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Collaborative Purchasing, Revisited

So collaborative purchasing appears feasible for the restaurant industry. But what about other business sectors? Can different companies - even direct competitors - really band together to get better deals from their suppliers?

We've already seen some major efforts in that direction. Way back in 2009, PepsiCo Inc. and Anheuser-Busch Companies, Inc. announced a joint procurement deal for the indirect sourcing of items such as office supplies and travel arrangements. Either of those companies is big enough to secure excellent deals from vendors, but the two of them together make for a purchasing behemoth.

Then there's the proliferation of joint purchasing efforts among hospitals and other healthcare providers, a trend that will only get stronger as that industry struggles to keep down costs. And groups like the Independent Grocers Association are hardly strangers to the concept of the purchasing cooperative.

Still, the practice is nowhere near as prevalent as it might be, given the obvious advantages of consolidating the spending power of multiple businesses. "There's no reason that there can't simply be groups of private corporations, publicly traded corporations, even governments that collaborate to obtain better pricing of goods and services," says Michael L. O'Shaughnessy, an attorney in Chicago with the law firm of Greensfelder, Hemker & Gale. What's more, he sees no reason why those entities can't be direct competitors.

A number of companies began moving in that direction more than a decade ago, with the sudden popularity of B2B e-commerce exchanges. In theory, it was an ideal way to exploit the advantages of the internet for all kinds of collaborative activities, especially procurement. Companies would reduce transaction costs and get better deals from vendors in the meantime. Supplier portals, an offshoot of the concept, would serve as hubs for acquiring any number of raw materials, components, services and miscellaneous items, in addition to monitoring vendor performance.

Things didn't work out as planned. Suppliers balked at participating in a system that seemed exclusively focused on price. Buyers proved reluctant to turn over a valued internal function to third-party management. Traditional relationships between vendors and their customers seemed threatened by this new medium for procurement.

In addition, says O'Shaughnessy, many of the B2B ventures were under-capitalized or ended up spending money at an accelerated rate. And broadband capabilities of the time weren't sufficient to handle the volume of traffic that was needed to make the B2B exchanges economically viable. "The hope for software suites and purchasing that could be done electronically just never matured," O'Shaughnessy says.

Exhibit A in the failure of the first wave of exchanges was Covisint, a joint effort in 2000 among General Motors, Ford Motor Co. and what was then DaimlerChrysler. Besides having a name that people weren't sure how to pronounce, the exchange never achieved its goal of creating a single, directly owned network under which the Big Three automakers could do business with a universe of suppliers. After just two years of existence, Covisint ran into funding problems, and in 2004 was sold to Compuware Corp. It subsequently expanded into healthcare, oil and gas, and other industries, and remains an independent entity today, offering collaborative portal and data-exchange services.

In retrospect, it's hard to imagine those three giant rivals getting along. "What you need at the core of any collaborative purchasing arrangement is a willingness to work together, and in some cases compromise," says O'Shaughnessy. For example, participating businesses might have different timetables for acquiring goods and services, driven by internal calendars. Nevertheless, he believes the concept is sound, and due for a revival.

There are, of course, complications. The first and most obvious question is of a legal nature. Don't these prospective "collaborations" among competitors raise antitrust concerns? O'Shaughnessy says that isn't necessarily a problem. The Federal Trade Commission gave a tentative green light to Covisint, and both FTC and the U.S. Department of Justice have developed strict guidelines over the years for participants in collaborative purchasing ventures. But they haven't ruled them out altogether.

There are also concerns to be addressed on the private-sector side. A workable B2B exchange involving nominal competitors must have provisions for ensuring confidentiality about details such as purchasing volume. The presence of a third-party aggregator can help to shield each participant's spend numbers, O'Shaughnessy says.

The need to achieve critical mass is yet another factor in judging the viability of any collaborative effort. At the outset, the concept was thought to be best suited to larger companies, which automatically bring hefty purchasing volumes to the table. As things progressed, however, it became obvious that many of those Fortune 50 or 100 entities believed they had enough spending prowess to go it alone. B2B exchanges therefore became more of a vehicle for small to medium-sized companies, looking to combine modest volumes into a single spending power.

But how many of those smaller players are needed, before a collaborative effort can attract the kind of deals that make it worthwhile? "The volumes you need to drive to get lower costs are better achieved with larger participants," says O'Shaughnessy. Moreover, a viable B2B exchange should consist of companies that are roughly equal in size, so that the venture isn't controlled by one or two purchasing giants.

Finally, a decision has to be made about who takes title to purchased goods, and when. It's probably simpler and cheaper, says O'Shaughnessy, to allow each participant to deal directly with vendors as to when and where the goods are shipped, and when title passes. But such one-to-one communications can undermine the value of a collaborative venture.

Collaborative purchasing has been in existence for 20 years or more, but the concept is still new and untested to many companies. For the short term, O'Shaughnessy sees the most promise in arrangements between government agencies, and even between governments. Still, large portions of the private sector - which tends to view every penny of savings as a competitive differentiator - remain stubbornly unconvinced.

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Keywords: supply chain, supply chain management, inventory management, inventory control, international trade, supply chain planning, retail supply chain, sourcing solutions

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