How to make aggregation a key part of your procurement strategy
Aggregation works. Building volume to get a better deal is a founding principle of the procurement profession. Buyers instinctively get it. Yet aggregation doesn’t always work as a strategy. It isn’t always the right answer. And buyers often find plenty of reasons not to aggregate with others.
So, when is using external aggregation most valuable? When is it most right? And, when not? Simply, that is the purpose of our short workshop as part of the SUPPLY CLUSTERS conference this year in Sydney on 29th August.
On the face of it, there are compelling reasons to use an external aggregator – summarised by the top 7 benefits of aggregation (below) …
Strategically, what is really important for a procurement manager considering using an external aggregator, is discerning which categories are best purchased through an aggregator rather than those which are best handled by the in-house procurement team?
The key is to purchase those categories that are critical to your core business in-house – primarily the operational support categories as well as the strategic supply lines, such as raw materials.
Using the Kraljic Matrix helps determine which categories are, for your enterprise, more strategic v transactional ….
Those categories that fall into the top half of the matrix are more risk dependent. That is, when continuity of supply is critical to your business operations. When they do not turn up, your business suffers directly and quickly. Categories falling into the bottom of the matrix are typically more INDIRECT and the business much less sensitive to their late delivery.
The Kraljic Matrix is the foundation stone of strategic procurement. And the basis of the STRATEGIC PROCUREMENT Masterclass.
It also drives the increasingly obvious principal procurement strategies that fulfill categories within each of the four key boxes – for example:
These core procurement strategies can also be combined with different approaches to procurement operations. Certain strategies for spend management align quite naturally to managing very limited procurement resources, essentially as spend under management grows and procurement maturity grows with it. We will explore how we can use this approach in more detail:
The point is that AGGREGATION can have a real role to play in proactive procurement strategy. The aim is to capture the seven key benefits of aggregating for your organisation …
The SEVEN Real Benefits of Aggregation
Ultimately, there are perhaps 7 key benefits to using aggregation as part of any joined-up procurement strategy: During the workshop, we will briefly look at each in turn and how to make sure they work … beyond the corporate obstacles that so often get in our way:
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.
Yet, ultimately, the greatest benefit of AGGREGATION is often simply to save time. To obviate the long-winded market sourcing step for an INDIRECT category that can take such effort and resources when there is so much more to do. Particularly, supporting strategic and operational core business supply lines.
The SEVEN Myths of AGGREGATION
Alas, procurement managers can be a sceptical bunch. And, over the years, seven persistent myths have surrounded aggregated buying groups. Each of these seven myths can (mostly) be dispelled … all but one has little substance, regardless of which aggregator you choose to work with. Each will be addressed in the workshop.
Indeed, the growth of aggregation is clear; particularly in defined sectors such as aged care, financial services, retail, education and local government. Each of these sectors has a relatively new or re-branded and proactive aggregator offering their support.
Speed to value
But grasping the 7 benefits and clambering over the 7 myths of aggregation are only a means to an end, not an end in their own right. The true aim is to achieve speed to value. That is, generate value from the supply side quickly and in some order of priority – which is procurement’s true aim at the end of the day.
That workshop …
During the 90 minute workshop we will cover all these themes, as well as other relevant facets of using aggregation as part of your procurement strategy:
Avoiding fake savings – and how to harvest your savings to make them real
The difference between cost avoidance and direct savings
The importance of data integrity – and state of the art spend analysis
Jonathan Dutton FCIPS is the former founding CEO of CIPSA until 2013 - the procurement peak body in this region. He now works as an independent management consultant specialising in procurement www.jdconsultancy.com.au and has a non-executive role at Supply Clusters www.supplyclusters.com.au
30th July 2019