Purchasing Cooperatives

Thoughts and strategies for running a purchasing cooperative or buying group

Category: Strategy

Successfully Adopting Electronic Ordering within a Purchasing Cooperative

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On October 11, 2017

In Strategy, Technology

Purchasing cooperatives struggle with moving from a decentralized or paper-based ordering network to a centralized electronic ordering platform. Even though electronic ordering benefits everyone in the buying group’s supply chain, numerous road blocks seem to deter groups from moving forward.

Why Electronic Ordering?

Electronic ordering (or e-ordering), if done correctly, can provide buying groups with valuable purchasing data that can be used to strengthen the coop through:

·        Meaningful preferred vendor programs

·        Improved rebate negotiations

·        Knowledge of member performance and trends

·        Ability to forecast rebate earnings

·        Additional value-added shared services to members

·        Improved relationships with suppliers

E-Ordering Strategy

A successful e-ordering strategy includes:

·        adopting a flexible methodology that makes it easy for members with different capabilities to participate

·        providing carrots for both member and supplier participation

·        setting realistic adoption goals

·        committing to provide feedback to both members and suppliers on an on-going basis of the results of the program.

Flexible Methodology

It’s a fact of life of buying groups that when it comes to technology, members have their own comfort zones, capabilities, and preferred way of doing things. Unless your members are strongly motivated to adopt e-ordering, attempts to impose a single way of doing things will fail.

There are three broad forms of e-ordering:

·        A web-based ordering system where members manually key orders into an online catalogue

·        Capturing orders generated from members’ ERP systems

·        Converting other manual order mediums, such as emails, faxes, or spreadsheets, into an electronic (EDI) format

Each of these approaches have pros and cons, and no single approach will appeal to all of your members. However, by providing all of these options (or as many as possible), you will ensure that the maximum number of members participate. 

Online Catalogues

An online catalogue is simply a web-based tool for members to view the product available from a supplier and manually key in orders.

This approach requires the most effort from your group, your suppliers, and your members. As a purchasing cooperative, you will need to work with your suppliers to provide product information in a format you can publish into a web-catalogue. Ideally this product information will include product images, rich descriptions, and relevant cost information. Where possible, the task of putting this information together should be pushed to the suppliers themselves, but your purchasing cooperative should be prepared to step in where needed.

Members will have to be willing to visit the group’s web catalogue and manually key in orders. If they are accustomed to keying in orders into their supplier web sites, this will not be a difficult transition. However, if the member is used to generating purchase orders directly from their ERP systems, then convincing them to re-key their orders will be an uphill battle.

One advantage of managing online catalogues is that you will have a rich repository of product data that can be used in analytics as well as member e-commerce. The other advantage is that there are no costs for the member to participate.

Capturing Member Orders

A far less labour-intensive approach to e-ordering is to allow members to enter purchase orders into their existing ERP software, as they are already doing, and then provide a way to access those orders electronically.

The most common approach is to provide integrations into the various ERP systems used by your members. Such integrations result in either a file exported that can be transmitted and mapped as an EDI file, or a direct API integration into your ordering platform.

Some online catalogue providers also have the ability to accept “punch outs” from various systems. With a punch out, the member can view the catalogue and place orders while staying within their own software platforms. This style of e-ordering is most common with larger systems such as Oracle or J.D. Edwards.

The benefit of this approach is that it is built upon your members’ existing ordering process and eliminates any need for re-keying. The downside is that there is usually a cost involved for the member to create the integration and on an ongoing basis for transmitting orders. Groups can help reduce these costs by funding ERP integrations on behalf of their members and by negotiating a group rate for the EDI traffic.

Other Mediums

Depending on your provider, it is also possible to capture purchase orders in other formats and convert them into EDI files.

If your members regularly email or fax their orders, some providers have tools to capture those transmissions and convert the PDF attachment or fax into usable data that can be translated into an EDI file. This practice, unfortunately, tends to be less accurate than traditional EDI methods and may result in an increased number of failed orders.

