Does aggregation really lead to lower prices?

The idea that greater purchasing power delivers lower prices may be accepted wisdom in procurement circles, but it doesn’t always add up writes Alan Low, MD of Purchasing Index. The simple fact is that the “Viking” (volume is king) model, applied ad infinitum to B2B and B2G Purchasing, has not delivered consistently better prices than those being achieved by less volume-intensive purchasing organisations.

Such evidence as there is suggests that at the top end of the volume spectrum (the dominant buyers) the opposite has been happening.

Little visible proof that volume leverage works

“Evidence collected by PI through the Pricetrak services it provides to its clients in three continents points strongly to volume thresholds for the best prices being relatively low.”

“One obvious reason must be that marginally attractive buyers on the volume scale are manifestly less threatening to suppliers than aspiring dominant buyers who in certain sectors have been trying to aggregate spend from their different operating divisions and dispersed business units.”

“Yet the myth of volume leverage continues to survive despite there being little quantitative proof from the purchasing profession. For decades, top management of many large organisations have bought into the Viking pricing theory, investing heavily in corporate purchasing structures with the expectation of lower prices,” says Low.

Unintended Consequences

Aside from the failure of volume leveraging endeavours to deliver lower prices, other potentially harmful unintended consequences of aggregation strategies have still not been properly debated.

The downside of aggregation includes the further entrenchment of already dominant suppliers; the elimination of locally based SMEs from tender opportunities and the raising of entry barriers for new businesses. Volume leverage has also spawned a proliferation of public and private sector intermediaries positioned between business links and their prime suppliers.

To operate in today’s economic environment, effective buying requires high-quality, properly trained and motivated staff – and enough of them, access to market information and independent measurement of their pricing achievements. Since for many business units these criteria are unlikely to be met, solutions must lie in a pragmatic approach to ad hoc measures of collectivization as and when circumstances suggest that this may be the answer. It is an alternative strategy that is already working well in some places.

A little independent measurement of both price and process cost performance would undoubtedly stimulate and inform a debate. It may not be easy to find out what organisations in your own and other business sectors are paying, but it can and is being done.

Of course there is such a thing as volume discount but this is triggered at very much lower levels than buyers often realize. Marginal sales are of immense value to suppliers trying to increase their market penetration. They have established their core business and may take additional sales at far lower margins than they would offer their existing customers – indeed this may be the main driver to a new business salesperson measured and remunerated mainly on volume of sales.

Efficient, low-overhead SMEs can and often do provide true competition – they compete with the big players every day of the week. Far too many buyers with geographical spread insist on single suppliers and close the door to real savings opportunities and service enhancement for the benefit of a minuscule administrative saving.

Buyers should not lose sight of a rather obvious fact – just because you are paying less for something than the majority does not mean you could not do much better.

“Help suppliers to help you” – understanding how you both can adapt to take out unnecessary cost is a key to savings and enhanced service levels from happy suppliers.

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