The Purchasing Consortium - Is It Right For My Company?

Author(s):

Kathleen E. Macie, C.P.M.
Kathleen E. Macie, C.P.M., Purchasing Director, Supplier Base Management Services, Dun & Bradstreet Information Services, Murray Hill, NJ 07974, 908/665-5057.

80th Annual International Conference Proceedings - 1995 - Anaheim, California

Group and cooperative buying has been practiced by buyers in non-profit and not-for-profit organizations such as hospitals, nursing homes, museums and educational institutions. These organizations buy such items as pharmaceuticals, office supplies, food stuffs and building services. Buying together brings the advantages of higher volume prices when lower volumes are combined or leveraged. In companies in business for-profit the endeavor of purchasing together is known as consortium buying.

The Consortium. Buyers in the manufacturing sector are only just beginning to investigate the possibilities and advantages of the consortium effort. In this arrangement, companies in different fields with similar materials and/or service requirements join forces. To enter into this kind of alliance, the allies must be familiar and comfortable with each other. Because of the necessary sharing of highly proprietary information, the consortium members must trust each other and protect their partners' competitive information, even trade secrets, as if they were their own. Such alliances are likely to be formed among a small number of partners - although the companies and purchased volumes might be quite substantial.

The relationship between the partners must withstand legal and ethical challenges. Thus the partners may be likely to adopt a written agreement to include non-disclosure terms and other agreed upon principles, policies and procedures. The team composition and the structure of any documentation will vary by commodity and by each partner. Each consortium effort may designate lead negotiators as well as the overall assignment of specific tasks.

The partners, unlike a hospital association (cooperative), are not likely to be competitors, unless the firms are geographically restricted so as not to compete in the other's territory. Most likely the consortium members are already linked in supplier-customer relationships who extend these relationships into joint purchases of common requirements. The partners might also be geographic neighbors, operating in different industries and having certain requirements in common. The partners might also be former members of a corporate family who are now legally independent and can still benefit from this joint endeavor. Small to mid-sized companies are good candidates for partners in a consortium.

Managing the Consortium Process. Initiating the consortium is not an easy process, especially the first undertaking. Purchasing must commit to a substantial effort to get corporate leadership and other internal units to participate and cooperate. If a major prospective partner is also a key customer, marketing can be a powerful internalally, eager to strengthen the existing relationship further. In any event, strong arguments in favor of this new kind of strategic alliance are reduced cost, increased competitiveness, and cooperation with highly reputable, non-competing firms. Vigorous championing is likely to produce either an enthusiastic or a grudging approval (for various reasons) of a limited trial. It is prudent and essential to pick both a partner and a commodity/service that have the potential of an impressive success.

The detail of the process of adoption of the consortium implementation will be discussed in detail at the workshop and is outlined below in the steps that follow:

Phase I Includes Development, Initiation of Program and Formation of First Consortium

  1. Initiative
  2. Team Information
  3. Criteria
  4. Identification
  5. Exploration
  6. Invitation
  7. Presentation
  8. Communication
  9. Commitment
  10. Agreement

Phase II Includes Pilot Project, Agreement on Specifications, Requests for Quotation, Joint Negotiations and Contract Award

Phase III Includes Documentation Summary, Performance Data, Evaluation of Process, Assessment, Reports and Expansion

Potential Risks of Consortium. The partners joining forces in a consortium alliance face a number of risks that must be understood and faced openly. These risks include antitrust challenges, reluctant supplier cooperation, perceived control, exit barriers, integrity, extent of savings and supplier choices. To minimize the risk of antitrust exposure, consortium efforts cannot be used to restrict price competition, boycott suppliers, markets, or boycott other buyers. Consortium experienced executives have found that the major concern of suppliers is the potential violation of the Robinson-Patman Act. This law requires that favorable prices received by a buying group must be available to comparable buyers unless the price differential is cost-justified or granted to meet a competing supplier's price. Membership in a purchasing consortium must therefore be open to other buyers who meet the criteria and time constraints of the group. These criteria must be objective and relate to demonstrable commercial necessity.

Supplier cooperation can be a challenge to the endeavor. Potential suppliers to the alliance may fear expensive concessions and be reluctant to endanger their current relationships with individual partners. Some may even try to jeopardize the partnership by playing members against each other. A prospective partner may perceive reduced control over the purchasing process resulting from the consortium arrangement. This concern is ill-founded since all other aspects of the supplier relationship other than price remain under the buyer's full control.

A prospective partner may also question the extent of the savings to be achieved. Will the savings warrant the effort of the participation? The first round of negotiations will typically bring the greatest savings while the alliance's impact on price will be far less dramatic in subsequent years. Consortium partners with substantial volumes of their own may not realize as significant a price reduction as others in the alliance. This minimal benefit may, however, be more than compensated by savings achieved in other commodities where the leverage achieved from partnering is greater.

While there are no formal penalties for partners who choose to leave a consortium alliance (such as a resignation assessment), the fact that a return to stand-alone purchasing will result in higher prices due to reduced volume and acts as an exit barrier. Prospective partners may also be concerned about the ethical standards of their allies. Any misconduct by any of the partners will reflect unfavorably of the other members of the consortium. Accordingly, the integrity and reputation of all partners have to be outstanding. The partners must be open in sharing information and protective in preventing information leaks.

A final risk may derive from the limitations that the combined purchasing volume imposes on the alliance's range of supplier choices. Distributors are often left out as RFQ's are sent directly to manufacturers. Similarly, smaller suppliers, including minority businesses, may be unable to meet the new volume requirements. There may only be a very limited number of suppliers capable of supplying the needs of a consortium.

Benefits of Consortium Leveraging. Whatever the risks the consortium entails, they are shared by all members of the alliance. However, the risks are outweighed, by far, by the many benefits that accrue to both the consortium partners and to their suppliers. The single most powerful driver of the consortium is cost reduction which occurs in several ways. Improved quality and joint learning of valuable professional techniques and strategies also occur.

Summary. At this time several companies continue to participate in consortium relationships. New partners joining the alliance realized substantial initial cost reductions. Long-time members are encouraged by the stability of lower costs and dependable relationships. Suppliers are gratified by the predictability of future volume requirements of the alliance and by the timely and dependable receivables. The suppliers proactively cooperate in managing product cost and innovation and thus have become vertical partners.

Properly managed, consortium programs offer significant and lasting advantages to all participants, buyers and sellers alike, strengthening quality, competitiveness and financial performance. The consortium represents powerful strategic procurement direction for the future, dynamically combining the strengths of independence and flexibility with the synergy of teamwork.

References

  1. Lewis, Jordan D. Partnerships for Profit - Structuring and Managing Strategic Alliances. New York. The Free Press, 1990.
  2. ibid.

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