Members may also create orders in Excel spreadsheets or other file formats. As long as the format is consistent from order to order, these files can be mapped into traditional EDI files. This process is highly accurate and provides a very reliable form of electronic ordering. The downside is there will likely be an additional cost to the member for translation maps.

Carrots

For an e-ordering initiative to be successful, it is important to have buy-in from your members and suppliers. The first step in achieving this buy-in is to communicate very clearly why you are adopting e-ordering and what the benefits are for everyone participating.

Carrots for Members

Members will benefit from added efficiencies, improved customer service, and increased cost savings.

The added efficiencies enjoyed by your members will vary based on how they are currently placing orders and how they will be sending e-orders. In environments where members have to visit each individual supplier’s web site, remember a username and password, and login to key in an order, having a single, group-sponsored online catalogue for every supplier will be very appealing to members.

Online catalogues also open up the opportunity for providing product information to members to fuel their POS, ERP, and e-commerce solutions. Product data is gold, and its value to members should not be underestimated.

In environments where orders can be created and transmitted directly from their ERP systems as part of their normal ordering process, maximum efficiency is gained. There is no re-keying as purchase orders are created automatically.

Members with the ability to already generate EDI orders from their ERP systems may have already launched their own e-ordering campaign. These efforts by individual members are generally time consuming and expensive, usually resulting in only a handful of suppliers being onboarded. A group-initiated e-ordering campaign eliminates these duplicated efforts among members, and result in a much higher level of supplier participation at far less cost and effort for each member.

Electronic ordering typically includes electronic acknowledgements and advance shipping notices. This will provide your members with timely information about out of stocks, back orders, product substitutions and shipping dates that can be vital when dealing with trade customers.

Finally, e-ordering can be used to negotiate increased rebates or discounts from your suppliers. E-ordering will save your suppliers money and will generally increase their sales. This can be used as a basis for negotiating additional rebates that can be passed along to your members. These rebates will sometimes cover any EDI costs the member may incur.

Carrots for Suppliers

Suppliers enjoy many cost savings and revenue generating opportunities when orders are placed electronically.

Electronic orders are fed directly into their ERP systems without the need for human processing. Their automatic processes are able to take the order, acknowledge it, fulfill it, and invoice it far more efficiently than if it arrived by other means.

Combining e-ordering with e-invoicing will provide further incentives for suppliers to participate. Studies show that e-invoicing greatly reduces the time to pay, putting money in your suppliers’ pockets sooner.

Offering a central billing program for some or all of your suppliers will also make them more eager to participate. If your group is paying invoices on behalf of your members, your suppliers will feel more confident of prompt payment. A single payer also streamlines their payment processes. With e-ordering and the right software tools, you will have visibility of what your members are ordering and be able to control any credit risks associated with central billing. The benefits of central billing to your suppliers will often cause them to provide you with better terms discounts which can introduce further savings for your members or generate revenue for your group.

Onboarding

Onboarding suppliers onto an electronic ordering platform is as much an art as it is a science. Treat it as you would any other major group initiative – talk about it in all your communications, measure it, and build a marketing initiative around it.

Tackle your low-hanging fruit first. Identify your suppliers who already support e-ordering and who are eager to participate. Early wins will help build confidence in the program and build momentum.

Next focus on your bigger suppliers, the ones with the greatest purchase volume from your group. They have the most to gain and will provide the biggest benefit to your members.

On the member-side, identify the most common ERP systems in use by your members and work to create integrations with them. Recruit members who will act as champions for your campaign and will be willing to talk with suppliers and other members.

If you will be creating online catalogues, make sure you have adequate staff in place. No matter how good your catalogue tools are, you will need staff to maintain products and catalogues on an on-going basis.

Set realistic goals and timelines for the number of suppliers and members participating in the program. It is unrealistic to expect 100% participation. Decide what numbers make sense for you.

Reporting

Once your e-ordering platform is up and running, continue to follow up on it. Continue to add suppliers to the platform. If possible, encourage your members to place orders for non-group suppliers as well so that you can capture data about those purchases.

Run reports every quarter, showing member purchases from suppliers and provide this feedback to your trading partners. Historically, purchases from suppliers who participate in e-ordering will increase over time. It is good practice to show this trend to your suppliers.

