Bookshop.org launched in the US and UK as an “ethical” alternative to Amazon, allowing independent booksellers to create a virtual store front. If someone bought a book specifically from one of the participating stores, that bookseller would receive 30% of the cover price from the sale. When a sale was made and not linked to a specific bookseller, 10% of the cover price would go into a pot that was split equally amongst all of the booksellers.
When this platform launched, it was greeted with great public enthusiasm from independent bookstores, publishers, authors, and readers – including myself. Finally, here was a model to help independent businesses sell online.
Complaints from booksellers have been growing. Bookstores would normally make between 43 and 50 percent on a book, much more than the 30 percent offered by bookshop.org. Tamsin Roswell, a bookseller at Kenilworth Books says the platform is “attempting to homogenise all indie bookshops.” The biggest fear seems to be that rather than stealing customers from Amazon, the site is stealing customers away from the independents themselves.
Now, don’t get me wrong. I believe that bookshop.org’s heart is in the right place. They applied for B corporation certification, a designation for businesses that meet high standards of social and environmental “purpose”. As Andy Hunter, CEO of the website says, they are pushing for “a sea-change in consumer behaviour that protects independent bookstores.”
It’s not the intentions of bookshop.org that bother me, but rather their ownership model.
I firmly believe that the long term needs of independents are best met through a cooperative model where ownership and responsibility is shared equally by members under the principle of “one share, one vote”.
Under a cooperative structure, independents would be in control of their own destiny. The competition and tension amongst independents who previously were allies would be removed. The voice of each independent would be preserved as would the individual strengths each brings to the table.
Cooperatives need to stop shying away from technology and help their members sell. Software platforms designed for purchasing cooperatives, such as the LBMX Marketplace provide a National Accounts module designed to help B2B sellers compete online. Coops such as Home Hardware in Canada have embraced online B2C selling on behalf of their members.
So while it was understandable that supporters of independent businesses, such as myself, were excited by the potential “ethical alternative” to Amazon, we forgot to look at it from the perspective of the independent. We forgot that the cooperative or purchasing cooperaive model continues to be the best model to support independent businesses.
At the end of the day, “independence” is what makes independent bookstores and other businesses special. Any solution supporting independents needs to keep this in mind.
A purchasing cooperative is a member-owned, member-controlled organization devoted to purchasing and other supply-chain issues. Traditionally, purchasing cooperatives help their members lower their costs by aggregating their collective purchasing power, thus keeping them competitive with larger competitors.
In simple terms, independent businesses within a common vertical – such as HVAC distribution, restaurant supply, building materials retail, flooring retail, electrical distribution, etc. – come together to negotiate collectively with their suppliers. By negotiating collectively, each business effectively approaches each of their suppliers not with their own individual purchasing power, but with the purchasing power of the sum of the cooperative’s members.
For example, a “mom and pop” sporting goods store on its own does not purchase enough product to get the same deal from their suppliers as a national retailer. However, if all of the “mom and pop” sporting goods stores across the country combine their purchasing power, collectively they can negotiate a better deal with their suppliers. This allows them to be competitive with national retailers while still retaining their independence.
There are four key concepts here:
A purchasing cooperative consists of independent members. This means that each member runs their own business the way that they see fit. Unlike franchises, they do not have to operate under a specific brand name, they can operate under their own procedures using any software systems they want to, they do not have to report their sales to the purchasing cooperative, and they can choose to leave the coop at any time. They are under no obligation to follow any of the guidelines of the cooperative, and they can even choose to ignore the supplier deals negotiated by the purchasing coop. In short, they remain completely independent.
Purchasing cooperatives are member owned. Typically, each member owns one share – and one share only – of the purchasing coop. Every member has an equal vote in how the cooperative is run. This means that the smallest volume member has the same voice as the largest volume member. Because the cooperative is owned by the members, the cooperative itself does not have a goal of making a profit. Administrative costs are met, and funds are raised to provide various programs and services to members, but otherwise any revenue raised by the coop is returned to its members, usually in the form of rebates based on usage.
