In many of our previously developed projects specifically focused on increasing the EBITDA margins and savings on purchases, we have encountered a constant request from Chief Financial Officers or Purchasing Directors. This is blending their volume of purchase to other clients’ non-strategic budget items(regardless of the sector they belong to). In order to take advantages on the synergies for increasing the volume of purchases.
Because of this, it is fair to analyze if it is appropriate to adopt the method of a central purchasing body. For instance, in the tourism sector it is common to find central purchasing bodies for hotels, restaurants, etc. In addition, they are more sophisticated in the construction sector, since they are linked to construction materials, electric or conditioning supplies. In the retail sector central purchasing bodies of food, beauty products, and textile items are very popular. We can assure that thanks to this type of method, the traditional sportswear sector has found the way to maintain its market share in front of vertical operators such as Decathlon, and gain the power to negotiate directly with giants such as Nike or Adidas.
“Taking in consideration the new digital economy, can we actually consider as central purchasing bodies the new collaborative sites where individuals place their requests and professionals(from different sectors) compete for delivering services?”
What is a central purchasing body?
According to ANCECO (The Spanish national association for central purchasing bodies), it would be an entity that relays on sufficient funds, with an own legal entity that aims at developing economic activities and providing services to independent companies(with a cooperation intention) that have joined under internal rules to improve their competitive position in the market.
Generally, these entities do not take the risk of the operations they perform. For example, collections and payments processes are mandatory tasks for the associated companies, so the central purchasing body would obtain a fee for these transactions. It is important to highlight that the central body should also provide other complementary services besides negotiating the purchasing conditions.
“According to some sources of information, in Spain there are 350 central purchasing bodies that are composed of 60.000 companies from 47 different sectors. Therefore, it is relatively easy for Mid-caps to find the best central body for their needs.”
What is not a central purchasing body?
Since they are horizontal institutions, we can say that any other type of vertical body would not be considered a central purchasing body. For example, companies that work side by side to franchises.
These type of companies deliver services to their franchises, this is to their parent company, so it would be a central services body not a purchasing body. Therefore, many franchises are driven to misunderstandings since they expect an improvement of their purchasing conditions from the central services body. After all, a franchise grows from the parent company, that relays on a specific knowledge of the market and it aims at expanding its business by commercializing its idea.
Regarding recently created collaborative sites, they can be considered as an environment to avoid intermediaries in transactions, to lower expenses and to speed up the users-suppliers relationship. However, these sites do not perform the same tasks nor aim at the same objectives that a central purchasing body do.
(Why) central purchasing bodies do not always work?
“One of the main causes for failing as a purchasing model is that Mid-caps will have to lose some independence in order to be aligned to the rest of associated mid-cap companies.”
After many years dealing with professionals and diverse companies, we have learned that CPOs do not feel comfortable with sharing their purchasing volumes since there is a lack of trust regarding the type of synergy that could be generated when mixing large/small purchasing volumes of the other associated companies.
We can also indicate that there are some initiatives too specific or from a specific sector that have failed because the mid-caps companies share negative past experiences that block building positive relationships with associated mid-caps companies.
Lastly, we consider there are other key elements besides trust, such as the independence of the associated companies, transparency from the central body, having a reliable methodology and plenty of human and technology resources. There is no doubt that an entity that complies with the previously mentioned characteristics will be a good starting point for a Central Purchasing Body.
