Blog - Page 3 of 3 - Purchasing Cooperatives

Tech Strategies for Buying Groups

On April 6, 2016

Are you using software simply as an operational tool or are you using it to drive your buying group forward?

One of the biggest mistakes I see buying groups and purchasing cooperatives making is investing too much time, energy, and money on technology projects that are operational conveniences. Upgrades to accounting systems, cosmetic improvements to your web portal, and even adopting online ordering tools all have value, but will they help you meet your core objective of significantly improving your membership’s bottom line?

The technology you use should be aligned with the core objectives of your group. For example, a traditional purchasing group focuses on leveraging the buying power of their members. The goal is to reduce the overall cost of goods through discounts and rebates in order to significantly improve their member’s bottom line. There may be other secondary goals, but if this main goal is not consistently achieved, membership in the group has little value.

How can you use technology to drive your strategy? Your highest priority should be on getting accurate and complete real-time data about what your members are purchasing. Groups who capture category and item data real-time have a distinct advantage over other groups. They typically pay higher rebates out to their members. Their negotiations with vendors are smoother. They provide more creative services to their members. Member turnover is smaller, and as a whole the group is more resistant to the impact of corporate competitors.

Given how overworked most groups are, it can be tempting to think that increasing operational efficiency is a strategic goal. Tech projects can be frustrating and distracting for a lean buying group. That makes it even more crucial to focus on the right projects first. By focusing on operational efficiency, your group risks becoming an administrative body. Instead, focus on the larger goals of your group when choosing a tech project, and use these projects to distinguish yourself from other competing groups in your sector while adding value to your members.

For a full discussion on this subject, check out this recent webinar conducted with LBMX and the National Cooperative Business Association CLUSA International: https://goo.gl/W9nr4W

Sales Cooperatives?

By Steve_Seguin

On December 11, 2008

In Selling Cooperatives

Would the idea of a “sales co-operative” be that crazy?

For decades, purchasing co-operatives have flourished, giving independent businesses economies of scale to get lower costs from suppliers. In a traditional purchasing cooperative, independent businesses, who might otherwise be competitors, agree to negotiate together with their suppliers to achieve better terms, lower costs of goods, and, most typically, higher rebates. Over time, some purchasing cooperatives have expanded to provide additional services, such as centralized billing, marketing, private label products, product training, and a host of other services or functions too cumbersome or expensive for an individual business to do on their own.

The cornerstone of purchasing co-operatives is the idea of “one member, one vote”. Each individual business, or member, that belongs to the cooperative shares equal ownership of that cooperative. Regardless of how big or small a business may be, they only have a single share and a single vote. This ownership model provides a uniquely democratic foundation for doing business.

Ultimately, the goal of purchasing cooperatives is to help independent businesses survive in an age of “big box” corporates, private equity buy outs, and online giants. Traditionally, they do this by focusing on cost savings within procurement and operations.

But what about selling?

In a recent article, MDM’s Ian Heller speculated on the creation of a joint B2B e-commerce platform to rival Amazon Business. He proposed that if the distributors in various industries joined together in some form of jointly funded initiative, they could not only rival but outdo Amazon at the B2B game. Independent businesses could leverage their strengths – services, customer support, and product knowledge – in a way that Amazon could not.

The main question after reading the article is how would such a platform get created? Who would take the lead? What kind of ownership model would be used? How would decisions get made? How would it get funded?

This is where the idea of a “sales co-operative” comes in.

Why not adopt the model of a purchasing co-operative be altered and adopted to fit this need? Independent businesses joining together under the idea of “one member, one vote” to build a new B2B platform. Let the seven cooperative principles act as a guideline for running the joint business. Individual members of the new sales co-operative could still compete against each other based on their own strengths but on a level playing field provided by a common B2B platform.

Most importantly, a sales co-operative, like its purchasing cousin, would help independent businesses survive by leveraging their collective strength. As Benjamin Franklin once said, “If we do not hang together, we will all hang separately.”

“Supplier Financing” for Buying Groups

By Steve_Seguin

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.