Revenue generated by the purchasing cooperative is returned to the members, based on usage. One of they key outcomes of cooperative purchasing is a dividend from suppliers in the form of rebates. Rather than lower the list price of individual products, suppliers will negotiate a rebate with the cooperative and its members. While complexity and variety exists, in its simplest form a rebate is a reimbursement of a percentage of the purchases made throughout the year. For example, a supplier may pay back 5% of all purchase dollars spent by a cooperative’s members. This achieves the result of lowering merchandise costs based on actual purchases and not on promised purchases. Rebates are paid back to a cooperative’s members based on each member’s share of the purchases included within the rebate. The purchasing cooperative often holds back a portion of these rebates to fund the coop’s operating expenses.
Cooperative purchasing is not price fixing. Purchasing cooperatives negotiate purchasing terms, not selling prices. Price fixing is illegal, and purchasing cooperatives must be vigilant in avoiding the appearance of impropriety here. Members benefit from reduced costs of the goods they sell, but they are free to sell those goods at any prices they wish to.
There are three broad functions of purchasing cooperatives: negotiating purchase agreements, marketing products, and providing services. As purchasing cooperatives mature, they often provide additional functions and services. Howard Brodsky, CEO of CCA Global Partners, one of the largest purchasing cooperatives in North America, once said, “It is the job of the cooperative to do for the members what the members can’t do for themselves.” In addition to aggregating purchasing power, CCA provides marketing, insurance, financing, and other services to its members.
It should be noted that for-profit buying groups exist that operate similarly to purchasing cooperatives. The main difference is that a buying group is not owned under the “one member, one share” model. Buying groups are owned by a private party who intends to generate a profit by operating the group. Despite this key difference, the operational challenges and strategies of a buying group are identical to those of a purchasing cooperative, and the terms “buying group” and “purchasing cooperative” often get used interchangeably.
Purchasing cooperatives provide a way for regional independent businesses to remain competitive with national corporate entities while retaining their independence and entrepreneurial spirit. Within a coop, members have an equal voice in controlling their future.
Buying groups and purchasing coops – what is your group’s strategy for increasing member loyalty? Loyalty is defined as feelings of support or duty towards someone or something. Like communication, it is a two-way street. Your members’ loyalty can be expressed verbally – such as objecting to negative comments about the group made by other members. Loyalty can also be expressed through behaviour – such as sharing best practices with other members. The strongest groups I’ve worked with all have one thing in common: their members describe the group and the other members as family. What are you doing to foster that sense of family?
The primary function of a buying group or purchasing cooperative is to maximize members’ rebates and lower the cost of goods sold (COGS) through selecting preferred vendors, negotiating effective programs, and accurately tracking rebates earned across all members.
Rebate “revenue” can make the difference between a profitable year or an unprofitable year for your members. Loyalty to your group is largely a factor of how successful a group’s rebate performance has been. Rebates also form the basis for operational budgets for a group as well as funding additional services the group provides for its members.
Given the importance of rebates, it would be fair to assume that buying groups and purchasing cooperatives would use software designed to increase the amount of rebates earned and decrease the level of (largely human) errors that steal money from your members’ pockets.
Unfortunately, that assumption is wrong.
The truth is that all too many groups rely on antiquated software, manual processes, and inaccurate data in order to manage rebates on behalf of their members.
Rebates are a best practice.
Rebates are a pricing best practice within a supply chain, and they should present a win-win-win scenario for a group, its members, and its suppliers.
Rebates allow suppliers to provide fair and accurate volume sales pricing to their customers. Without rebates, a supplier would base its volume discount on the past performance of a buyer combined with the promises of what that buyer will buy in the coming year. What happens when a buyer says they will buy $200M in product, but they only buy $75M? Or, what happens if a buyer promises to buy $200M in product, but they actually buy $300M? Rebates are used to price based on actual purchases rather than promised purchases.
Rebates also provide suppliers with a way to promote purchasing the products they want to sell more of. Does the supplier want to sell more items that have a large profit margin as opposed to lower profit items? Is the supplier introducing a new product line that they want to be successful? Does the supplier want to gain a stronger product mix within their customers’ stores? Each of these goals can be achieved through effective rebate programs.
