasingly prevalent and a key resource for procurement managers everywhere. According to Corporate Purchasing Solutions, Fortune 1000 companies have reported that purchasing through their consortiums saved them approximately 13.4%. This significant percentage in savings proves that purchasing consortiums have the potential to benefit businesses across all sectors and are not just reserved for libraries, health care institutions, or small government agencies.
In this article, we examine the top misconceptions when it comes to consortium buying.
Consortium buying is only for small businesses
While it may be true that large companies have more leverage, this leverage is only useful when you have the volume and deep subject matter expertise. For example, the procurement manager of a major metals manufacturer may have deep knowledge on the commodity and would probably spend large amounts of money purchasing ores and minerals regularly. But when it comes to office supplies, they would most probably fall short in terms of purchasing volumes, expertise and even supplier contacts. Granted office supplies are not complicated items to purchase, but the sheer number of products and manufacturers available to choose from can faze even the most seasoned of buyers! Also, purchasing printing supplies such as copiers, printers, faxes and scanners require some subject-matter knowledge which, if unavailable, can lead to low-value, costly purchases. This is results in an inability to drive deeper savings, putting a dent on company revenues. As such, it makes good sense for companies everywhere to employ consortium buying to ensure quality and cost-effectiveness in the procurement process.
Consortium buying only applies for product purchases
Every procurement process consists of several steps and involves a fair number of individuals with differing responsibilities. Although the responsibility of procurement lies with the procurement manager, there are often other resources needed to support the procurement process. Drafting a procurement contract requires a certain level of know-how, and this skill set could be one that the procurement manager lacks. In this case, the services of resources to support the procurement process, such as lawyers and contract administrators, may be cumulatively procured by companies with similar needs to manage purchasing streams that are not highly time-sensitive. Consortium buying of this nature helps companies balance the load between shared resources, maximize productivity and minimize expenditure. Consortium buying also allows templates for common types of purchasing contracts to be sold to the purchasing consortium on a per unit basis, further engendering best practices while driving higher savings. When purchasing research on legal matters that affect purchasing consortiums, it helps to approach the subject-matter expert as a group of clients with similar interests. This allows the work to be done only once and sold as a package. The price of that package may be more than what is usually the norm for a single client per project, but when divided across the purchasing consortium, becomes significantly less.
Consortium buying is always cost effective
Consortium buying pools demand from various companies to serve the needs of the majority, which means that purchasing consortiums must serve the good of many companies, not just one. As with any collaboration, there are bound to be some (minor) disadvantages to consortium buying, even in terms of cost. Establishing the process of consortium buying is a laborious task that requires a clear understanding of the rules and regulations, proper documentation, and effective management. Without these best practices in place, consortium buying will surely prove to be ineffective. Therefore, 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. With such a high capital outlay required, it’s important to have a clear understanding of the costs involved from the get go, and to only enter into an agreement if the benefits are expected to exceed the costs. Procurement processes are all about cost savings and efficiency, and these requirements should also be reflected in the consortium buying process for it to be meaningful to the companies involved.
Consortium buying is free from legal implications
Companies that are part of purchasing consortiums must be aware of the fact that they are subject to competition law, which, unlike common assumption, does not only apply to suppliers. Here are several legal implications when it comes to consortium buying:
- Contracts between companies in a purchasing consortium: Suppliers may have contracts with each member of the purchasing consortium respectively, or just one contract with the purchasing consortium as a single legal entity.
- Competition: The size of a purchasing consortium should be kept small to prevent its clout from affecting the marketplace. An acceptable size would be 15% of the relevant market.
- Confidentiality: The members of the purchasing consortium must adhere to the confidentiality agreements of their respective information resources as well as those of their suppliers.
These issues need to be managed carefully when entering into purchasing consortiums so that relationships with other members are preserved.
We here at ThunderQuote hope that this article has been helpful in giving you better knowledge and insights upon this matter of misconceptions in consortium buying. For more related articles as such, head on over to ThunderQuote
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