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 best prices, best services, and best technologies that they might otherwise be unable to negotiate.
What are the Advantages of Purchasing Groups?
There are 8 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 and consequent purchasing power that they could not hope to obtain alone.
Lower prices/Greater negotiating power
By increasing the forecast purchase volume, the Purchasing Group is generally able to negotiate lower prices for the goods or services purchased with respect to what could be obtained by individual companies working alone. These savings are usually considerable, ranging from 10% to 35%.
Reduction of transaction costs
By joining a Purchasing Group, organizations can effectively simplify their procurement processes. This reduces both the per unit cost on their goods and also the per transaction costs, 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, as well as past purchasing experiences. The end result is eliminating redundancy in the supply chain, as well as reduced transaction costs and achievement of 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 the 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 in order to guarantee an optimized 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 can go beyond the initial advantage connected with scale economy alone. In fact, once the initial phase is complete, and lower price points are achieved, the organisation managing the Purchasing Group will then use its experience to help the networked businesses use buying technology to take their purchasing to the next level, reducing overall waste and optimising 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, for example of 5%, produces an increase in profits of more than 2% and that to obtain the same result, sales would need to increase by more than 20%…? 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.