In short, rebates are a best practice within a B2B supply chain to ensure that businesses receive the desired price, volume, and product mix. The role of buying groups and purchasing cooperatives is to maximize the rebate opportunity on behalf of their members.
Groups provide a way for individual businesses to leverage their purchasing power with other businesses within the same category in order to negotiate higher rebates. Using the example above, 100 buyers buying $200M each will have better success negotiating a higher rebate than one $200M buyer.
The “cost” of combining the purchasing power of independent businesses to increase rebate performance is having effective tools and systems in place to track and manage each program.
Most common rebate programs.
Purchase Percentage/Value per Units: This is perhaps the simplest and most common form of rebate program. These programs are not based on volume or growth, but apply to evenly to all purchases. For example, a 4% rebate on purchases would be calculated as total dollars purchased multiplied by 0.04. Or a $1.25 rebate per unit would be calculated as total units purchased multiplied by 1.25.
Volume Incentive/Plateau: This is one of the most effective programs for incentivizing higher purchasing amounts. Rebates increase as purchasing tiers are reached. For example, a program could have incentive targets of $100K, $500k, and $1M.
Purchases
Rebate %
$0-$100K
2%
$100K-$500K
4%
$500K-$1M
6%
>$1M
8%
Sample Volume Incentive/Plateau Program
So if a group purchased $200K of product, they would earn $8,000 in rebates.
Growth Incentives: As the name implies, growth incentives are based on achieving specific growth targets. Growth targets can be based on aggregate group growth or growth by specific members.
Growth over Previous Year
Rebate %
2%
2%
5%
4%
8%
6%
10%
8%
Sample Growth Incentive Program
Product Mix Incentive: This type of program provides an additional rebate on product X based on purchases of product Y. The intent is to provide an incentive to carry additional product lines from a supplier.
Purchases of Product Y
Additional Rebate on Product X
$0-$100K
2%
$100K-$500K
4%
$500K-$1M
6%
>$1M
8%
Sample Product Mix Incentive Program
In addition to the above standard types of programs, groups may choose to create rebate programs where the rebates earned go specifically to the group and not the member. The group may choose to pay their members at a lower rebate rate earned than the group earned. Or the group may pay the entire rebate earned to their membership.
Maximizing rebates.
The groups role is to analyze the purchasing patterns of their members and use this information to negotiate programs that result in the maximum amount of rebate revenue.
For example, most suppliers separate their product into “items that are eligible for a rebate” and “items that are not”. A simple purchase percentage is then applied to rebateable items – for example 4% rebate on all eligible purchases, regardless of volume or SKU.
This is simple to negotiate and simple to track. The problem is that it leaves a lot on the table.
Not all product is the same. One product line may have a higher profit margin for the supplier than another. Given that a supplier wants to incentivise purchasing high profit margin items, wouldn’t it make sense to offer a higher rebate percentage on high profit margin items and a lower rebate percentage on low profit margin items? The net result could be higher gross rebates for your members.
Focusing on volume or growth incentive programs should result in increased rebates – especially combined with effective preferred supplier programs and monitoring purchase volume real time.
Rebate management software makes supplier negotiations easier and more effective.
The key to negotiating effective rebate programs is data. Groups need accurate and detailed purchase data of what their members are buying, from whom, when they are buying it, and for how much.
Groups need accurate and timely purchase data in an easily digestible form, delivered automatically without reliance on suppliers or members. This data should be delivered seamlessly real-time by the rebate management software used by the group.
Effective rebate management software must allow you to analyze purchase data, determine what products are being purchased more than others, what plateau levels are realistic, and what opportunities exist for product mix incentives. The software should also identify similar items sold by different suppliers and make recommendations of reducing the number of suppliers in order to increase rebate dollars.
Imagine entering a supplier negotiation knowing more about what your members have purchased than your suppliers do. Proper rebate management software makes that a reality.
Tracking rebates should be strategic and not administrative.
