If you are interested in global purchasing but
you are not yet ready to go about it alone, there are alternatives.
VIII.1. Global
Purchasing Through Third Parties
A large number of small- to medium-size companies buy their foreign-made materials
from sources in the United States. These sources are typically the U.S. subsidiaries of
major foreign companies, or sometimes distributors and representatives for those
companies. |
These third party companies shelter the buyer from some of the more difficult
problems facing international buyers. They are in a local time zones, they speak English,
they understand American business culture, and they take care of all the customs and
logistics issues. |
This gives the buying companies a choice of "global products", in
addition to their domestic purchases, but it will not help them fully benefit from what
global purchasing has to offer. |
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VIII.2. Global Purchasing Through a Consortium
Another option is to join, or form, a consortium, called Global
Consortium Buying. |
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. Buying together brings the advantages of higher volume prices when lower
volumes are combined or leveraged. |
Buyers in the manufacturing and service sectors are only just beginning to
investigate the possibilities and advantages of the consortium effort. |
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VIII.2.a. Global Consortium Buying
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 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.
If Consortium Buying is likely to be formed by small- to mid-size companies, some large
corporations also benefit from this trend.
Example of large corporations in a Consortium Buying Group:
- US West NEWVECTOR Group, the cellular phone/service business of the company, located
in Bellevue, Washington, practices consortium buying.
Art Mendel, the Director of Purchasing and Materials Management, says "One key aspect
of the success of this new group is its members do not compete in another's
"footprint" or service area," "With savings projected at approximately 30%
of the first year, the consortium effort is very worthwhile in reducing the three billion
dollars the four member consortium must spend to provide service to their customers,"
said Mendel. He adds, "Suppliers benefit through the efficiency of gaining volume
through multiple partners and longer term relationships rolled into a single agreement." |
- UNISYS Corporation's Pueblo Operation, Colorado, as one of six member consortium,
realized 15% to 50% in price reductions. These reductions are based upon a comparison of 1994
to 1995 prices. Paul Guetter who is the Facilitator/Coordinator of the consortium and Unisys
Corporate Contracts Manager said "While there are risks that need to be considered
seriously, the gains are far more advantageous." He added "Our consortium
members use one contract and each member manages its own orders and payments to the supplier,"
and "Suppliers are very cooperative and are pleased to earn volume commitments over
longer contract terms." |
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Initiating the consortium is not an easy process, especially the first ndertaking.
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. |
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VIII.2.b. 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 project. 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. |
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. |
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VIII.2.c. 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. |
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VIII.2.d. In Summary
Consortium Buying is the best alternative to "direct" global purchasing:
1. By joining an alliance, you realize substantial initial cost reductions. |
2. Long-time members are encouraged by the stability of lower costs and dependable
relationships. |
3. Suppliers are gratified by the predictability of future volume requirements of the
alliance and by the timely and dependable receivables. |
4. Suppliers proactively cooperate in managing product cost and innovation and thus
become vertical partners and even more vital to the success of the businesses they serve. |
5. Properly managed, consortium programs offer significant and lasting advantages to
all participants, buyers and sellers alike, strengthening quality, competitiveness and
financial performance. |
6. The consortium represents powerful strategic
procurement direction for the future, dynamically combining the strengths of independence and
flexibility with the synergy of teamwork.
Remy M. Mauduit |
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