You can also use purchase data when evaluating your preferred vendor programs as well as tracking your members’ participation in your programs. Access to line item information may also help you when considering container buys or white label product lines.

Solution Providers

Moving to an e-ordering platform requires a knowledgeable partner who understands the uniqueness of the buying group model, has the appropriate software tools, and has experience building an EDI exchange within a supply chain.

Disrupt or be disrupted! Will the buying group/purchasing cooperative model face disruption?

By

On October 27, 2016

In Strategy

I had a very interesting conversation with the leaders of a couple buying groups recently in Miami about whether the buying group/purchasing cooperative will last or whether it will be disrupted like Netflix disrupted the DVD rental business.

“Disruption”, as defined by Clayton M. Christensen, refers to a process where a smaller organization with fewer resources successfully challenges an incumbent business.

Here’s the way disruption works:

As an existing business focuses on improving their products and services for their most demanding and most profitable customers, they ignore the needs of other customers. Disruptors successfully target those overlooked customers, delivering more-suitable functionality often at a lower price. They do this partly by harnessing new technologies but also by developing new business models and exploiting old technologies in new ways. The incumbent business, which has institutionalized focusing on their more-demanding segments, does not respond fast or strong enough to the new competitors. These disruptors then move upmarket, delivering the benefits that incumbent’s mainstream customers need/want, while preserving the advantages that drove their early success. When the mainstream customers begin to adopt the entrants’ offerings in volume, disruption has occurred.

What could possibly disrupt buying groups? During our wine-fueled discussion, we came up with the following:

  • Will a nimbler buying group more adept at technology enter your space? 
  • Could online ordering portals allow independents to aggregate their purchasing power outside of the group?
  • Will Amazon’s continued growth disrupt the supply chain in a way that affects groups?
  • Will third party supply chain finance organizations provide new ways to fund purchases?
  • What effect will the rise of 3D printing have on your preferred vendors?

OK, someone always mentions 3D printing in every discussion about disruption. Most likely, if disruption comes, it will come from an unexpected direction.

So what can a buying group do to prevent disruption?

First, groups need to watch for and be aware of potential disruptors. It is important to have someone in your organization constantly asking what your competitors are doing and what you can do to either stave off or embrace disruption.

You also need to watch for potential disruptors to the business of your members.

It is worth noting that you should choose carefully what you view as disruptive. This shouldn’t become a “sky is falling” scenario. Develop a keen understanding of competitive offerings and know when a new model can offer more to your members in a different way than you currently do. Avoid an excess of attachment to today’s measure of success, and avoid the common technology trap of being attracted to the next shiny object.

If you do determine that a potential disruptor is entering your space, you should focus on focusing on the needs of smaller members. Remember that disruption starts with smaller, less-demanding customers (or in this case, members). Because your offerings are not as well-suited to the needs of smaller, less committed members, the door is open for disruptors to focus on providing them with a “good enough” service.

The good news is that disruption is creative and not just destructive. By devoting people and energy towards the growth opportunities that accompany disruption, your group may become stronger than ever.

Are Purchasing Cooperatives Still Relevant?

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On August 5, 2016

In Strategy

Technology can be a game changer.

 Technology is making it easier and easier for independents to connect with distributors in ways that drive down costs for each party, which in turn increases margins. For example, more and more web sites are appearing that are designed to facilitate B2B ordering. Sites like www.stockinthechannel.com, which claims to be the largest search engine for IT re-sellers, manufacturers and distributors, hope to transform the supply chain by making it possible for all independents to buy their product in one location, without having to belong to a buying group or purchasing cooperative.

 If technology exists to facilitate B2B ordering at lower prices, are traditional purchasing cooperatives still relevant? Why pay to join a coop if you can simply go to a site and do all of your ordering at comparable margins?

 There are quite a few reasons, actually. It is worth noting that B2B sites typically do not understand the nuances of the independent buying model. I’ve seen a lot of tech outsiders come in, trying to adapt a corporate B2B model to the independent model, and it never works.

