Corporate United - Fourth Quarter 2007

For years, group purchasing solutions were looked upon as quick remedies to identify cheap sources of supply for commodities using volume as leverage. While these approaches seemed attractive at first, difficulties with collaboration, short-sighted goals, and reluctance from suppliers led to the demise of most buying consortia.

The legacy of group buying included focusing on piece-price reductions, ignoring the opportunity to impact a company’s supply chain. Cleveland, OH-based GPO Corporate United is one of the organizations reinventing a more sophisticated approach that focuses on more than just an initial savings potential.

Corporate United focuses not just on collaboration among participating buyers, but also between the group and the supply bases with whom it works. By creating a transparent platform the group of more than 100 Global 2000 companies is able to work with their members to achieve levels of standardization that allow the suppliers to more deeply penetrate their own supply chains.

The result is a more effective and sustainable buyer-supplier partnership. The leverage, when applied strategically, works to the benefit of buyers and suppliers. The net effect is that GPOs like Corporate United are re-emerging as a valuable component of corporate supply chains around the world.

In some notable cases the GPO has re-emerged as a hybrid-outsourced solution providing resource flexibility, savings and speed to market unparalleled by internal or other third-party procurement efforts. The lessons learned by the recent failures of the large well-funded vertical purchasing groups (such as, Covisint and the O’Hare Group) have helped to re-shape the industry, and the survivors are delivering substantive value to companies with the foresight toparticipate.

Before examining how companies are successfully making purchasing through GPOs an important component of their overall supply chain strategy, it is important to understand the context in which organizations are making the decision to employ these solutions.

The resource–performance dilemma
Economic pressures have driven most major companies
to trim their operational budgets. While many have
saved money through traditional methods, like right-sizing
their workforces and outsourcing production and
back-office work to emerging markets, these options
have limitations and most companies have already
maximized their potential.

In an effort to achieve bottom-line improvements while managing risk, organizations have turned to their spend management department to help close the gap by attacking large corporate operating budgets. The problem is that many of these departments are ill-equipped to manage this work. They lack the tools, know-how and staff. But with responsibility for bottom-line relief shifting to them, they need to become more creative in how they reach their goals.

Real leverage & total cost management
This effort to find bottom-line relief often starts with the search for external solutions. Companies are prone to join GPOs based on their ability to achieve hard dollar savings. In principle, while there is nothing misguided about that approach, many of them were missing the true value of the leverage that GPOs could offer.

Leverage of piece-price savings alone represents the same kind of limited value proposition that right-sizing and outsourcing offers. The prevailing attitude among participating firms was that once line item pricing was rationalized across participants, nothing more could be done. However, initial savings are not the beginning of the end, but the end of the beginning. Companies are now realizing that price reductions are merely the tip of the iceberg, and that the true value of leveraging enables not just savings, but knowledge of best practices, enablement of supply chain organizations, contract management, supplier development and continuous improvement.

Early purchasing groups represented themselves as a single body and rarely (if ever) acted in a truly collaborative manner. Request for proposals (RFPs), for example, were issued at a common time but spend and specifications were never truly aggregated. These organizations took requirements to the market at the same time, but issued separate RFPs simultaneously, rather than standardizing on certain specifications to take advantage of suppliers’ cost drivers and leverage greater savings. Cost savings ensued in some cases, but since no true leverage was being applied, the results were sub-optimized.

Today’s more sophisticated approach finds companies truly interacting with one another and subsequently finding a much greater return. In addition to aggregating their spend to take advantage of the natural cost drivers in the categories they are sourcing, companies are working together to manage their suppliers on a long-term basis. So, companies are not only going to market at the same time, thereby generating increased interest from the supply market, they are also standardizing certain specifications to help the suppliers become more aggressive in their approach. To cite a very simple example, by creating a market basket of office products in which all participants have standardized specifications for BIC pens, participants allow the suppliers to negotiate with the manufacturer to drive better pricing. Additionally, through the sharing of best practices, participants in these new models are learning ways to improve sourcing and spend management; and using that knowledge to impact their own indirect spend portfolios. The knowledge obtained through these efforts helps to better equip companies to tackle their goals.

Furthermore, and perhaps most important, the application of leverage extends beyond the award process. Participating members are able to use their power to manage suppliers with the authority of a much larger organization; forcing continuous improvement initiatives, stronger compliance, issue resolution, and general responsiveness. In short, cooperation allows these organizations to achieve superior supplier partnerships.

