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.
Despite the benefits of purchasing alliances, many companies don’t pursue them. This is largely because alliances are surprisingly difficult to implement and run. Our analysis indicates that their success depends on five key factors:
Committed Partners. Partners must be committed to the alliance for the long term. They must craft a multiyear agreement that reflects the shared objectives and interests of the companies. In addition, the agreement should specify the categories for joint procurement and allocate sufficient resources to manage the effort. Alliances with agreements are more successful because they confirm the mandate and support of each company’s management team.
An Effective Management Structure. Too frequently, purchasing alliances fail because the partners are unable to reach agreement on purchasing details. To avoid such paralysis, alliances should be managed by a small team that understands the interests of the individual companies and has the authority to take quick, decisive action.
Communication with Suppliers. When an alliance is announced, some suppliers may attempt to undermine it by reaching out to individual member companies and trying to establish a favorable purchasing agreement. To minimize conflict, alliance members must clearly explain to vendors the roles and purchasing responsibilities of the alliance and those of their internal procurement teams. In addition, the alliance must develop a robust communications program to convey its mission and maintain an ongoing and open dialogue with suppliers.
Compliance. For some organizations, unauthorized purchases are not an issue. For the majority of companies, however, it is essential that procurement teams develop a compliance and tracking plan for each category so that the alliance can meet its supplier commitments.
Partner Alignment. The toughest challenge facing the formation of a purchasing alliance is reconciling the different business perspectives of potential members. For example, some companies strongly believe that to succeed an alliance must be set up as a joint venture, while others favor establishing a consortium. Some executives are attracted by the potential for savings but are concerned about their loss of control. It is critical that time is spent up front to discuss and address such issues. Prospective partners should understand not only the position of the other parties but also their reasoning, for only then will the companies be able to come to an agreement.
Although establishing and managing a purchasing alliance has its challenges, it can help companies improve their profit margins. In a tough economic climate, it can be an effective way to have a positive impact on the bottom line.
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