Virtual Group Buys

Leveraging group purchasing through eCommerce platforms

May 1, 2015
by Boris Tsinman

computer connectivity

From the April 2015 print edition

Recently, the topic of increased complexity in the supply chain has been brought to light, with vendors and purchasers trying to understand an ever-changing process. Public sector buyers must adhere to acts, regulations and policies ensuring that the procurement process meets government needs. Purchasers work with end users to create specifications and meet customer deadlines. The process unfolds slowly due to internal approvals, decision-making points, as well as meetings and communications between the parties. Depending on the complexity of the requirements, it can take months for the tender documents to be ready for vendors to download.

The question is, can we simplify this process and still meet all the required policies and procedures? The simple answer is yes, but how?

A simpler process might begin with end-user empowerment. For example, those responsible for the specifications, such as subject matter experts, could create a bid package at the same time that they are laying out the specifications.

This can be done using a software platform that allows anyone to write a proper RFP, which in the case of public organizations, that complies with all the government regulations, policies and procedures that are internal to the organization For private enterprise, such platforms are used to buy various supplies required for final product production and operations. The documents are then sent to a centralized purchasing organization (if there is one) or directly to the proper approval authorities within the organization and, if there are no further additions to the bid package, it can be posted with a keystroke. The benefits are obvious: no lengthy deliberations regarding specifications and no confusion as to the role of each team member as they are well defined: the subject matter experts create a draft of a procurement document together with the specifications that suit end users, and the procurement department participates in an advisory or consultative role instead of writing and re-writing bid documents. Approval authorities receive concise summaries for final approval of the purchase. The ease with which the documents are created reduces the time to market dramatically.

Technological advances have made the evaluation of received proposals easy as well. Team member collaboration happens online, with no requirement for numerous face-to-face meetings during this process. The majority of work by the evaluators happens at their own time and place. When it is time for contract creation there are platforms that allow this process to be done virtually, much the same way that the RFx process unfolded, with the end user concurrently creating the document during the approval process.

Making the most of virtual group buys

Many industries such as the grocery, health care, electronics, industrial manufacturing and agricultural sectors are using group buying to leverage the purchasing power of a group of organizations to get lower pricing from vendors based on collective buying power. The positive results of such buying are proven and the costs of certain commodities are reduced significantly. There are many group purchasing organizations (GPOs) in Canada and the US that address the specific needs of their members. The organizations that belong to such GPOs have aligned their procurement methods with GPO-based processes and procedures. In many cases, this reduces operational costs as well as the cost of products purchased via contracts established by the GPO.

But procurement is still complex if you ask anyone who is involved in the process. The end users, the buyers, the vendor community and governments have raised this issue many times in the past and will probably continue to do so. To reduce supply chain complexity, many organizations have entrusted central procurement organizations and GPOs to establish cross-organizational contracts so that all the members of the group can purchase goods, services and equipment without going out for competition individually. The administration of those contracts is quite from procurement’s point of view, where multiple organizations with many buyers can cut purchase orders against a pre-established agreement with ease.

But the complexities to get to this point are the same. Thus, practitioners are seeking new perspectives in the ever-changing procurement world. The new reality is that we have the technology and the knowhow to create contracts that can be employed by as many users as required, but the navigation of the sourcing/bidding process is still a challenge. The further use of virtualization of group buying could help all parties in the sourcing process tremendously.

A solution lies in creating a virtual environment offering the same benefits, at a significantly reduced cost, to buyers and suppliers alike. To make this happen, the sourcing process could be fully automated—public advertisement of the requirement, auto selection and award to the best offer submitted against the pre-established criteria—and this could all be done online with very little interaction from the specific organization or agency. The terms of the resultant agreement could be modified to allow potential members to join agreements midstream, either as their own contracts expire or for other reasons, such as availability of funds. The membership of each group could be public, private or mixed, as this would make no difference. The main driver would be a product or service that is applicable to all members who wish to join the virtual group. The benefits of this model could be significant, not only in supply chain cost reductions but in the simplification of the connection between end users and a large number of vendors.

Many studies have shown that an efficient, competitive procurement process results in greater efficiencies and lower prices. The prospect of combining everyone’s volumes provides the members of a buying group with an opportunity to take advantage of the economies of scale that vendors can pass along to their clients during the bidding process. The efficiencies can be measured by the reduction in costs only, or by combining this with service level improvements, higher product or service quality, improvement in client operations, and better logistics and warehousing opportunities.

The aggregation of volumes created in order to achieve cost reductions or greater efficiencies is finite because the complexities of managing such global procurements increase depending on the number of organizations involved, locations, staff, financial constraints and other factors. Therefore, an economic analysis should be done to see what would be the optimal volume a buying group could sustain. After all, the goal of the group is to improve not only the costs of acquisition of goods but also to simplify the sourcing process.

Virtualization of the sourcing process gives supply chain staff who participate the time to spend on analytics and on driving value for the organization, removing all the non-value added activities from the process. For example, if the procurement and supply chain functions are automated end-to-end, staff can spend more time on customer service and less on mundane tasks such as chasing orders or invoices. The goal is to reduce unnecessary touch points and to empower end users from the start of the process to final implementation. Efficient group buying is better able to provide service to a successful organization.

Boris Tsinman is principal at Novus Incorporated. Reach him at
[email protected]