The Drawbacks 

The biggest mistake is focusing on cost rather than on a model that includes rebates. They don’t understand that vendors are reluctant to lower costs because that tends to lower the street price of their product. Think about it. A large independent is competing against big boxes, often on price. It would be very tempting to take advantage of a lower cost to reduce their list price to beat their competition. Their competitors would respond by negotiating a similar cost reduction and lowering their own prices. If this happens on a large enough scale, the reduced price becomes the permanent street price. This example is simplistic, but illustrative.  

 That’s why vendors prefer to offer after-the-fact rebates. They can pay a monthly, quarterly, or annual payment based on the purchases of the re-seller. It is often difficult to trace this lump rebate back to specific products, making it difficult to assign cost and adjust street prices.

 In addition to protecting their street prices, rebates have the advantage of being based on actual purchases. Negotiations around cost are based on what the re-seller thinks they will buy; rebates are based on what they actually bought.

 Because of this last point, a higher upfront cost combined with a strong after-the-fact rebate will result in better overall margins from vendors.

 The B2B sites don’t get this fact, probably because they view the ordering process as a technical problem to solve. They haven’t invested the time to understand the commercial ecosystem they are trying to market to.

 This lack of understanding of the world of independents manifests itself in other ways as well. Most of these technology companies have visions of corporate sales which do not apply to independents. Independents are often reluctant to change their procedures and suspicious to new technology, even when offered free. Many of the hardware stores I sold POS systems to in Canada did not even have high-speed internet. And while they may belong to a group, the group can’t make a sales decision for them.

The sales cycle for new technology is one lengthy sale after another, a fact that tech companies don’t appreciate until it’s too late. I’ve seen far too many tech companies leave the independent B2B market because of this slow sales cycle.

 So the purchasing cooperative model still has a viable place despite the rise of B2B technology companies looking to work directly with independents. But it is vital that coops establish themselves in the minds of their members and vendors and clearly demonstrate the value they add when it comes to technology.

What can groups do? 

How can they do this?

 Buying groups and purchasing cooperatives need to recognize they must do more than just negotiate prices on goods sold. They must add value through marketing programs, administrative functions, product education, group benefits packages, HR tools, and a host of other functions.

 As part of their offering to members, groups need a robust technology offering for their members. The people who run buying groups should keep up with industry trends and mentor their members about how technology can be used in their businesses. They should be involved enough to help members make the right tech choices, while making sure those choices strengthen the group rather than weaken it. Groups should also use their buying power to negotiate better pricing and rebates for the technology purchased by their members.

 Most importantly, groups need to invest in their own technology to compete with these start ups. Technology that is relevant to the robust ecosystem of independent businesses, an ecosystem where buying groups are still very relevant.

“We have no pull with our vendors”

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On July 21, 2016

In Strategy

Our Vendors Don’t Listen to Us

One of the most common comments I hear from buying groups is “our vendors don’t listen to us”. Variations include “they will listen to our members but not to us”, “our vendors wouldn’t change that for us”, and “our suppliers barely know we exist”.

Almost universally, buying groups have a pessimistic view of how important they are to the vendors that service the group. It doesn’t seem to matter whether it’s a central bill group (where the group pays all invoices on behalf of their members) or a direct bill group (where members pay vendors themselves), the belief exists that the buying group itself has no influence with vendors.

What Do Vendors Think?

Because of this complaint, I’ve been thinking about the supply chain from the vendor’s point of view.

What do vendors think about buying groups?

What value can buying groups provide suppliers?

How can a buying group gain more influence over their suppliers?

Would unilaterally focusing on what your group can do for your vendors cause vendors to look at what they can do for the group?

With these thoughts in mind, I recently had dinner with the VP of Sales of a large national vendor that supplied product to 8 different buying groups.  When I asked him what buying groups can do to help him as a supplier, he brought up four areas.

  1. “Treat your preferred vendors better than the non-preferred vendors”: Preferred vendors have demonstrated their support to your Group through group-negotiated pricing and rebates, by participating in your shows, and helping out with other promotions as needed. In exchange for this, are you doing everything you can to make sure your members are buying from your preferred vendors?

