Coalition And Consortium Purchasing Power: It's Big, It's Here, And It's The Future Of Strategic Purchasing
Janet L. Sickinger, M.A., M.B.A., C.C.A
Janet L. Sickinger, M.A., M.B.A., C.C.A, 3M, St. Paul, MN 55133-3327, 612/737-3073
Research Contribution By: Steve Creason, Metropolitan State University
81st Annual International Conference Proceedings - 1996 - Chicago, IL
A newspaper headline announced that IBM, ITT, Marriott International, Nabisco Brands PFIZER, and Sears are among ten companies banding together to form the first national services purchasing coalition. A Midwest company has realized cost reductions from 5% to 50% as a result of its membership in a purchasing consortium. One of U.S. WEST'S GROUPS has estimated 5% in its first year of purchased expenditures through its coalition membership. Higher savings are expected in follow-on years as the supplier base gains confidence in these new types of arrangements. Cooperatives, coalition and consortium activities are not new. They have been very active in the Government, Not-for-Profit and Health Care Industries for years. However, as major Companies continue downsizing, small and mid-size companies start up, and Purchasing organizations move from administrators of high transaction tactical purchasing activities to "Strategic" purchases... the formation of alliance purchasing groups may well be a purchasing organization's single largest area of opportunity to add value to its company in the 1990's. This paper will offer examples of purchasing alliance groups, the benefits and issues associated with such alliances and recommended steps to form a purchasing alliance group.
What are Purchasing Coalitions, Consortiums and Other Alliance Groups? We have not found any universally accepted definitions distinguishing the differences between coalitions and consortiums. Often times, we have seen the terminology used synonomously and interchangeably. Therefore, we will use the all-encompassing term "alliance purchasing" in our discussions unless we are referencing a group that has been established and has named itself as a "cooperative, coalition, consortium, or distributive" group. Generally speaking, the groups will have the following characteristics:
COOPERATIVE PURCHASING has traditionally been practiced by non-profit organizations such as hospitals, government entities, co-op grocery stores, or educational institutions. Their objectives were to procure goods and services at a reduced cost, yet maintain high quality of product or service by the leverage offered by the combined requirements and economy offered by the members.
CONSORTIUM PURCHASING can be formed for the same objectives as cooperative purchasing groups such as securing the benefit of higher volume price breaks when the lower volume requirements from the individual consortium members are leveraged. The primary difference between a cooperative or a consortium group is that consortiums are formed to support the "for profit" organizations.
Consortiums may have a larger scope of responsibility and term than coalitions. Coalitions may be formed to focus on a single "project" and when that project objective has been accomplished, the coalition may disband or re-organize into a consortium. Some consortiums, such as the National Information Infrastruction Testbed, Inc., may be formed to develop industry-led standards and applications which may later be responsible for lobbying and influencing legislative requirements governing the information superhighway.
COALITION PURCHASING is an alliance traditionally, a temporary one of factions or parties combining into one body with accomplishment of a common objective. For example, 9,000 Cleveland businesses, with an average of seven employees formed a purchasing coalition called the Council of Smaller Enterprise (COSE). Twenty percent of those members did not have health care coverage for their employees before joining COSE. Those members that did have coverage reduced their costs by an average of 35%.
DISTRIBUTIVE PURCHASING This is a formation of a purchasing alliance for the procurement of goods from distributors. Distributors have formed consortiums to offer customers better means of reducing their inventories, implementing true JIT procedures, eliminating errors, coping with reduced staffs, improving the order process, reducing downtime and enhancing manufacturing efficiencies. Parker Hannifin has formed a wholly owned subsidiary to manage the activities of its distributors in meeting integrated supply needs. This group has documented 20% - 40% savings in total procurement costs.
PURCHASING COUNCILS These are assemblies of persons called together for a consultation, deliberation, or discussion and sharing of ideas. They are a body of people who volunteer, are elected or appointed to serve in an administrative, legislative or advisory capacity. Typically this grouping of individuals will be the first stage of forming a coalition, consortium or other formal purchasing alliance organization.
Examples of Purchasing Alliance Groups and Their Benefits. There is a large diversity of purchasing alliance group models. Some are run totally by volunteers; others may have 15 - 20 full-time staff people administering a multitude of activities. Some are oriented toward reducing price by volume - leveraged participation; others are oriented towards education, outreach, community networking, establishment of standards, sharing and combining Research and Development (R&D) dollars/resources or influencing state or federal legislation.
Purchasing alliance groups may be formed by individual companies banding together, but employers aren't the only ones forming coalitions, consortiums and other variations of alliance purchasing groups. Some are formed by employee trade or professional organizations, consultants and brokers. Therefore, costs to run and administer such groups may be contributed by the members on a pro-rata basis or on a set-fee or "dues" schedule.