How does your group track rebates? Too often, groups rely on receiving purchasing reports from their suppliers to tell them what their members have bought.
There are many problems with this approach:
Supplier reports come too late. Typically a supplier will deliver purchase reports to a group 8 to 12 weeks after the fact, much too late for a group to do anything. Missed reaching a plateau level by $10K? Nothing you can do about it now.
Supplier reports are inaccurate. Suppliers often don’t have the ability to view individual businesses as part of a single group. They end up manually piecing together information from several different spreadsheets from different people into one, resulting in inaccuracies. Suppliers often have not invested in accurate rebate tracking software themselves, resulting in further inaccuracies.
Members don’t provide accurate data. Realizing that supplier data may be inaccurate, some groups rely on members to verify supplier reports. This adds work load to members, often resulting in time wasted following up on requests, reconciling member reports with supplier reports, and potentially confusing the numbers even more.
Managing rebates become an administrative task. This is the most dangerous trap for groups. Given how time consuming the process is and how ineffective it has been historically to impact rebates during a rebate cycle, groups become administrative bodies. The focus is on manually dealing with a huge number of supplier and member spreadsheets, manually consolidating and verifying data in order to come up with a somewhat accurate rebate payout for members.
Spending time administering rebates rather than managing them is wasteful in terms of labor costs, lost rebates, and opportunity costs of other value added programs. What other services could the group be providing their members if they weren’t spending so much time buried in rebate spreadsheets?
Effective rebate management software will free up a group so that they can start thinking strategically rather than administratively. This level of data is only available with real-time rebate management.
The concept of real-time rebate management.
Real-time rebate management is based on electronically capturing all invoices, debits, and credits from suppliers and using that data to calculate rebates earned down to the penny. This real-time data can be used to analyze current and historical purchasing patterns as well as forecast new trends, providing powerful information for negotiating, tracking, optimizing, and reconciling member and group rebates.
Creating an EDI-based marketplace in which suppliers send electronic invoices to members and members send electronic claims to suppliers. The accuracy of rebate processing depends entirely on the extent to which suppliers and members commit to the electronic exchange of trading documents.
The good news is that most suppliers recognize the efficiencies involved with EDI ordering and invoicing. Major suppliers already send electronic invoices to their customers so it will not be a major challenge to add your group to their network.
Once your EDI network has been established, you can begin making the switch to real-time processing. With the right software, you can begin this transition immediately, combining both after-the-fact reporting with real-time rebates as suppliers are rolled onto your EDI platform.
The move to real-time processing of rebates is a journey, and one that provides significant value at each stage. The end result is the building of a foundation that achieves the key objectives of rebate management: accurate reporting and strategic use of data.
Benefits
The benefits of real time rebate processing are significant and provide groups with a significant ROI in both operational savings and strategic advantage. Groups that have adopted this approach have experienced the following benefits.
This approach means groups will know when they are getting close to a plateau rebate level, allowing them time to reach out to members to enable them to make additional purchases, driving increased rebates from suppliers.
Item level reporting provides the opportunity for the group and their members to understand the true net-net item cost after all rebates have been taken into consideration. This information can be particularly helpful in both special order and special bid situations.
The real-time approach allows the group and members to gain control over rebates and not depend exclusively on supplier reporting, which is often late and subject to error.
Capturing invoices and calculating rebates in real-time, reduces the number of non-reported purchases, increasing the overall payout to members.
Because the group can report on rebates at the invoice line-item level, there is additional scope for creative rebate development, advanced rebate reconciliation and more effective rebate negotiations with suppliers.
Real-time rebates eliminate the need for members to audit their purchases; often a task that is time consuming and prone to error.
This approach provides the opportunity to track more creative rebates. For example, suppliers may offer rebates for very specific product categories which they wish to strategically market to the members, or for categories that have higher gross profit margins and consequently there is the ability to provide greater rebates.
This information shifts the power of knowledge from the supplier to the group, in rebate program negotiations.
Groups need rebate management software designed specifically for a group environment.