Buying outside of the group is bad for everyone, but it is particularly hard on a loyal vendor who has put money on the line in to gain preferred status. Getting just one more member to start buying from a preferred vendor can make a big difference.

Likewise, don’t offer benefits to non-preferred vendors that should only be given to preferred vendors.

  1. “Make sure your buying shows consistently benefit your vendors”: Shows and conferences can be expensive for vendors to attend. In addition to the fees, there are travel costs, which are even higher if they have to bring product to display.

Are your suppliers getting enough orders at these events to justify their participation?

Don’t assume that if you haven’t heard any complaints, that your suppliers are happy. They are reluctant to offer criticism, no matter how constructive. Ask them very straightforward questions: Is it worthwhile for you to attend our events? Are you connecting with the right people? Would you prefer national events or regional events? How does our event compare to other events that you attend? Is there a different format that would be better?

  1. “Simplify the rebate process”: Suppliers have to provide groups with after-the-fact reporting on member purchases in order to calculate rebates. This is typically a very manual, time consuming process. Finding ways to streamline this process will help make it easier for the supplier to do business with you.

Improving the rebate reporting process may also allow vendors to offer more creative (that is, more beneficial) rebate programs. A supplier views rebate programs as an incentive program to get customers to buy the products the supplier most wants to sell. There are some types of product that suppliers want to sell more than others.

For example, think about a high-margin product or part that needs to be replenished regularly. Suppliers would gladly provide higher rebates for these types of items if they could clearly see the group’s total historical purchases and if doing so did not create additional administrative hassles for the supplier. I’ve seen this occur within the buying groups that use our rebate management software so I know it works. Rebates don’t have to be the same amount across all product lines.

  1. “Give us data on your members’ purchases from us”: The structure of a buying group with independent members usually does not fit nicely with vendors’ reporting tools. They can eventually pull data on what your members are spending with them, but they would love it if you made their job easier for them. If vendors had clear numbers about the Group’s total purchases from them, they would be better able to see the value of working with the Group and will be better able to run Group-specific promotions. Put systems in place to get this data, and make it your job to let your vendors know exactly what your members are buying from them.

Spend some time thinking about your vendors from their perspective. Figure out what is important to them and how your group can help them. Be a better business partner with your preferred vendors, and you will find that they start to reciprocate. You may find that you have a lot more pull with your vendors than you might think.

“Supplier Financing” for Buying Groups

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On September 27, 2006

In Strategy

Increasingly buying groups and purchasing cooperatives have been looking at new options to provide financial support to the members and suppliers within their supply chain. Traditionally, groups have had a single model for financing – central bill – in which the group guaranteed payment of their members’ invoices from approved vendors.

Since the financial recession in 2008 new forms of supply chain financing have emerged that did not rely on banks or other financial institutions. Initially only available to large businesses, emerging technology platforms have made these financing options increasingly available to buying groups and their members.

Why Should Groups Get Involved?

Helping finance the purchases between members and suppliers appeals to buying groups and purchasing cooperatives for the following reasons:

  • It can help members optimize their cash flow and working capital
  • It can help lower purchase costs
  • It helps improve relationships with suppliers
  • It may form part of the cooperative’s social responsibility program

Supply Chain Financing

There are a number of types of financing that fall under the umbrella term “supplier financing”, all having the goal of enabling suppliers to be paid earlier than the invoice due date and enabling the buyer to optimize cash flow or lower their purchasing costs.

Conventional supply chain financing (SCF) consists of using a third party to pay invoices on behalf of the member who benefits from using someone else’s cash to pay suppliers early and gain terms discounts. In many ways, this is similar to a central bill model except that a third party rather than the buying group is advancing the money.

Supply chain financing can provide an alternative to groups who do not have the cash or the desire to become a central bill organization. However, introducing a third party into the payment process can present complications, especially if that third party undergoes its own financial difficulties.

Most importantly, the risk is that it by abdicating its role within the supply chain purchase to pay cycle, the strength of the group itself may become undermined.