There is no set list of goods or services which signal whether or not alliance purchasing groups should be established. However, if this is to be a first attempt at forming a purchasing alliance, the resultant alliance contract should be for an indirect good or service requirement (but not a critical production material or support service). Its alliance members should not be competitors but should have similar business goals. Alliance members will gain access to each other's resources, share risks and administrative expenses, but will also share the benefits of cost reductions gained from leveraging. Below, are examples of successful alliance groups that have been formed.
The Consortium for Distance Learning (CDL), formerly the Northern California Telecommunications Consortium is the largest consortium user of ALS materials in the country with 22 member colleges and seven associate member colleges. Some of the services CDL offers to its consortium members are telecourse acquisition and utilization, negotiation of contracts for telecourse leases, station broadcast time, and audiovisual rights for permanent collections. The consortium also develops workshops, seminars and conferences in conjunction with their board meetings. The CDL consortium is funded by fees paid by members.
Six manufacturing companies banned together in the early 90s to form a purchasing consortium and have reported the following cost reductions: Janitorial Services - 5% to 30%; Janitorial Supplies 25% to 30%; Industrial Gasses, cylinder rental - 50% to 75%, and product - 35% to 50%; Industrial/Production Chemicals - 15% to 35%; Office Supplies - 25% to 45%; Repair and Calibration of Test Equipment - 15% to 25%; and Snow Removal/Landscape - 10% to 20%.
In advance of the recent Computex Electronics Show here, Taiwan's new PC Consortium (TNPC) demonstrated a power PC system designed for 601 and 603 processors running at speeds of 80 MHz. All of the components on the motherboard except IBM Corporation's Dakota Chip Set were designed by consortium members.
Considerations and Issues of Forming a Purchasing Alliance. Sharing proprietary information with alliance partners may be required; therefore, care must be taken to select a few partners with high volume requirements who are willing to enter into highly restrictive non-disclosure or confidentiality agreements.
The first time, start-up of an alliance is not an easy undertaking and sometimes a lengthy process. Therefore, it is important to get the legal department involved as early as possible. There should be no problems in obtaining approval from the Federal Trade Commission (FTC) as long as the formation of the alliance purchasing group is not developing (or controlling) more than 50% of the market.
There must be company executive level commitment and support to the proposed alliance formation. Each alliance company member must be prepared to dedicate the use of its best "talent". The marketing organization could be a powerful internal ally, especially if one of the alliance member companies is a customer.
Potential anti-trust exposure and violation of the Robinson-Patman Act are typical concerns of both the alliance members as well as the sellers or suppliers. Consortium efforts can not be used to restrict price competition, boycott suppliers, markets, or other purchasers. Suppliers, are concerned with the "Robinson-Patman Act" which requires favorable pricing received by a buying group must be available to comparable purchasers unless the price differential is cost-justified or granted to meet a competing supplier's price.
Membership in a purchasing consortium must be open to other purchasers who meet the criteria and time constraints of the group. These criteria must be objective and relate to demonstrable commercial necessity.
In addition to the above-listed concerns, suppliers may also fear expensive concessions. They may even try to jeopardize the consortium members relationship with each other by playing one member against another.
There are no current penalties for partners who choose to leave a consortium (such as a resignation assessment). Therefore, the agreement should provide language for an extended "due notice period" in order to have time to bring in an additional member.
Any misconduct by any of the partners will reflect unfavorably on other members of the consortium. Therefore, ethical standards should be established and agreed upon and transmitted to the supplier.
Funds are not transferred to the alliance group. Prices and other contractual terms are fixed within the alliance agreement to the seller. Each alliance member will issue its own purchasing document. This purchasing document will cite by reference, the master alliance agreement number and specify its required goods or services and obligate the appropriate funds at the time of the purchase order.
Steps to Forming an Alliance Purchasing Group.
- It is imperative to select the right commodity as well as alliance members in order to get the "first success story". Establish company selection criteria of alliance members and commodities to be contracted.
- Select an indirect commodity or service that is not critical to the main product production process.
- Extend a high level, formal invitation to prospective alliances.
- Execute non-disclosure/confidentiality agreements with alliance member companies.
- Draw up an alliance agreement - (similar to teaming agreements).
- Establish team composition. Designate lead negotiators, contract administrators, and the role of each alliance member.
- Put together a program plan and schedule.
- Develop Request for Proposals (RFP's) (competitive if possible), evaluation criteria, and master contract terms and conditions.
- Contact Federal Trade Commission, with proposed alliance approach and estimated percentage effect on market place.
As many purchasing organizations are going through the re-engineering process to ready their groups to meet the needs of the year 2000, the traditional purchasing responsibilities as we have known them are becoming very strategic in nature. The purchasers role in identifying, managing, and administering alliance partnerships with peer companies will become a value added opportunity to be cultivated in the next five years.
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