Buying groups and purchasing cooperatives are unique and require unique software. LBMX understands these unique needs since they have been focusing on providing software, services, and other technology for over twenty years. In fact, through consulting with groups large and small around the globe, active participation in cooperative associations including the NCBA CLUSA, the Business Council of Co-operatives and Mutuals, Cooperative Business New Zealand, and through hosting the largest annual global conference on group purchasing, LBMX has had a hand in writing the best practices for group rebate management.
Not all rebate management software works within a group environment. Often they do not provide functionality for paying out rebates to members, taking deductions, creating accurate rebate statements, or prepaying rebates to key members.
Beware of rebate software that simply promises to simplify your after-the-fact supplier reporting processes. Without real-time invoice data, these types of solutions bring the same mistakes and misreporting as your old spreadsheet system does. They do not provide you with actionable data that can make a significant increase in your members’ rebates.
A second trap groups fall into is the belief that they need to create their own rebate management software. They believe that because of their uniqueness, they need custom software. This may work in the short term but has serious long-term disadvantages. Software needs constant updates, making it more expensive than you think. Custom software rarely solves the problem with after-the-fact reporting. Custom solutions typically create a dependency on a single person within the group to maintain and operate it, resulting in significant problems should this person ever leave.
Groups need a real-time rebate solution created specifically for buying groups and purchasing cooperatives by someone with expertise in creating an electronic data interchange (EDI) marketplace.
The key to success
The key ingredient for success in real-time rebate management is for groups to secure the cooperation and participation of their suppliers to send electronic invoices. If groups do not have the will to ensure suppliers provide electronic invoices, members will become islands in an ever-increasing connected world. It is challenging to understand why boards do not demand their suppliers provide the same service they are providing their corporate competitors. Groups that acquiesce on this responsibility are not providing the leadership their members need to survive.
Time is money, and when it comes to rebates, real-time is more money in your members’ pockets.
Your buying group is sitting on an oil field. In 2006, Clive Humby, architect of the Tesco Clubcard, a supermarket reward program, declared that “data is the new oil”. He went on to say, “it’s valuable, but if unrefined it cannot really be used.”
How valuable is it? According to one study by MarketsandMarkets, the global data monetization market is expected to grow from 2.3 billion USD in 2020 to 6.1 billion USD by 2025.
Data monetization strategies fall into two general categories. Direct revenue – selling direct access to your data to third parties – and indirect revenue – using refined data to improve supply chain performance, understand customer behaviour to drive sales, predict trends, and highlight how to save costs, avoid risk and streamline operations.
So what is your group’s data strategy? Do you even have one?
The first step in any buying group’s data strategy is accumulating the data. A centralized EDI program, such as the one offered by LBMX, allows groups to capture live supply chain data as electronic invoices, purchase orders, purchase order confirmations, and other documents flow through the group’s database. Nightly feeds from member POS systems can provide valuable sales data. Group-sponsored e-commerce sites can supplement sales data while also capturing customer information. Companies like CoMetrics provide tools to survey members on key metrics and provide benchmarking information across groups.
Admittedly, these approaches are simple, but they are not easy. Until they see the benefits, independent members may be reluctant to share their data. Clearly defining your group’s data strategy, including what data you are capturing and how you will use it, will go a long way in reducing member concerns. The key is to get started. As the proverb says, “The best time to plant a tree was 20 years ago. The second best time is now.”
Keep in mind, though, that it isn’t just about collecting information. It’s the ability to do something with it that solves specific problems that is important. It’s critical to really understand the data in order to see potential new opportunities, how to achieve them, and if they’re sustainable and efficient.
Do you even need a data strategy? Organizations that aren’t maximizing the value from enriching data are missing out on opportunities to grow, optimize, and manage risk. Your savviest members will have their own data strategies and will be hungry for the additional data you can provide. Your suppliers are likely doing everything they can to accumulate data within your sector. Competing groups will be employing their own data strategies as a market advantage. Your corporate competitors have been doing this for years. If you don’t begin to make use of your data to help your members, you can guarantee there are others actively using their data against them.
What do you do with the data?
