CIPS POSITIONS ON PRACTICE PURCHASING AND SUPPLY MANAGEMENT: BUYING ALLIANCES

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1 CIPS POSITIONS ON PRACTICE PURCHASING AND SUPPLY MANAGEMENT: BUYING ALLIANCES INTRODUCTION The CIPS' practice documents are written as a statement in time. They are a collection of views on good practice within a particular subject area and are intended to provide direction on good practice with some guidance for context and interest. The reader is encouraged to use the CIPS practice documents for their own purposes, such as writing policy statements, guidance or procedures. This particular practice statement has been written primarily for the benefit of fulltime purchasing and supply management professionals, but can be used by anyone associated with, or interested in, purchasing and supply management (P&SM). This document is about buying alliances. DEFINITION The CIPS definition of a buying alliance is: "Two or more organisations, or groups within organisations, collaborating on certain aspects of their spend, with the intention to commit their spend, in order to generate leverage and better value for money for all." BACKGROUND Buying alliances are becoming increasingly common and are manifested in several different forms. Opinions vary as to what the main forms of buying alliance are. They generally fall into two broad types: consolidated buying which is where separate organisations purchase together, and joint ventures which include partial equity ownership. Within these two broad categories there are, at least, a further four forms: vertical, horizontal, intra- and inter- organisational buying alliances. There are several definitions of what is meant by vertical and horizontal buying alliances. CIPS' preferred definition is that 'vertical' means the same industry sector buying things specific to that sector whereas 'horizontal' cuts across industry sectors and would include activities such as the purchase of office equipment to be found in all sectors of industry. This does not prevent organisations within the same industry sector purchasing things that are not specific to them; this practice is very common in the public sector with the use of consortia which purchase many products and services such as PCs, stationery and furniture. Intra- organisational buying alliances are groupings within the same organisation, or group of companies, buying together. Inter- organisational buying alliances apply across different (indeed, often competing) companies, industries and organisations. Clearly, there are various combinations of the above, e.g. inter-organisational vertical buying alliances such as universities purchasing scientific equipment together. In all cases, however, the driver is the requirement for similar products and services. 1

2 P & SM professionals should not be constrained by the above definitions and instead need to be creative, as far as is practicable, in developing buying alliances to suit their needs. Indeed, one new method of collaborative purchasing is where organisations come together and set up a separate company to buy on their behalf; this not only aggregates requirements but minimises duplication and shares resources. This approach is not strictly a buying alliance, but can provide a service based on the buying alliance principle. EXPLANATION Benefits of Buying Alliances CIPS considers that the benefits of buying together, in addition to the obvious purchasing power through leverage, are: Reduced acquisition costs and duplication of effort among participants Shared market intelligence and product knowledge Shared resources - people/time, management information Investing together in supplier development and R&D so enabling improvements which can be shared Increasing the suppliers' interest as a greater value is placed on the group (e.g. suppliers provide excellent service; their commitment reduces risk of interruptions to supply) Presenting a united front to suppliers (e.g. to ease communication) Releasing time to concentrate on more strategic procurement Inter-member trading can be set up to cover for shortages; inventory can be managed more effectively Supplier benefits from greater market penetration and reduce tendering and negotiation costs for the user and supplier Gaining and using expertise on products and markets available from other alliance members CIPS would, however, advise buyers in the public sector contemplating entering into an alliance to be aware of the regulatory factors that prevent some public bodies working with the private sector and, indeed, with certain other bodies in the public sector as well. Key Issues There are a few issues that need to be managed carefully when entering into buying alliances, including the risk of the relationship with other members breaking down. This can be minimised by selecting partners whom one knows well or by gradually building up a relationship through an activity such as benchmarking. The major weakness and cause of failure and duplication of effort in public sector consortium buying is a lack of commitment by partners protecting their own positions. Commitment at the outset to the tender initiating body is essential from all members of a potential alliance. It is not a benchmarking exercise and is based on an initial exchange of information. If sellers know or suspect members are not committed they will not give the best price and terms as they will anticipate a second bite of the cherry. Other issues include customer buy-in ; this is a perennial problem in those organisations where purchasing is decentralised as end users who are empowered to contract with suppliers must be willing (or mandated) to purchase from the contracts that have been let via the buying alliance. Sometimes potential buying alliance members cannot join because they are tied into an existing contract for the supplies in question. The supplier will often agree to release the buying organisation provided they can then compete for the buying alliance's business. 2

