Need Savings in a Tough Economy?
Collaborative sourcing can mean different things depending on the context, so let’s start with the basics of what collaborative sourcing means. Collaborative Sourcing is a process by which two or more organizations go-to-market to source their combined demand requirements in order to leverage a greater degree of quality, cost savings, service, and value from their suppliers.
In practice, collaborative sourcing can aggregate demand between completely different companies, between separate businesses that share the same parent holding company, or even within one company (we see this often in companies making procurement transformations from decentralized to centralized procurement where evaluations and decisions may need to be both at an individual site level as well as at a regional or global level).
Aggregations can provide essential leverage and generate significant hard dollar savings. But collaborative sourcing and aggregations isn’t a one-size-fits-all approach, and is best considered under specific circumstances. It can be an invaluable lever within your procurement strategy when employed effectively. It is important to remember not all commodities or markets are suited for demand aggregation.
When deliberating if and how aggregation could drive value for your business, we’ve identified a few key factors to consider.
Three Key Levers to Increase Value
1. Choose the Right Commodity
More often than not, increasing the volume of the buy means better pricing and terms from your suppliers. While I can think of some specific examples where the pricing model and revenue management strategies in some industries (hotels and airlines immediately come to mind) can run counter intuitive in certain markets where increased volume doesn’t necessarily lead to better prices – more often than not, suppliers benefit from economies of scale when they secure larger contracts and can price more aggressively.
Group purchasing can be deployed in a wide spectrum of industries; it is most often found in indirect spend areas, although it can be practiced in direct spend areas as long as anti-trust precautions are met.
Several commodities that are well suited to collaborative sourcing include:
- Facilities management (canteen, cleaning, security, maintenance, waste and water treatment, etc.)
- Indirect materials (MROs, IT equipment and software, marketing and printing, spare parts, packaging, work clothes, etc.)
- Services (temporary labor, professional services, car leasing, insurances, auditing, etc.)
- Transportation and logistics (warehousing, distribution, ocean freight, courier services, etc.)
- Utilities (gas, electricity, etc.) in competitive energy markets
2. Focus on Value
Collaborative Sourcing can drastically help to minimize or maintain costs by providing immediate advantages (by reducing expenses through special pricing, discounts, etc.) and long-term results (equipping those companies to achieve higher performance and pass along increased quality and service to their clients). The benefits can be whittled down to three primary cost-reduction advantages: aggregated volume, improved buying power and improved market attention.
3. Networking & Benchmarking Benefits
Through collaborative sourcing projects, in addition to better pricing participant organizations also gain improved contract terms and conditions that would not otherwise be available to them. There is significant value in Collaborative Sourcing in terms of peer-to-peer networking, benchmarking, governance and process benefits.
Many of our process industry clients face the same challenges. We’ve seen many instances where the participating companies gain significant insight in the exchange of best practices and business processes, as well as discussions on supplier performance and/or referrals.
With these possibilities within your grasp, it is essential to understand the process, the challenges, and the ideal timing and setting of such a practice.
In our accompanying white paper, you’ll discover the biggest challenges with collaborative sourcing and how you can overcome them to use collaborative aggregations to your greatest advantage.
Simply click the cover image to read!