In order to make use of or monetize your data, groups must identify the biggest opportunities your data can provide. For example, a partial list of opportunities for your group include:
Refining and enriching your group’s data and providing it to your members, either free or as a paid service
Analyzing the performance of specific product categories and suppliers to increase rebate revenues
Identifying product demand and analyze supply chain documents to see which suppliers are out of stock in order to make sure members have the stock they need to drive sales
Implementing predictive analytics to make intelligent forecasts about geographic market trends, pricing, product demands, and customer behaviour.
Providing strategic marketing and loyalty programs within your group.
Boosting levels of cooperation between manufacturers, vendors, and your members, resulting in cost savings throughout the entire supply chain.
Selling data – with a keen eye towards data security and privacy rights – to other companies.
The data buying groups hold is uniquely valuable, as it provides a holistic view of the market that suppliers, members, and customers do not have. There are challenges around security, privacy, and competitive concerns that need to be addressed before data can be monetized. These challenges are surmountable and can be addressed by developing and communicating a transparent data strategy with your members.
If you don’t begin taking advantage of this growth opportunity, you can guarantee that someone else will.
Covid has changed the business landscape, arguably forever. Some of the challenges – lack of digital sales platforms, for example – have been looming on the horizon for years. Others, such as the disruption of the supply chain, are new. Already hard pressed by corporate competitors, independent members need new strategic thinking from their buying groups in order to adapt to the new landscape.
Members need strategic leadership from their groups. They need help to do the things that they can’t do on their own. Often too bogged down in short term problems, independent businesses need a vision of where they should be going, and they need programs to get them there. Whether it is help developing effective ecommerce strategies, help developing continuity plans, financial loans to ease debt, or access to new business through national account programs, members need their groups to innovate.
Accelerate Virtual explores the question of what groups are doing to ensure their members’ success, now and in the future. Hosted by a panel of group experts from different segments and countries, this is an open discussion around what groups are doing for their members.
I look forward to you joining the discussion on Tuesday, October 27 at 10:00 am (ET). If you haven’t received your invitation, email me at sseguin@LBMX.com
Do you know how much, and how often, your members spend with a specific supplier? The answer to that question is key to negotiating a fair and realistic vendor buying agreement with your vendors. When it comes to supplier negotiations, the power balance in the supplier/group relationship has always favored the former. For groups looking to optimize their members’ rebates, vendor spend analysis data is key to the success in re-balancing that equation.
Most buying groups and purchasing cooperatives lack comprehensive real-time insights into what their members’ purchase. The same is often true of your suppliers – they often don’t recognize the full buying power of your group. That’s why accurately presenting spend analysis data is vital to improve buying groups’ negotiation of supplier contracts as well as improve their relationships with suppliers.
What is Spend Analysis?
Basically, spend analysis is the process of collecting, cleansing, classifying, and analyzing all available spending data that results in a better understanding of how money is spent in the procurement of products. It is considered to be the fundamental foundation of sourcing.
Spend analysis attempts to answer:
· What are members buying?
· Who are they buying it from?
· Which members are buying it?
· How often do they buy it?
· When did they buy it?
· How much did they pay?
· How much rebate did your members and your group earn?
· Is the group and its members getting what they were promised?
· How does the data compare to previous years?
Sources of Spend Analysis Data
Typically buying groups and purchasing cooperatives are reliant on after-the-fact reports submitted manually by either suppliers or members. This often results in missing or inaccurate data.
The best source of purchasing data is invoice data routed electronically through the group’s databases via EDI. Central bill groups have an advantage of having easier access to this data, but it is possible – and advisable – for direct bill groups to have invoice data routed through their system as well. Note that invoice data, not purchase order data, is key for accuracy.
While invoice information provides the most accurate information, claims, remittance advices, advance shipping notices, and other supply chain documents, when captured electronically are useful supplements.
Spend Categories
A spend category is the logical grouping of similar items. For example, “power tools” may be considered a spend category. To be effective in a buying group, spend categories must apply across members.
Once spend categories are set up, line items on invoices that flow through the group must be assigned to appropriate spend categories. Preferably, this task should be automated with the help of product inventory management (PIM) software.
