Purchasing groups (otherwise known as centralized purchasing) can be defined as:
Two or more organizations joined together (or through a third party), in order to combine needs and leverage negotiating strength. This allows the individual purchasers the contractual strength to access prices, services, and technologies they might otherwise miss out on. There are many advantages of purchasing groups. For example, they give individual purchasers the contractual strength to access best prices, best services, and best technologies that they might otherwise be unable to negotiate.
What are the advantages of purchasing groups?
There are eight main advantages of purchasing groups. Let”s look at them in a little more detail:
Scale economies or “purchasing power”
The most obvious advantage of a purchasing group is the scale economy. The volume of the aggregated purchase demands, such as a network of businesses coming together to order supplies, gives the individual businesses access to scale economy. Consequently, this leads to greater purchasing power.
Lower prices/greater negotiating power
By increasing the forecast purchase volume, the purchasing group can negotiate lower prices for the goods or services purchased. These savings are usually considerable, ranging from 10 to 35 percent.
Reduction of transaction costs
By joining a purchasing group, organizations can simplify their procurement processes. This reduces both the per unit cost on their goods and also the per transaction costs. This is due to the reduced number of contracts to be negotiated, prepared, and managed.
When organizations come together, they can share information about suppliers, new technologies and market knowledge. The end result is eliminating redundancy in the supply chain. This reduces transaction costs and achieves far greater process economies.
Since the Purchasing Group manages all stages in the lifecycle of contracts on behalf of their network, the individual businesses benefit from a significant reduction in their workload and are free to focus on their core business, which is therefore more strategic for them.
Improvement in best practices over time
The organisation that manages the purchasing group enables their network businesses to improve their results by sharing the best practices. In fact, most of the modern organisations that handle purchasing groups use industry experts for each individual product market they manage. These experts constantly search out increasingly more effective methods to improve the process, quality and efficiency of the supplier. This lets them optimize process at increasingly competitive prices. This is known as improvement in the TCO – Total Cost of Ownership.
Technical savings and improved TCO
The benefits that the organization managing purchasing groups offer go beyond just economies of scale. In fact, lower prices allow the organisation to use its experience to help the networked businesses use buying technology to take their purchasing to the next level. This reduces overall waste and optimises the use of goods and services purchased.
Positive impact on the profits for each individual networked company
Did you know that a reduction in purchasing costs can impact your business’s bottom line more than upping your sales? This means that the savings generated by a centralization of purchasing in a network of businesses will increase profits in each individual network company without having to increase sales.
This is a guest post by Sergio Giordano, a career procurement professional with more than 30 years of experience. If you’re interested in sharing your knowledge with Spend Culture readers please contact us.