All posts by Sergio Giordano

Centralization of purchasing in business networks (Part 2)

How are the business networks towards the centralization of purchasing operated?

How are the business networks towards the centralization of purchasing operated?

  • Formal consolidation of the relationship with partners who have for years been part of a single supply chain, putting together a greater production, marketing, commercial and sales capacity.
  • Once the primary objective has been consolidated, it is important to look at the secondary objectives, best exploiting the indirect advantages of being part of a business network: what can be improved and optimised by working together? Clearly, suggestions in this respect can be obtained by looking at how big companies and/or industrial groups operate.
  • During this phase, the contribution by the network manager, who is responsible for performing this analysis and suggesting the right strategy by which to exploit the indirect advantages of the network becomes essential. Of these, one of the most natural, highest-impacting actions is without doubt the introduction of centralised purchasing.
  • For the centralization process to be a success, it is important to introduce it gradually, starting with the product markets that are most immediately and easily able to be centralised.
  • Finally, specific professional skills will be needed in the field of purchasing for managing the relevant activities, issuing the contracts/orders open and managing them (in some cases, the networked companies are of different sizes and the most structured may already have staff with specific professional purchasing skills who can therefore be used for the management of centralised activities, alongside the network manager).

Difference between business networks according to logistics

  • Same region
    • Greater attention may be paid to local suppliers for more categories
  • Multi-region
    • National/international supplier categories will mainly be used

E-procurement and the use of a platform to manage purchasing

The tool that helps us in centralization is an e-procurement platform. This is a question of equipping the business network with a “shared” computer system, based on the latest web technologies and used by all networked businesses.

The introduction of innovative purchasing tools such as e-procurement is one of the most important subject matters by which to improve the overall efficiency of the procurement processes of a complex organisation like a business network. The electronic negotiation of purchasing (e-procurement), in fact consists of enabling those using it to manage all relations with its suppliers over the internet, using a “dedicated purchase” IT platform that enables processes like the selection of the contractor, receipt of offers, submission of orders and catalogue consultation to take place on-line. For example, in the purchasing of consumable goods or in any case of repeated purchasing, the choice of a centralised procedure that defines a series of conventions with a series of suppliers makes it possible to include on-line catalogues available to the various different network structures by which to make direct purchasing at competitive prices, insofar as they had already been established in the conventions.

Current IT technologies also enable a simple interfacing and sharing of data, virtually in real time, with all the various managerial information systems (MRPs) of the individual networked businesses.

Methods for the use of the e-procurement platform and possible market offers:

  • purchase of licences by which to obtain a platform in Saas (Software as a service, i.e. hired, not purchased) mode for each buyer-operator;
  • hire or payment of an annual tariff for each utility activated for the use of a partner company platform;
  • delegation of the entire purchasing activity or part of it (through the e-procurement platform) outsourced to partner companies (maintaining complete visibility and sharing of all specialised processes in this activity.

The advantages of using such a platform include:

  • standardisation of the buying process using a single, common tool for all networked companies;
  • possibility of creating on-line catalogues for use by the individual customers of each company, whose list prices will be negotiated upstream, according to the forecast total quantities required by the network as a whole;
  • in the expenditure cycle activities, it enables the correct management and attribution of invoices for the individual company involved in the purchasing process. The platform will be easily integrated with the ERPs of the individual businesses (each business receives invoices from the supplier for its part or in any case as envisaged by the network contract rules);
  • use of electronic invoicing;
  • single roll of network suppliers available to each individual networked business;
  • objective supplier assessment system for the continuous improvement of performance;
  • each company can easily pool purchasing experiences (suppliers that are valid and others that are not, price references for individual expense categories, etc.), with clear reciprocal benefits;
  • standardisation of the technical specifications for purchases with the best practices of the networked businesses with consequent improvements in the price/performance of the goods and services purchased. It is easy to imagine enhanced efficiency in the purchasing of common materials such as Personal Protection Equipment, stationary, cleaning services and facility management, etc.

Procedures and controls

A choice to centralise purchasing entails special attention paid to the procedures regulating the purchasing procedure. In actual fact:

  • In the case of structures that are mutually independent, the procedures used by the individual networked companies vary considerably and may be more or less complex, depending on the dimensions of the structure (micro/small/medium-sized business) and the purchasing budget. In most cases, we find ourselves looking at a lack of written procedures insofar as the purchasing methods are connected with the common sense of the person implementing them.
  • In this type of situation, moving towards centralised purchasing entails paying special attention to the drafting of a purchasing procedure. This procedure, according to the expenses involved, must be:
    • coherent with the objectives of reducing costs and procurement time
    • coherent with the incoming quality and efficiency objectives
    • compliant with the ethical standards established for purchasing
    • shared and approved by way of protection of expenses managed by each individual structure participating in the purchasing group.

Again by way of protection of the interests of the individual networked companies, there must be a control of the operative application of said procedure by an appointed person/audit structure for the network (e.g. network manager).

Closing remarks

Considering that the priority objective for the centralization of purchasing can certainly be identified as the exploitation of scale economies by which to reduce the unit prices of the goods and services to purchase, it is important to see if that objective looks to include a standardisation of said goods and services or, additionally, the identification of the goods and services with the best cost-benefit ratio. In actual fact, these objectives need three different operating approaches, the consequences of which need to be carefully assessed, particularly according to the time frame involved in order to obtain results. In actual fact:

  1. it is relatively simple to obtain scale economies to reduce the unitary costs by bringing previous specifications together, but this can at most have a positive financial effect in the short-term. Already at the second tender, with the same logic, it is difficult to obtain significant additional discounts;
  2. If we add an objective of standardising goods and services to the positive effect of scale economies, we are then facing a more complex work in which all the individual structures must be involved (data collection and assessment/sharing/choice of standards), but at the same time, we are also looking at greater economic benefits;
  3. Finally, identifying the goods and services with the best cost-benefit ratio is an extremely complex matter, as it requires lengthy technical analysis and the concentration and sharing of data with the internal applicants. This, however, represents the launch of a virtuous process of the introduction of logics and instruments governing the business network, ensuring a comparison of peers and the construction of organic partnerships with suppliers, which may represent a carrier for long-term organisational development.

