What is group purchasing and how does it work? (part1)

Meeting place for people and finances. CFO CAFE.

Any CEO wants purchases in their company to be effective and efficient, and wants the supplier to provide high quality services.

But in practice:

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“Our purchase volumes for certain categories are small, so suppliers prefer larger companies or they jack up prices.

“Procurement specialists are focused on direct purchases, while indirect ones are initiated by a budget holder who is not motivated to save money.

 

Logistics costs are inflated, since deliveries are made in small lots and only for one customer.”

 

“We have purchases of more than 70 categories using services of different purchasers. Of course, they do not have enough expertise and time to invest enough effort in each of them.”

 

“Our procurement department lacks time to monitor contractual terms and prices for the contracts already made. And suppliers try to compensate for their tender expenditures. This results in an increase in the cost of the contract by 20-50% and the declared level of service is not met.

Does the problem sound familiar?

Take a closer look at the group purchasing diagram.

Group purchasing is a process where several unaffiliated companies hold a tender together or join a buying consortium (pool), and combine volumes of purchased goods and services to get more favorable commercial and service conditions from suppliers.

Procuring companies can create a consortium themselves or contact a third party, called a Group Purchasing Organization.

According to statistics[1]:

What are the benefits?

Benefits illustrated with statistics are achieved owing to the following:

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Suppliers are ready to offer more profitable commercial terms and higher quality services to the pool, as an aggregate volume of purchases puts the pool on a par with top-100 companies. Cost savings reach 25 %.

A Group Purchasing Organization performs all tender and contract operations, monitors the total cost of a contract, and conducts analysis. This saves resources of a client who can then focus on strategic categories – raw materials, packaging, capital costs.

A client saves on costs of the procurement procedure, as project costs are shared between pool members.

The pool provides expertise and best practices based on experience of performing such purchases.

After signing a contract with a supplier, GPO traces market trends, analyzes consumption, evaluates the level of service, monitors contract prices and conditions to be met, and resolves problems with a supplier. This helps to maintain the achieved savings and the supplier’s level of service during the contract period.


Whom can I consolidate with?

If we are talking about indirect purchases (office goods and services, communications, IT, logistics, etc.), then anyone can be a pool partner. Stereotypes do not work here. For example, it is reasonable to consolidate with a company that is your competitor in the final product market. After all, needs and locations are similar, and it will be easier to standardize specifications. At the same time, we know a case when two international manufacturers belonging to the same group of companies failed to join their efforts due to differences in their corporate culture: one was large, with inert processes, the second was more flexible, quickly made decisions, was aimed at results. We found other partners in the pool for them, comparable in size, corporate culture and location.

Options for consolidation are shown in the diagram:

Which categories are suitable for group purchasing?

The pool can comprise any categories, but it is better to start with simple ones:

  • Office supplies, consumables
  • Express delivery, mail, courier services
  • Mobile telephony
  • Fixed-line telephony and Internet
  • Taxi services

The next step can be:

  • Administrative services: business trips, insurance, corporate events, vehicles fleet management
  • Marketing: printed materials, advertising, mailings, souvenirs, digital
  • HR: recruiting, employee assessment and training, hired staff services
  • IT: software programming, outsourcing services, IT equipment, data center services
  • Logistics: cargo transport and warehouse services.

What companies organize group purchasing in Russia and in other countries?

Examples of major Group Purchasing Organizations at the global level include Corporate United, Insight Sourcing Group, and Intalere. However, none of these international Group Purchasing Organizations is represented in Russia.

There used to be a joint venture of British American Tobacco (BAT) and AB InBev, Agrega company, a group of category managers who held tenders for indirect purchasing for both companies simultaneously. Now the union of AB InBev and BAT no longer exists.

PrECA* was the first company in the Russian market of Group Purchasing Organizations. It provides outsourcing, consulting and automation services in procurement. PrECA also initiated the professional community of purchasers. PrECA’s specialists help companies optimize their purchases, reduce costs, and improve efficiency of procurement services.

 

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*4 facts about PrECA: 

2010

The year when the company was founded

44

clients with the annual turnover of up to 940 bln rubles

1,1

billion Rubles

are clients’ savings on purchases in the last 5 years

3

months

is the average payback period of projects 

 

In the second part of this article, we will thoroughly discuss participants in group purchasing and possible algorithms to arrange it.If you are interested in group purchasing, you are welcome to contact us, we’ll be happy to answer your questions and help you initiate your project.


[1] According to SpendMatters analytical portal.

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