3 Another issue is whether the organisations which collaborate on purchasing have to have a similar level of spend for the category in question, i.e. would a larger organisation always allow a smaller organisation to obtain the same prices as them? It is easier if all organisations have the same spend but major volumes are required from at least one. There are ways around this issue by using differentiated pricing for the different members of the alliance provided that the alliance enables better value for money than if the members had purchased alone. In addition to price, other factors (such as service levels) come into consideration, thus some participants might need and be offered more frequent deliveries than others based on factors such as geography or size of order. There is also the risk of finding oneself trapped in an existing arrangement when one wants to take advantage of new technological opportunities but others do not. A further aspect to consider is geography. Buying alliances are often formed between organisations in one geographical region for obvious benefits such as supplier distribution, use of local suppliers and travelling to meetings. However, it might be better for two organisations in distant regions to collaborate if they are to purchase from a global supplier, particularly if specialist equipment is required. Record keeping and co-ordination are also important issues in buying alliances. For example, someone needs to be responsible for co-ordinating details of the total volume of business from each of the participants, or the achievement of order levels which secure higher levels of discount. Legal Considerations Some buying alliances involve third parties with a legal arrangement underpinning the relationship. An example of this is a public sector buying consortium which has a legal arrangement with its member organisations to leverage their spend in certain categories. Other buying alliances are more like gentlemen's agreements to purchase in a partnering fashion. In the long run these tend to fail as they are often being used to compare prices rather than commit due to buyers other than the tenderer, attempting to protect their position, duplicating effort and subsequently often comparing unlike situations (e.g. the lead buyer may have to be taking account and recovering his own costs whilst prospective members are not including theirs, or, the lead buyer may be considering whole life costs). CIPS believes it is good practice, especially in respect of the latter, to have a charter or memorandum of understanding which may consist of just one side of paper but which states the principles under which the parties have agreed to collaborate. This charter or memorandum of understanding should set out the goals, objectives, process, plans and decision making authority of the buying alliance. CIPS has identified a number of other legal implications of buying alliances, such as: Who contracts with whom - for instance the suppliers may have individual contracts with each member of the buying alliance or may have just one with the buying alliance as a single legal entity. Competition - Those entering into alliances should be mindful of the fact that they are subject to competition law; it is a widely held misconception that this applies only to suppliers. The buying alliance should not be so big that its power distorts the marketplace - a reasonable rule of thumb is 15% of the relevant market. However buyers, particularly those in the public sector, need to be alert to the increasingly robust nature of competition law as it applies to this area. Many suppliers will also be interested in such developments. Confidentiality - the members of the buying organisation must agree to respect the confidentiality of their respective information resources as well as those of their suppliers. Intellectual property rights - the members must come to an agreement on which member(s) hold IPR on any product development work. 3

4 General Recommendations Buying alliances should ideally focus on markets that are fragmented (i.e. with many buyers) so that even a small increase in market percentage gives buyers market leverage. CIPS believes it is important that the organisations within a buying alliance are able to work together and have mutual trust and respect. Ideally the organisations should have a similar strategic fit and culture; for example, it would be awkward if one member had a very adversarial 'arms-length' approach to supplier relations whilst another was keen on supplier development and implementing partnerships. Similarly, if one member organisation places sustainability high on their list of criteria for selection of suppliers and offers then this might not be seen as being compatible with another organisation which does not subscribe to such values. The traditional category of spend subject to buying alliances is the leverage (low risk - high aggregate value) category on Kraljic's four-box grid with commodities such as stationery, PCs, furniture, travel and other standard goods and services generally required by all businesses. However, buying alliances are increasingly common in security/bottleneck categories (low value-high risk) as, by aggregating requirements, the members of the buying alliance become a more attractive customer to the supplier who may not otherwise be particularly interested in supply security and continuity considerations. The CIPS view is that in practice there is no reason why organisations cannot collaborate on any type of purchase. An example of innovative collaborative purchasing is where three banks (competitors in the same industry) all had to renew some expensive machinery that they had in common so they formed an alliance and bought the manufacturer of the machinery. Occasionally, suppliers suggest to customers that they purchase collaboratively in order that the supplier receives more business and their contract/customer management costs are reduced. Buying alliances between competitors may be appropriate for commodities and non-strategic items where margins are very low and/or where there is another dominant buyer in the marketplace. However, some competitors may choose to create a buying alliance for specific items where the objective is to exclude some of their competitors. Buying alliances encourage standardisation of specification. The process of selecting suppliers and a range of standard specifications helps to challenge organisational perceptions of acceptability. However, standardisation is not necessarily a pre-requisite of buying alliances (there is no necessity for all members to specify the same products) - as long as the required products are available from one or more suppliers then all members' preferences can be satisfied. CIPS considers it advisable to obtain permission from the Board before embarking on a buying alliance, whether or not it has a formal legal standing. Buying alliances have a higher chance of success if they have senior executive support and commitment from the start. The Board will need to be satisfied that there is no risk to reputation from such alliances and that they do not, for instance, conflict with or compromise any other strategy the organisation is trying to pursue e.g. partnering on R&D with the competition of the proposed buying partner. CONCLUSION CIPS believes that while buying alliances take time, commitment and effort to put in place they can deliver value for the members, of which reduced price is only one aspect. CIPS also predicts that buying alliances will become increasingly common in the future due to the need to keep gaining leverage. They will also grow in number due to developing technology; ecommerce and eprocurement technologies are drivers and enablers of buying alliances as they allow electronic orders to flow through defined portals to suppliers, facilitating internal compliance and demonstrating volume movements to suppliers. Similarly, buying alliances are increasingly making use of eauctions to drive down costs. The increase in buying alliances may result in price range differentials between larger and smaller companies and suppliers may respond with defence strategies, such as creating supplier alliances with their competitors. 4

5 CIPS believes that all P & SM professionals should explore buying alliances as a means of leveraging spend and obtaining the other benefits outlined in above. It is a valuable component of the P & SM professional's toolkit. In particular, this should be a preferred route for low-value, high-volume goods and services which has the significant consequence of allowing the P & SM function to concentrate on more complex value-add procurement activity. As with other aspects of P & SM, relationship management skills are a key feature of working in collaboration with others. 2:12:JL 5