Centralization of purchasing in business networks (Part 2)

How are the business networks towards the centralization of purchasing operated?

• Formal consolidation of the relationship with partners who have for years been part of a single supply chain, putting together a greater production, marketing, commercial and sales capacity.

• Once the primary objective has been consolidated, it is important to look at the secondary objectives, best exploiting the indirect advantages of being part of a business network: what can be improved and optimised by working together? Clearly, suggestions in this respect can be obtained by looking at how big companies and/or industrial groups operate.
• During this phase, the contribution by the network manager, who is responsible for performing this analysis and suggesting the right strategy by which to exploit the indirect advantages of the network becomes essential. Of these, one of the most natural, highest-impacting actions is without doubt the introduction of centralised purchasing.
• For the centralization process to be a success, it is important to introduce it gradually, starting with the product markets that are most immediately and easily able to be centralised.
• Finally, specific professional skills will be needed in the field of purchasing for managing the relevant activities, issuing the contracts/orders open and managing them (in some cases, the networked companies are of different sizes and the most structured may already have staff with specific professional purchasing skills who can therefore be used for the management of centralised activities, alongside the network manager).

Difference between business networks according to logistics

• Same region
  • Greater attention may be paid to local suppliers for more categories
• Multi-region
  • National/international supplier categories will mainly be used

E-procurement and the use of a platform to manage purchasing

The tool that helps us in centralization is an e-procurement platform. This is a question of equipping the business network with a “shared” computer system, based on the latest web technologies and used by all networked businesses.

The introduction of innovative purchasing tools such as e-procurement is one of the most important subject matters by which to improve the overall efficiency of the procurement processes of a complex organisation like a business network. The electronic negotiation of purchasing (e-procurement), in fact consists of enabling those using it to manage all relations with its suppliers over the internet, using a “dedicated purchase” IT platform that enables processes like the selection of the contractor, receipt of offers, submission of orders and catalogue consultation to take place on-line. For example, in the purchasing of consumable goods or in any case of repeated purchasing, the choice of a centralised procedure that defines a series of conventions with a series of suppliers makes it possible to include on-line catalogues available to the various different network structures by which to make direct purchasing at competitive prices, insofar as they had already been established in the conventions.

Current IT technologies also enable a simple interfacing and sharing of data, virtually in real time, with all the various managerial information systems (MRPs) of the individual networked businesses.

Methods for the use of the e-procurement platform and possible market offers:

• purchase of licences by which to obtain a platform in Saas (Software as a service, i.e. hired, not purchased) mode for each buyer-operator;
• hire or payment of an annual tariff for each utility activated for the use of a partner company platform;
• delegation of the entire purchasing activity or part of it (through the e-procurement platform) outsourced to partner companies (maintaining complete visibility and sharing of all specialised processes in this activity.

The advantages of using such a platform include:

• standardisation of the buying process using a single, common tool for all networked companies;
• possibility of creating on-line catalogues for use by the individual customers of each company, whose list prices will be negotiated upstream, according to the forecast total quantities required by the network as a whole;
• in the expenditure cycle activities, it enables the correct management and attribution of invoices for the individual company involved in the purchasing process. The platform will be easily integrated with the ERPs of the individual businesses (each business receives invoices from the supplier for its part or in any case as envisaged by the network contract rules);
• use of electronic invoicing;
• single roll of network suppliers available to each individual networked business;
• objective supplier assessment system for the continuous improvement of performance;
• each company can easily pool purchasing experiences (suppliers that are valid and others that are not, price references for individual expense categories, etc.), with clear reciprocal benefits;
• standardisation of the technical specifications for purchases with the best practices of the networked businesses with consequent improvements in the price/performance of the goods and services purchased. It is easy to imagine enhanced efficiency in the purchasing of common materials such as Personal Protection Equipment, stationary, cleaning services and facility management, etc.

Procedures and controls

A choice to centralise purchasing entails special attention paid to the procedures regulating the purchasing procedure. In actual fact:

• In the case of structures that are mutually independent, the procedures used by the individual networked companies vary considerably and may be more or less complex, depending on the dimensions of the structure (micro/small/medium-sized business) and the purchasing budget. In most cases, we find ourselves looking at a lack of written procedures insofar as the purchasing methods are connected with the common sense of the person implementing them.
• In this type of situation, moving towards centralised purchasing entails paying special attention to the drafting of a purchasing procedure. This procedure, according to the expenses involved, must be:
  • coherent with the objectives of reducing costs and procurement time
  • coherent with the incoming quality and efficiency objectives
  • compliant with the ethical standards established for purchasing
  • shared and approved by way of protection of expenses managed by each individual structure participating in the purchasing group.

Again by way of protection of the interests of the individual networked companies, there must be a control of the operative application of said procedure by an appointed person/audit structure for the network (e.g. network manager).

Closing remarks

Considering that the priority objective for the centralization of purchasing can certainly be identified as the exploitation of scale economies by which to reduce the unit prices of the goods and services to purchase, it is important to see if that objective looks to include a standardisation of said goods and services or, additionally, the identification of the goods and services with the best cost-benefit ratio. In actual fact, these objectives need three different operating approaches, the consequences of which need to be carefully assessed, particularly according to the time frame involved in order to obtain results. In actual fact:

1. it is relatively simple to obtain scale economies to reduce the unitary costs by bringing previous specifications together, but this can at most have a positive financial effect in the short-term. Already at the second tender, with the same logic, it is difficult to obtain significant additional discounts;
2. If we add an objective of standardising goods and services to the positive effect of scale economies, we are then facing a more complex work in which all the individual structures must be involved (data collection and assessment/sharing/choice of standards), but at the same time, we are also looking at greater economic benefits;
3. Finally, identifying the goods and services with the best cost-benefit ratio is an extremely complex matter, as it requires lengthy technical analysis and the concentration and sharing of data with the internal applicants. This, however, represents the launch of a virtuous process of the introduction of logics and instruments governing the business network, ensuring a comparison of peers and the construction of organic partnerships with suppliers, which may represent a carrier for long-term organisational development.

Finally, if the competences in terms of purchasing are limited to within the network of businesses, one solution may be to appoint external procurement professionals who, alongside the Network Manager, can start the centralization of purchasing process and, potentially, thereafter manage the activities by e-procurement, with the use of an appropriate platform. This choice would have effects that are so immediate that the costs of the solution would rapidly be repaid by the immediate returns enjoyed in terms of the reduction of the TCO.