Once invoice data has been collected, cleansed, and categorized at the line item level, procurement data may be sliced and diced based on a number of key performance indicators (KPIs). Some of the most common metrics include:
· Spend by category
· Number of suppliers by category
· Number of transactions by category
· Average purchase order value
· Spending distribution of key members
· Total expenditure by supplier
· Payment terms and conditions
· Rate of payment
· Number and dollar value of claims or returns
· Frequency of out of stocks
· Average delivery time by category
Using Spend Analysis
Successful, long-term negotiations and relationships must be strategic. Too often, I hear horror stories of groups enter less-than-favourable supplier contracts because they don’t realize how much their members are buying or they enter negotiations with a “hunch” rather that data-backed reasoning.
Using accurate spend analysis data buying groups can re-establish their leverage with suppliers. Done correctly, you may find that you have more information about your members’ buying habits than your suppliers do.
Crucially, spend analysis is most effective when comparing suppliers with competing suppliers within the same category. This is information your suppliers do not have, giving you a clear advantage. Understanding your alternatives, and strategically inserting them into the negotiation process adds more leverage to the buying group.
Managing supplier relationships and keeping them win-win is often key to a buying group’s success. Spend analysis is not just competitive, but collaborative. Sharing data where appropriate helps to establish your group’s credibility and trust.
In short, spend analysis should be a vital aspect of the negotiation of supplier contracts and the maintenance of positive and mutually beneficial vendor relationships. Buying groups need to overcome their lack of comprehensive data through the adoption of EDI as well as analytics tools such as the LBMX Solution Centre. With a proper, automated, and real-time supplier spend analysis process in place, buying groups can ensure that they have the best preferred vendors for each spend category with optimized terms and rebate programs for their members.
Amazon Business continues to disrupt distribution and is expected to reach $52 billion in sales by 2023. The Coronavirus pandemic has further shifted B2B traffic to Amazon and pointed out the shortcomings of many independent online distributors. Since selling their products directly on Amazon Business ultimately results in weak customer loyalty and fractionalized sales, independent distributors must form their own online marketplaces to succeed.
But how can independents compete against online B2B giants like Amazon Business, Alibaba, and eBay? Here are 6 ways your members can succeed in the B2B e-commerce marketplace:
1. Focus on a specific vertical.
Amazon Business is a multi-category marketplace, typically offering commodity products that are easy to store, pack, and ship. To compete, independents need to dominate a vertical-specific marketplace, rather than attempting to co-exist in a multi-category marketplace. Specializing in a specific vertical allows independents to offer a comprehensive selection of products, typically with lower prices and better price transparency.
However, if there can only be one or two dominant players in any given vertical, how can the majority of independents succeed? This is where buying groups can step in. Buying groups with the vision of becoming the dominant marketplace player within their vertical can create a platform where all of their members can flourish.
2. Mine the data.
An e-commerce site’s data offers invaluable insights into customer activity that can be used to constantly improve traffic and sales. What paths do customers use to navigate your site? Traffic patterns may suggest new products or cross-promotional opportunities.
3.Service your customers.
As a successful independent, you know your product and your customers better than any multi-category marketplace. Make it easy for customers to ask questions. Don’t just rely on FAQs or online manuals. Integrate online chat – with a trained service rep and not an automated chatbot. Call your customers to answer questions rather than relying on email. Offer technical support.
4.Make it easy.
Make it super simple to do business with you. For online marketplaces, search is king – if your customers can’t find it, they can’t buy it. Pair every product with images and videos to reduce confusion and enhance product descriptions. Optimize site speed. Provide charge accounts and invoice options. Save past orders, and make re-ordering as easy as one or two clicks. Track when certain products were purchased, and pro-actively remind customers of maintenance parts.
5.Reduce total costs.
Reducing costs for customers doesn’t always mean lowering prices. Localized product inventory and efficient cross-border fulfillment can save customers time and money. Look for other ways to reduce shipping costs. Offer rebate incentives to guide buyers to specific categories or to reward large customers without jeopardizing street prices.
6.Don’t forget the underserved.