Supplier response
Another important aspect of understanding the value of shifting from a piece-price rationalization to a totalvalue approach comes in the recognition of suppliers as consultative partners. Clearly, supplier involvement is a crucial element in the stability of a group purchasing model, and the historic approach described above was (understandably) unattractive to most vendors.

Today, progressive suppliers view the group purchasing model as an excellent channel to obtain business in an efficient way, in addition to retaining that business at a higher rate. Although corporate buying groups are still very different from their healthcare and public sector counterparts, the shift in group purchasing philosophy has transformed the consortia from a seller’s obstacle into a substantive opportunity.

In order for this natural fear on the part of suppliers to be assuaged, however, participants in GPOs have to be serious about respecting supplier partnerships. All too often, buyers and suppliers give lip service to wanting to establish partnerships, but few on either side of the equation are willing to do what it takes to make those relationships fruitful. The modern GPO focus on total cost and longterm partnerships allows suppliers to take a less defensive stance, and therefore provide more value (including continuing cost improvements) to participating members.

Credibility and functional alignment
Difficult economic times bring new dilemmas to spend management professionals — mounting pressure to deliver savings combined with slow-downs in production. In this environment, attention naturally turns to indirect spend, but this approach is not without its obstacles.

Perhaps the most significant barrier with indirect spend is ownership of it, and the fact that large indirect spend contracts (for example, staffing, benefits, IT, telecom, facilities and transportation) are controlled outside of the supply chain function in the majority of organizations. Here, the utilization of a sophisticated group purchasing approach provides users with a multifaceted advantage.

By providing access to a broad array of relevant agreements created by a network of like professionals, procurement has a reason to open a meaningful discourse with their colleagues in human resources, IT, marketing, and other strategically important functional groups. Once that discourse is established, the group involvement allows for the demonstration of credibility that is paramount in creating relationships that will lead to greater penetration into these new spend areas. For example, while procurement historically may have had difficulty penetrating HR, they may open doors by introducing a leveraged agreement in contract labor. This can help to establish a productive relationship, and procurement may later have an opportunity to source a benefits category that was previously outside their reach; thereby better enabling procurement to reach their savings.

By strategically employing a group purchasing partner, corporate procurement resources are afforded the knowledge, products and resources that will enable them to reach savings goals which may have otherwise been unattainable.

All of these efforts are powered by knowledge, and that knowledge also comes from the GPO and their participants. Understanding the ‘why’ behind these efforts is reasonably simple, but identifying the ‘how’ has been challenging. Being part of a network actively facilitated by a third party means having access to more than the knowledge of a broad spectrum of professionals — it means having the results of that knowledge.

Leading GPOs are able to synthesize the information that exists within their groups to identify pragmatic solutions and lead participating members to grow their own successful spend management practices.

Savings and speed to market
With all of this said, saving money remains the name of the game. So even if someone knows what areas of spend to attack, how do they do it and does it have the acceptance of the functional groups that control the budget? And where dothey find the time to source and manage the categories?

Indirect spend can span well over 100 different categories, ranging from the fairly commoditized products (such as office supplies)to complex services (such as legal counsel). Almost no spend management organizations are prepared to manage that kind of workloadnor should a company be expected to have in-house expertise in so many categories that are not their core competencies.

Here again, the GPO provides a unique solution. Participating members are able to leverage the resources of a third party to identify immediate cost savings by taking advantage of pre-negotiated agreements. The savings are important, but the resource flexibility attained by taking advantage of leveraged contracts allows the corporate procurement staff to manage a far greater percentage of their overall indirect spend portfolio.

This type of hybrid-outsourcing affords companies the advantages of retaining their data and maintaining direct relationships with their internal customers and suppliers, while saving the time and resources associated with sourcing and tactical supplier management. No other solution allows organizations to simultaneously enjoy these types of advantages.

It also provides companies with an unparalleled opportunity to manage risk via the collective power the GPO holds within the supply community. Rather than exercising this strength to drive suppliers out of business, which was a hallmark of early corporate purchasing groups, the modern GPO is using its power to derive more value from its supply chain, thus giving members access to a level of performance they could never achieve on an individual basis.

David B. Clevenger,
Vice President, Corporate United