Businesses have plenty to worry about when procuring quality materials with minimal cost impact. Group purchasing is one option, as participants have often claimed power in numbers.

In collaborating with other purchasing organizations, companies can evaluate a broader range of contracting opportunities and can leverage more resources to maximize cost savings opportunities. Leveraging a larger membership base, group purchasing businesses can negotiate discounted prices with leading national suppliers and vendors as cost savings are passed to a group purchasing entity’s members, cost savings often drastically greater than if purchasing individually. The largest and most obvious point of the group purchasing model is the collaboration and partnership involved — often with rival companies. The competition. The so-called enemy.

Can your purchasing business play nice with others? Or is your business the type that throws sand in the sandbox?

Across numerous industries, businesses pool their purchases to purchase raw materials and supplies, a practice most commonly practiced in such industries as health care, grocery, electronics and agricultural.

One group purchasing success, as exemplified in an in-depth study by GovPro online, is Lehigh Valley Association of Independent Colleges (LVAIC), incorporated in 1969.

Beginning as a group of six independent Pennsylvania higher-education institutions more than three decades ago, the nonprofit consortium, as well as it purchasing entity LVAIC Business Services, today “wields an estimated $900 million economic impact on the Lehigh Valley region and the local communities it serves, according to the Human Capital Research Corp.” The member colleges, governmental and private sector grants, as well as student fees for certain programs, collectively fund LVAIC’s budget. LVAIC Business Services’ procurement model now is one with more than $50 million in joint purchasing of products and services and more than 100 purchasing contracts and service agreements.

“[Ours] is a good example of sharing resources among the institutions,” William J. Marushak, director of Business Services, explains. “The largest receives better pricing than it would get on its own and the smaller and midsized institutions receive price benefits and the valued expertise of the Lehigh staff.”

In this example, reports GovPro, the vendor also wins, as “he consolidates his runs and pickups and passes those savings on to [LVAIC] through a price decrease.”

When it comes to participating in a group purchasing organization, or creating one, both collaboration and partnership are key: “The [rival] mentality has to be let go. By working together, everyone benefits. If you keep a vendor to yourself so that you’ll have an edge on me, then you’re not doing the job that you should be doing for your college or municipality, or whatever,” says Elizabeth M. Lees, purchasing director of one of the LVAIC colleges.

Marushak defines LVAIC Business Services’ steps in the formal bidding program with the following pointed model, from initiation through follow-up:

• Statement of Improvement Opportunity: Identifies the pursuit of a particular project, vendor, commodity, or service.
• Available Alternatives: Helps [participating businesses and organizations] identify and decide if the program is appropriate for them.
• Conclusions and Recommendations: Gets down to the decision process based on financial and other benefits of the project.
• Implementation Schedule and Matrix and Implementation Team Matrix: Drill down to which departments need to be consulted on the decision to move on to the project.
• Six-Month and Twelve-Month Diagnostic Reports: Create a follow-up program after the project is implemented leading to renewal, termination, re-bid, or reevaluation of a contract for services.

Those opposed to pooling purchases say group purchasing organizations are a concentration of market power that reduces competition, stifles innovation and creates barriers to market entry. Those opposed also often claim that GPOs are a vehicle for dominant manufacturers to achieve and/or maintain monopoly power. As well, detractors say that the contracting/purchasing processes among groups are burdensomely and inefficiently slow. Phases typically include product identification and selection; requests for proposals or bid invitations; submitted-proposals review; assessment of product quality; contract negotiation; and, finally, contract award. Admittedly, this economies-of-scale approach can take quite some time.

If considering pooling for collective buying power within a group purchasing organization works for your business — small or large — it’s important to remember that GPOs are not buyers; rather, they are contract negotiators, or transaction facilitators. And, as such, participants must work with other companies and organizations in order to achieve the sought goal.

So before you begin to even consider the option, consider the question: Can your purchasing business play nice with others?

Resource

Buying Smarter
by Catherine Radwan
GovPro.com, Aug. 16, 2005