Amazon focuses on large customers who buy commodity products and who ask few questions. Independent marketplaces can serve smaller, irregular customers whose purchases add up.
The stakes are high for independents. The trick is to not emulate Amazon Business. Independents will succeed by combining the knowledge, service, and passion independents bring to traditional distribution with new online tools and strategies. Buying groups can play a role by educating members and by offering relevant shared services.
Wouldn’t life be easier if all of your members used the same POS and ERP system? Your purchasing cooperative could more easily capture sales data. You could more easily create customizations specific to your group. You could create training materials and best practices for your members.
Why wouldn’t every group want to adopt a common software system?
There are some downsides, however.
It may be difficult finding one system that satisfies all of your members. Smaller members have different needs and budgets than larger members. Some members focus more on B2B sales and others B2C. Some member-distributors belong to more than one vertical (and more than one buying group). Some members have a stronger need for eCommerce than others.
Even if there is a suitable system for everyone, it can be dangerous putting all of your eggs in one basket. Just like you wouldn’t rely on a single supplier for key products, you shouldn’t make your membership vulnerable to a single software provider. Costs and customer service change. Companies go out of business. A little competition is healthy.
Given the above, some groups attempt to create their own POS software, specific to their coop. On the surface, this seems to eliminate problems of cost and customer service while providing your members exactly what they need. Unfortunately, buying groups are not software companies and most such initiatives are doomed to failure – especially once employee turnover occurs.
Requiring a single POS or ERP system may also inhibit adding new members. Changing systems is expensive and disruptive, adding another barrier to joining your group. Invariably, exceptions get made for certain new members, defeating the purpose of a single system.
The nature of purchasing cooperatives and their independent members goes against the idea of a group-imposed software system. Members tend to be fiercely independent. It’s their biggest strength (and their biggest weakness). They know what is best for their business.
So what should a purchasing cooperative do?
Start by surveying your members and identify which POS/ERP systems they use, what they like about them, and what they dislike.
Next identify not only the functionality that your members need, but also the functionality that will advance your coop’s initiatives. This functionality should include:
· EDI capability. You will want all of your members invoices flowing electronically through your group so that you can accurately track rebates, assess preferred vendors, negotiate event buys, etc. You will also want electronic ordering to gain extra rebate revenue. Inexpensive integrations with your members’ ERP systems are crucial.
· Data feeds. As is commonly said, data is the new oil. If you can capture members’ sales data, you can more effectively run your group. Equally as important as getting data out of the system is getting data in. Do you intend to use a common PIM and send product data to your members?
· Common product numbers and product hierarchies. As a group, you can’t compare member category performance if your members use different product numbers or assign those products to a different merchandise hierarchy. Members will be reluctant to adopt a common taxonomy (see above comments regarding independence). However, a good system will allow you to assign a second product number and category in alternate fields. Make sure these fields are included in the sales data fields.
· Support for the group’s private label credit card or loyalty cards. Does your group accept Airmiles? Do you have a branded credit card? Make sure your members’ POS systems support it without manual keying.
Once you have your list of must-have functionality as well as your list of most common providers, treat them like you would any of your preferred suppliers. Negotiate a vendor buying agreement that includes costs, terms, and levels of service. Establish a rebate program. Work towards reducing the list down to 3 or 4 providers (as opposed to one) like you would in any other product category.
Remember, access to your annual or semi-annual shows is important to POS providers. It’s a key time for them to connect with their customers and generate revenue. Restrict access to these shows to preferred software providers.
Most importantly, make your list of functionality a requirement of becoming a preferred supplier. If a provider does not commit to providing the functionality you need, remove them from the list. There may be times where you need software customizations very specific to your group, and you may be required to pay for them. It will be more cost-effective negotiating on behalf of your members than for your members to do it themselves.
Make sure you maintain active relationships with your software providers. Include them in communications you would provide all of your other vendors. Take the time to understand their product and assign them scorecards like any other supplier.
By setting up a strict preferred supplier program with a small number of POS/ERP providers, your buying group can attain many of the same benefits as having a single provider without the risks.
