Operations
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Creating Purchasing Alliances That Work

September 26, 2012 by Petros Paranikas and Robert Tevelson
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In This Article
  • Companies are under pressure to improve performance amid global economic uncertainty and lackluster growth.

  • To boost their profit margins, some businesses are taking a closer look at volume discounts and purchasing alliances.

  • Despite the benefits, however, many companies don’t pursue purchasing alliances because they are difficult to implement and run.

  • BCG’s findings suggest that there are five key factors of success.

 

Amid continuing global economic uncertainty and lackluster growth, companies remain under pressure to improve performance. Typically, businesses look to reduce costs to boost profit margins. But after multiple rounds of cost cutting over the past several years, companies are finding there is little left to trim. This has caused some to take a closer look at volume discounts and reignited interest in purchasing alliances.

A purchasing alliance is an agreement between two or more organizations to jointly procure equipment, supplies, and services. Companies looking to improve their margins should explore purchasing alliances because they can deliver value in four ways:

  • Increased Purchasing Power. Purchasing for multiple companies gives alliances leverage when negotiating with vendors. By purchasing in volumes that exceed those of individual companies, alliances are able to secure more favorable pricing and payment terms.

  • Price Matching. Alliances are also able to obtain better pricing through price matching. A comparison of partners’ purchasing contracts often reveals that, for whatever reason, one company has negotiated a significant savings on a certain item—a savings that is greater than the volume discount. The alliance then negotiates with the vendor to grant that pricing to all partners. Suppliers are often willing to extend the lower price to others in the group to win their business, particularly if the buying is streamlined.

  • Improved Category Management. Companies typically put their best purchasing managers in charge of strategic categories with the highest spending. Although the amount spent in other categories may be less, it is not necessarily insignificant, particularly when aggregated. By forming an alliance and combining their spending, companies can have skilled procurement management of nonstrategic categories, generating significant savings.

  • Support for Company Goals. Changing employees’ buying habits is not easy. Despite supporting company initiatives such as going green, employees often resist trying alternative products. Procurement managers who are tasked with getting compliance can find support for their efforts in a purchasing alliance. For example, a procurement team had significantly expanded its company’s use of recycled toner cartridges, but there were still a few holdouts. Several departments did not think such cartridges would produce the high-quality printouts that they needed. After an alliance partner demonstrated the quality it was achieving with recycled cartridges, these departments got onboard.