Author: Asif Khan
The opportunity to increase profits through more effective purchasing is a lone Business Dogma that has largely been overlooked
I always remember growing up buying particular products with friends because a) I couldn’t afford to purchase the product on my own and b) I would get a better deal due to multibuys/better discount. Now of course, this didn’t always apply for everything I wanted to buy, but on items such as protein powder it would…. and …. still works very well. By ‘chipping-in’ with my friends I would get the same or even, on some occasions, a better product for a lower price than if I was to have bought the product individually. Today this movement for know-how shoppers of pooling their buying power is definitely on the rise in the consumer world.
This construct of ‘pooling your buying power’ then begs the question as to whether organizations pool their buying power with other organizations? Or is it something that is not feasible a global scale? Now some of you may ponder on the first question and think “Why would larger organizations such as Walmart, Tata, BP & Boeing, for instance, need to pool their buying power when they are so big in size and already benefit from economies of scale?” Well, the answer is simple - no matter how big you are there is always waste that runs down the supply chain. Furthermore, why I mention these companies is because very recently they have been in the tabloids for their ‘bullish tactics’ of demanding huge price cuts from their suppliers to reduce their costs.Tata for instance demanded reduction from its suppliers very recently. BP also set recent meetings with its suppliers across its operations in order to reduce their costs to reflect the fall in the price of oil. Boeing too with its ambitious >$6bn cost savings target through its own supply chain. For more reading on these ‘bullish tactics’ see my recent post "Challenging Bully-Boy Tactics"
Now moving back to the topic at hand, in my digging on this concept I came across a really great article by the Institute for Supply Management (2004) where it addresses these two very questions. However, I should say that they do mention other strategies that are in existence that a firm can undertake in order to reduce the cost of purchased goods and services but to the focus of this blog I want to keep to the content related to the idea of pooling.
Group Consortiums are tricky
In this research article it was found that “In many organizations, different strategic business units were buying the same type of products/services from different suppliers or even the same type of product/service from the same supplier at different prices”. Organisations that do recognise this problem often rectify this missed opportunity via ‘Volume Aggregation’ but again this is not always the case or may not always be possible. In addition, it goes on to mention that not only has some organisation recognised and rectified it but have gone one step further in their strategy by pooling their buying power with other organisations and as a result realised more cost savings. These are known as ‘Group Consortiums’. Group Consortiums have increased in popularity in recent years because they do allow different organizations to pool their buying power for increased volume and leverage with suppliers in an effort to reduce prices (Carter et al. 2003). Thus, it is very beneficial for smaller firms or organizations that purchase a low volume of particular services as it creates economies of scale. However, one of the main difficulties they highlight that accompany Group Consortiums is getting all members involved to agree collectively on what is to be purchased (Carter et al. 2003). Since agreement among the group can be challenging, negotiations can be very lengthy and this in turn may end the Group Consortium (not forgetting to mention the risk of switching to a new supplier or the time spent, legal contracts etc as well as the usual sales and marketing costs involved in amalgamating all of this together under one umbrella).
So how does one not only address these two questions? But, also make sure the supplier benefits?
Well the answer is very simple - by creating a free online B2B market platform sharing the value of unlocked potential with both sides of a commercial transaction. But, how does one do that? Firstly, by being ‘FREE’ so there are no fees, charges or such to join, list, accept or communicate on the Platform. Secondly, to make sure suppliers are presented with customers who are ready to buy, and buyers benefit both from the suppliers’ resulting reduction in marketing costs, and from economies of scale that are otherwise out of reach.
One such network that is rapidly gaining huge traction and interest not only from SME’s but also the very large organizations is INNOVO Network. It is a new channel to market for companies of all sizes to do business and allows companies to deal with each other more efficiently and cuts out waste at every phase of a transaction. It can be used by an organization to procure everything (millions of goods and services) that it needs:
- All goods and services, direct and indirect
- Management talent and manpower
- Capital expenditure, including capital goods and property
INNOVO is truly unique not only of its ability to address the realization of cost savings among buyer’s but addressing the other side of this business enigma - the suppliers.
Case Study: 22% Energy Cost Savings at MHA
MHA MacIntyre Hudson is part of a global financial services group with revenues of £700m, offices in 65 countries and 8,700 professional staff. It used INNOVO to reduce its energy costs. INNOVO found a consultancy with expertise on reducing electricity costs. The project was agreed and the consultancy reduced MHA’s electricity costs by 22%. The profit from the project in the way of commission was shared between the consultancy and INNOVO whilst MHA realised the energy savings.
In recent weeks Macquarie Group, a Global finance group with offices in 28 countries and 120 infrastructure firms in utilities such as energy, road, rail, telecoms with a procurement spend of $30bn p.a. have signed up on the INNOVO Platform. The group have started introducing INNOVO to companies under its management with the intention of realizing these cost savings but also winning new customers on the INNOVO Platform. There have also been successful trials with a Global Bank in the last few months where INNOVO Network showed the Bank how it could save up to a $billion per annum in its cost of purchasing of products and services.
So the question really is now after getting to this is “Why haven’t you signed up?”
Image courtesy of ddpavumba at FreeDigitalPhotos.net