AGGREGATION is catching on and reaching the mainstream of procurement management – at long last, you may think. Jonathan Dutton FCIPS explains the hidden benefits of aggregation not just the obvious ones, in the second of a new series of articles for SUPPLY CLUSTERS www.supplyclusters.com.au
Aggregation is one of the very founding principles of professional buying. Everyone working in or around procurement gets it – buy more, get a better deal.
So, why does it seem that aggregated procurement is less utilised than you might expect? Sure, buyers often hedge in negotiation whilst ascertaining potential extra volume internally. But externally, not so. Firms seldom work together to build volume – to help each other get a better deal.
Public sector procurement fiddles with aggregation but it is rarely embraced and almost never mandated. Is aggregation procurement’s greatest lost opportunity?
Maxing-out discount quickly
It is true that professional buying will sometimes yield close to maximum discount with only relatively modest volumes, especially in relatively small markets like Australia. But only in categories that have some competitive element and have been fully addressed and rigorously market tested. And only with an exceptional effort from the procurement side.
Because addressing categories professionally takes time & effort. As well as the spend or risk profile to justify the effort in the first place against other competing categories. Especially operational or strategic spend priorities.
Moreover, good procurement practice increasingly demands transparency of solid process, stringent compliance and the purest probity standards – all of which takes more sourcing time.
Public sector aggregation
Maybe that is why it feels that public sector buyers are a little ahead of mainstreaming aggregation as a default procurement strategy in some instances?
Federally there is some coordination of Commonwealth expenditure on a handful of core indirect categories purchased through Finance – stationery, travel, IT and the like. Although it seems increasingly common for smaller departments to use larger departments panels informally for ordinary procurement needs – several departments and agencies use the Defence panel for instance. But there is no central commonwealth procurement team as yet.
At the State level, there are often “state contracts” available for different departments and local public agencies to use, although few are mandated. These are often arranged through the main procurement team of the ‘Department of Treasury & Finance’ team or their equivalent in each jurisdiction. But they rarely stray beyond a number of core indirect categories. “Whole of Government” procurement deals are rarely that. They are often just a handful of departments loosely working together.
At a local government level, you might expect more formal co-operation. But not so. Although, state governments sometimes play a role in coordination – such as in Victoria and the legendary s186 of their Local Government Act which addresses procurement process requirements (and is currently under review). Yet many local councils see aggregation at a very practical level and increasingly aggregate core (often unique) local government services.
Aggregation as part of your procurement strategy
In truth, aggregation as a strategy can help at several levels. Not just the obvious way – aggregating to build volume and get a better discount. Indeed, this is old thinking. Smart buyers can often outwit the market and achieve top-discount levels with limited volumes.
Aggregation can actually play different roles at different stages for busy procurement teams.
For newly established procurement teams, aggregation can surely offer a great short-cut to instant savings and time-saved to dedicate to more strategic supply lines at the outset.
For established or mature procurement teams, aggregation still has a role to play. You see, in a service-based economy like Australia, most procurement is for INDIRECT goods and services. Applying strategic procurement to non-strategic spend has limits. Diminishing returns. Which look like savings tending to zero over time. The 8th stationery tender anyone?
Smart CFOs are starting to ask a pointed question of diminishing savings efforts, that is, why am I carrying 12 months overhead to manage mostly cyclical spend?
Proactively segmenting procurement tasks out to the organisation manages down central resources but makes smarter, more efficient buying organisations:
menial spend (P.cards)
low-spend thresholds (user buys)
indirect categories (aggregators)
direct supply lines (decentralised buyers)
strategic supply lines (procurement professionals)
& CapEx (specialists) ….
The SEVEN Real Benefits of Aggregation
Ultimately, there are perhaps 7 key benefits to using aggregation as part of any joined-up procurement strategy:
1. Consolidated spend – better discounts
The obvious one. Controlling spend well enough to flow through an aggregator; even though the purchasing is still direct to the supplier, not through the aggregator in most cases.
But using others’ volume to jack up your own discount levels is a no brainer. So, it is a little surprising that almost everybody doesn’t use aggregation to some extent – especially where their spend-control is improving, but volume in the market is lower.
2. Obviate long-winded sourcing activity
This is perhaps the greatest hidden benefit of aggregation from a procurement team’s point-of-view. The time and productivity saved by negating the need for a formal sourcing event.
Procurement is often criticised by stakeholders for taking too long to complete a ‘go-to-market’ exercise. Especially, for teams without pro-active category management specialists in place. It takes a while to learn a category and the dynamics of a market.
Often, if no strong category knowledge exists, procurement teams substitute in the process instead – like an Expression of Internet, or two-step tender process. And a good process can ask more questions than it answers at the outset … It all takes time.
Time is, however, one thing busy procurement managers don’t have. Still being branded a “back office function” by too many CEO’s means that few procurement teams have the true resource levels the spend justifies. In other words, there is too much to spend and not enough time to spend it. Aggregation can help – certainly in the right categories at the right time.
3. Industry standard terms & conditions
Skipping past elongated go-to-market exercises, doesn’t mean leaving yourself open to suppliers so that they can take advantage of you. In fact, the opposite is the case with aggregators.
The contracts that are in place have been well sourced with industry-leading suppliers, carefully researched and negotiated. They present balanced, fair and relevant terms & conditions. And almost always the ‘industry’ terms in place navigate the frequent pitfalls and traps of specific industries.
4. Price testing
Aggregators should be market testing baskets of typical goods in each category – both openly and through mystery shopping. This builds confidence in actual base prices, not just up-front discounts, and the “target” spend threshold rebates all members receive back.
5. BUY NOW to SAVE NOW not later
More importantly, capturing real savings now through aggregators, is always better than continually vacillating over the start of a project to address a new category. Procurement managers often tag a newly addressable category but then get too easily side-tracked from starting work due to operationally critical distractions. Savings are foregone for urgency elsewhere.
But immediate aggregation brings real savings now. Not savings forgone to the good intentions of time-poor procurement teams. You can always re-address the category downstream when you do have time. Aggregation brings SPEED to VALUE.
A strong aggregator has developed good systems support – better than the average corporate P2P solution. This means good data.
Spend is very well tracked through the supplier sales system with a shadow back-office support system – one structured to offer quality data, well presented, in real-time through your dashboard portal. And for multiple categories. This of course reduces another headache for buyers, chasing data from suppliers.
In fact, the portal dashboard is also designed to cater for the critical information in that category. And, perhaps, the data feed in any given category is stronger than in your own generic P2P system?
7. Specialist advice – the right strategy in your wrong categories
A final ‘hidden’ benefit of aggregation is the easy access to clear, independent and expert advice in each aggregated category. These categories were sourced and negotiated with expert help – they avoid pitfalls, and capture the full opportunity of the category.
But the aggregators ready access to industry experts can often be made readily available to members of an aggregation scheme. And for free at the outset.
25 March 2019, Procurement www.supplyclusters.com.au
Jonathan Dutton FCIPS is the former founding CEO of CIPSA - the procurement peak body in this region. He now works as an independent management consultant specialising in procurement and has a non-executive role at Supply Clusters www.jdconsultancy.com.au