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CREATING PURCHASING

ALLIANCES THAT WORKBy Petros Paranikas and Bob Tevelson

A

uncertainty and lackluster growth,

companies remain under pressure toimprove performance. Typically, business-

es look to reduce costs to boost prot

margins. But aer multiple rounds of cost

cutting over the past several years, compa-

nies are nding there is little le to trim.

This has caused some to take a closer look

at volume discounts and reignited interest

in purchasing alliances.

A purchasing alliance is an agreement

between two or more organizations to

jointly procure equipment, supplies, andservices. Companies looking to improve

their margins should explore purchasing

alliances because they can deliver value in

four ways:

Increased Purchasing Power. Purchasingfor multiple companies gives alliances

leverage when negotiating with ven-

dors. By purchasing in volumes that

exceed those of individual companies,

alliances are able to secure more

favorable pricing and payment terms.

Price Matching. Alliances are also ableto obtain better pricing through price

matching. A comparison of partnerspurchasing contracts oen reveals that ,

for whatever reason, one company has

negotiated a signicant savings on a

certain itema savings that is greater

than the volume discount. The alliance

then negotiates with the vendor to

grant that pricing to all partners.

Suppliers are oen willing to extend

the lower price to others in the group to

win their business, particularly if the

buying is streamlined.

Improved Category Management. Compa-nies typically put their best purchasing

managers in charge of strategic catego-

ries with the highest spending. Al-

though the amount spent in other

categories may be less, it is not neces-

sarily insignicant, particularly when

aggregated. By forming an alliance and

combining their spending, companies

can have skilled procurement manage-

ment of nonstrategic categories,

generating signicant savings.

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Support for Company Goals. Changingemployees buying habits is not easy.

Despite supporting company initiatives

such as going green, employees oen

resist trying alternative products.

Procurement managers who are tasked

with getting compliance can nd

support for their eorts in a purchasing

alliance. For example, a procurement

team had signicantly expanded its

companys use of recycled toner

cartridges, but there were still a few

holdouts. Several departments did not

think such cartridges would produce

the high-quality printouts that they

needed. Aer an alliance partner

demonstrated the quality it was

achieving with recycled cartridges,these departments got onboard.

Despite the benets of purchasing allianc-

es, many companies dont pursue them.

This is largely because alliances are

surprisingly dicult to implement and run.

Our analysis indicates that their success

depends on ve key factors:

Committed Partners. Partners must becommitted to the alliance for the long

term. They must cra a multiyearagreement that reects the shared

objectives and interests of the compa-

nies. In addition, the agreement should

specify the categories for joint procure-

ment and allocate sucient resources

to manage the eort. Alliances with

agreements are more successful

because they conrm the mandate and

support of each companys manage-

ment team.

An Efective Management Structure. Toofrequently, purchasing alliances fail

because the partners are unable to

reach agreement on purchasing details.

To avoid such paralysis, alliances

should be managed by a small team

that understands the interests of the

individual companies and has the

authority to take quick, decisive action.

Communication with Suppliers. When analliance is announced, some suppliers

may attempt to undermine it by

reaching out to individual member

companies and trying to establish a

favorable purchasing agreement. To

minimize conict, alliance members

must clearly explain to vendors the

roles and purchasing responsibilities of

the alliance and those of their internal

procurement teams. In addition, the

alliance must develop a robust commu-

nications program to convey its mission

and maintain an ongoing and open

dialogue with suppliers.

Compliance. For some organizations,unauthorized purchases are not an

issue. For the majority of companies,

however, it is essential that procure-

ment teams develop a compliance andtracking plan for each category so that

the alliance can meet its supplier

commitments.

Partner Alignment. The toughest chal-lenge facing the formation of a purchas-

ing alliance is reconciling the dierent

business perspectives of potential

members. For example, some compa-

nies strongly believe that to succeed an

alliance must be set up as a joint

venture, while others favor establishinga consortium. Some executives are

attracted by the potential for savings

but are concerned about their loss of

control. It is critical that time is spent

up front to discuss and address such

issues. Prospective partners should

understand not only the position of the

other parties but also their reasoning,

for only then will the companies be

able to come to an agreement.

Although establishing and managing apurchasing alliance has its challenges, it

can help companies improve their prot

margins. In a tough economic climate, it

can be an eective way to have a positive

impact on the bottom line.

About the Authors

Petros Paranikasis a partner and managing

director in the Chicago oce of The Boston Con-

sulting Group. You may contact him by e-mail at

paranikas.petros@bcg.com.

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Bob Tevelsonis a senior partner and managing

director in the rms Philadelphia oce. You may

contact him by e-mail at tevelson.robert@bcg.com.

The Boston Consulting Group (BCG) is a global

management consulting rm and the worlds lead-

ing advisor on business strategy. We partner with

clients from the private, public, and not-for-prot

sectors in all regions to identify their highest-value

opportunities, address their most critical challeng-

es, and transform their enterprises. Our custom-

ized approach combines deep insight into the dy-

namics of companies and markets with close

collaboration at all levels of the client organization.

This ensures that our clients achieve sustainable

competitive advantage, build more capable organi-

zations, and secure lasting results. Founded in

1963, BCG is a private company with 77 oces in

42 countries. For more information, please visit

bcg.com.

The Boston Consulting Group, Inc. 2012.

All rights reserved.

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