ARTICLES | Consortium Buying

Consortium Buying

May 22 2019 By Andre Basson aggregated procurement, aggregating, bulking, competitive pricing, consortium buying, co-operation, delegation, devolution, discount, negotiations, procurement budget, procurement on-cost, procurement skills, purchasing power

A consortium is an association of two or more individuals, companies, organizations or governments (or any combination of these entities) with the objective of participating in a common activity or pooling their resources for achieving a common goal.  Wiki

Small, and even medium sized businesses, are doubly handicapped when it comes to procurement.

The obvious disadvantage smaller businesses have is their lack of purchasing power.  Particularly during the early years of a new business, this problem can be countered, to a degree and up to a point, by the personal involvement of the founder or the head of the organisation, with the gravitas that that brings.  However, this option runs out of steam sooner rather than later, particularly if the business is successful. 

Regardless of the strength of character of the head of the organisation, big sellers have their own priorities and selling at big discounts to small accounts is typically not one of them.  There is also a limit to the time the entrepreneur has available for procurement activities - so the devolution of the bigger decisions start, the smaller ones already having been delegated to personal assistants and others.  And the level of personal interest, which ensured the vigorous negotiations before, is no longer there.  This process continues until a junior person is designated as the buyer, and the foundation, thin as it may be, is laid for the procurement department.

Now the second disadvantage comes to the fore: not only does the lack of big purchasing power put the organisation at a disadvantage when facing suppliers, but it also prohibits the appointment of procurement persons of a calibre that could have made up for the gravitas lost.  The procurement on-cost (the internal cost of procuring) would simply become too large a percentage of the cost of the materials and services procured.

So, what can be done?

Consortium buying, the pooling of purchasing power among organisations, should be considered as a way to minimise the effects of the lack of individual purchasing power. 

Although the problem of multiple smaller clients, from an accounting and administrative point-of-view, remains, the aggregated business on offer may become big enough to ensure competition in the supply market, and to justify the use of a professional procurement person, either employed directly by the consortium, or on an outsourced basis.  All that is required is the willingness and commitment to work together towards a common goal, and the continued support of the process.  Some form of "glue", e.g. a shared region or industry, definitely helps to ensure success.  And the choice of the procurement agent is, obviously, critical to the success of the venture. AB

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