Finally, if the competences in terms of purchasing are limited to within the network of businesses, one solution may be to appoint external procurement professionals who, alongside the Network Manager, can start the centralization of purchasing process and, potentially, thereafter manage the activities by e-procurement, with the use of an appropriate platform. This choice would have effects that are so immediate that the costs of the solution would rapidly be repaid by the immediate returns enjoyed in terms of the reduction of the TCO.

Centralization of purchasing in business networks (Part 1)

Purchasing groups have many advantages including boosting 'purchasing power'
Purchasing groups have many advantages including boosting ‘purchasing power’

What do we mean by the centralization of the purchasing or purchasing group?

A PG (Purchasing Group) can be defined as an entity that groups two or more independent purchasing organisations that join together formally or informally or through a third independent organisation. Doing this combines their individual needs with the volume in the purchasing of materials, services and goods on capital account. Thereby exploiting the greater contractual strength in order to obtain the added value from suppliers in terms of best prices, best service and best technologies, which could not have been obtained individually by each organisation.

Advantages of the purchasing group

1. Scale economies or “purchasing power”

The first, most obvious advantage of a purchasing group is the scale economy. The volume of the aggregated purchase demands, for example of a network of businesses of reasonable size, gives the individual businesses that scale economy and consequent purchasing power that they could not hope to obtain alone.

2. Lower prices/Greater negotiating power

By increasing the forecast purchase volume, the PG is generally able to negotiate lower prices for the goods or services purchased with respect to what could be obtained, alone, by the individual companies. These savings are usually considerable, ranging from 10% to 35% according to the competence level of the structure dealing with making the centralised purchasing.

3. Reduction of transaction costs

By adhering to a PG, the organisations can effectively simplify the procurement processes. This not only reduces the unitary cost but also the total transaction costs, due to the reduced number of contracts (to be negotiated, prepared and managed).

4. Process economies

By sharing information acquired on suppliers, new technologies and market knowledge, as well as past purchasing experiences, not only is all redundancy successfully avoided, but transaction costs are also reduced and far greater process economies achieved than would have been possible by each individual organisation by itself.

5. Reduced workload

Given that the PG manages all stages for the issue and related management of contracts on behalf of the network, the individual businesses benefit from a significant reduction in their workload and are free to focus on their core business, which is therefore more strategic for them.

6. Improvement in best practices over time

The organisation that manages the PG enables the network businesses to improve their results by sharing the best practices in some business processes, exploiting competences in specific functional areas. In actual fact, most of the modern organisations that handle the PGs use sector experts for each individual product market managed. These sector experts constantly search out ever more effective methods aimed at improving the processes, quality and efficiency of the supplier in order to guarantee the optimisation of processes at increasingly competitive prices (improvement in the TCO – Total Cost of Ownership).

7. Technical savings and improved TCO

The organisation that manages the PGs in the future will offer all the advantages connected with its purchasing skills in the individual categories that will go beyond the initial advantage connected with scale economy alone. In actual fact, once the initial phase is complete, in which maximum use will be made of scale economy to lower prices, the organisation managing the PG will use its experience to help the networked businesses allow buying technology to progress, reducing waste and optimising the use of goods and services purchased.

8. Positive impact on the profits for each individual networked company

We know that a reduction in purchasing costs, for example of 5%, produces an increase in profits of more than 2% and that to obtain the same result, sales would need to increase by more than 20%…! Therefore, the saving generated by a centralization of purchasing in a network of businesses, increases profits in each individual network company.

Business networks contract in Italy: a great solution for SMEs

The business network contract is a private agreement between two or more enterprises to jointly perform one or more economic activities to increase their potentials for innovation and competitiveness. The network contract therefore enables companies (usually SMEs) to combine two key elements of business growth, which seldom coexist: enterprises can collaborate on large scale projects without losing their legal independence and their autonomy in the business activities not included in the contract.

Critical Issues affecting Business networks in Italy

The PG applied to the business networks, although having these undeniable advantages, also has critical issues that are often underestimated and that need to be managed in the right way:

  • Local supplier vs national supplier vs international supplier
    • Use of centralised purchasing by a group of networked companies, considering the increased quantities and related purchasing power, inevitably results in the involvement of national and international suppliers, as well as local ones. In this comparison/assessment of suppliers, it is important to pay attention to ensure that the right consideration is paid not only to the final price but also to the quality of the product and the services relating to the supply (lead terms, after-sales activities, etc.). It is also important to consider the characteristic aspects of long-standing (valid) suppliers linked to knowledge of the client, which results in greater flexibility in the customer-supplier relationship as well as the avoidance of the inevitable discontinuity typical when changing supplier. Naturally, alongside the attention paid to all the aspects highlighted, there must also be a new “Vision” towards the market, connected with the fact that now one is no longer alone, but rather part of a group of businesses, hence the choices to be made must be the best for the whole network of businesses.
  • Resistance to change (old supplier (history, knowledge, customs))
    • As for any process that results in a change in procedures/consolidated habits, etc., the centralization of purchasing will also be initially resisted. It is therefore important to pay close attention to dealing with this change gradually, so as to help the people involved to make it the best possible experience.