It is crucial when considering any supply chain financing model that the strength of the buying group to both their members and suppliers is preserved, if not enhanced.

Dynamic Discounting

Dynamic discounting may provide a more viable approach to assisting the financial strength of members and suppliers within a buying group or purchasing cooperative. Dynamic discounting allows the buyer to secure lower buying prices in exchange for using its own cash to make early payments to the supplier.

Think about static discounting for a moment.

In static discounting, typical terms could be 2%, 10, Net 30, which means the supplier is offering a 2% discount if the buyer pays the invoice on day 10, where the contractual term for payment is 30 days. The problem is that even if the member was prepared to pay the invoice on Day 2, they would still wait another 8 days to make payment. Also, if the member couldn’t make payment before day 10, there is no incentive for them to pay on days 11 through 29. Similar problems exist if an invoice is not paid on day 30 – there is little incentive to pay sooner rather than later. Static discounting leaves a lot of wasted potential to recoup cash flow by getting paid any of the other days within the payment term.

Dynamic discounting, on the other hand, leverages the entire payment period by providing incentives for the buyer to pay on every single day of the term. Members typically see average returns between 10 and 36 percent from dynamic discounting.

How Dynamic Discounting Works

In dynamic discounting, the supplier sets an annual percentage rate (APR) which usually is based on how much interest they would receive if they left their money untouched, the size of your group’s sales with them, their access to operating cash, etc. Once the APR is set, the member can approve selective invoices for Dynamic Discounting.

The total discounted amount depends on how soon you pay the invoice. The discount calculation amounts to:

[(APR/365)*Days Remaining Till Due Date]

This is essentially a form of early payment discount, except with a pre-agreed sliding scale of discounts, allowing buyers to pay on the day of their choosing right up to the due date, or allowing vendors to ask for early payment at a time that suits their needs.

Unlike SCF, dynamic discounting happens without a third party provider mediating your group’s or your members’ payment relationship within the supply chain. You can leverage your own business relationships within the supply chain, leaving members and suppliers with the power to decide the best returns for their businesses.

How Do You Get Started?

Success requires a strong I.T. infrastructure, integration with members’ ERP systems, and an efficient process for on-boarding new suppliers.

The rise of technology platforms has been key to making dynamic discounting practical for buying groups. E-invoicing platforms, like LBMX, enable groups to offer dynamic discounting by providing a cloud-based solution that is easy to deploy and simple to use which will remove the barriers restricting adoption. With these solutions, members typically select the invoices they want to dynamically discount and a date they wish to pay. Real-time, they can see the discount that will be applied so they can make appropriate business decisions.

After a technology platform has been selected, the group must get buy in from their suppliers. Preparation will increase your odds of success.

Some groups start by standardizing the payment terms for suppliers across the board. Stretching out payment terms will help encourage suppliers to accept early payment terms in exchange for a discount. Payment terms longer than 45 days is optimal.

Narrow your focus and set realistic timelines. Rolling out a dynamic discounting program can be complicated. Focus on a small number of suppliers with the highest amount of spend. Identify other target suppliers based on their size and their cash flow needs. There are often a number of small, cash flow sensitive suppliers that are core to your group’s business that are prime candidates for this type of program.

Work closely with these targeted suppliers to understand their business goals, cash needs, payment preferences, etc. Strong communication with vendors is essential. Don’t start the conversation by talking about dynamic discounting or technology platforms. Start by simply discussing how suppliers can be paid earlier. This will attract greater attention and buy-in from suppliers and achieve higher results.

Once suppliers have bought in to the program, negotiate a suitable APR on behalf of your members and set them up into your dynamic discounting platform.

The role of buying groups and purchasing cooperatives is changing. Groups need to position themselves to better compete in a global economy without damaging their supply chain. Simply forcing longer payment terms, lower prices, or higher rebates onto suppliers is no longer the answer, if it ever was.

Groups must develop strategies that add value and benefit both members and suppliers, allowing both to benefit by selling more and therefore growing together. Dynamic discounting and other forms of supply chain financing can become a core part of a buying group’s supplier relationship management strategy, allowing them to add clear value to both halves of the supply chain.

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