Recent cost increases are presenting a continuing and defining challenge for U.S. companies fighting to protect their margins without pushing price increases upon the consumer. But CEOs and other executives in senior management all too often focus on direct material costs and overlook the opportunities to be found in taking a total cost management approach to indirect costs, where dramatic savings often can still be realized.
For supply management professionals, of course, total cost management remains an exciting topic, and many are using a tool that has yet to be fully tapped: the group purchasing organization (GPO), also known as the consortium.
A Traditional Tool Gets More Attention
Group purchasing organizations have a legacy of serving industry micro-segments, and Jason Busch, managing director of consulting firm Azul Partners, points out that GPOs, at least in their current incarnation, have not been well known outside of the healthcare sector, a fact that has helped obscure their broader applicability. "When one hears the word ‘GPO,' it is easy to get the wrong impression," says Busch, who is also editor of the highly trafficked blog Spend Matters. "But modern GPOs can take on any form — industry-specific or not — and often go beyond just leveraging group buying power to drive negotiated prices. Many offer technology, reporting and other benefits to their participants as well."
GPOs also have suffered from the kind of high transaction costs and poor compliance that have plagued enterprise procurement organizations, according to Tim Minahan, former senior vice president of global supply management research for Boston-based Aberdeen and now senior vice president of marketing for supply management solution provider Procuri. "Of course, with multiple, disparate and often competing constituents, GPOs have had this problem in spades," says Minahan, who has tracked the GPO for several years.
Pierre Mitchell, research director for the business advisory firm Hackett Group, suggests that supply management professionals can also evaluate GPOs within the bigger landscape. Beyond the vertical or commodity-specific models and corporate-sponsored examples, organizations such as IBM, ICG Commerce, A.T. Kearney and others have made a GPO part of their supply management outsourcing offerings. "This becomes critical for the customer wanting a complete mix of options in his or her spend management goals," says Mitchell. He cautions that the aggregation component of outsourcing from such vendors has often been problematic and, in response, these vendors have downplayed their consortium efforts.
Busch believes that even for companies with world-class procurement capabilities, GPOs can play an important role for non-strategic or non-core categories where it does not make sense to develop expertise in-house, and where developing a custom outsourcing agreement is not necessary. "In fact," Busch says, "one might say that GPOs are a ‘stealth' outsourcing procurement play — and a model that can make more sense than a traditional outsourcing mode, depending on the buying organization's background and situation." Busch points to Corporate United and ICG Commerce as two proven GPOs with a track-record of cutting across industry and vertical segments.
David Clevenger, vice president with Corporate United, one of the largest U.S. group purchasing organizations, echoes Busch's statements. "This type of procurement is a hybrid outsourcing solution," Clevenger says. "Instead of outsourcing indirect procurement to one provider, consortium buying allows organizations to select specific categories to outsource." A horizontal, third-party provider of group purchasing, Corporate United currently provides 16 different indirect spend contracts to its 80-plus member base.