Originally posted on on the e-Sourcing Forum [WayBackMachine] on Wednesday, 26 September 2007

The benefits of purchasing consortia primarily fall into three buckets: economies of scale, economies of process, and economies of information. Each of these buckets provides a number of benefits to the member organizations.

Economies of Scale

The first type of benefit offered by a purchasing consortiums is economy of scale. The sheer volume of purchasing demand amalgamated by a decent size consortium generally provides each member with economies of scale that they could not hope to obtain on their own. The consortium is generally able to negotiate (much) lower prices for the good or service being awarded than any single member company in the collective. These savings are usually significant, ranging from 10% to 35% according to the Buying Support Agency. Furthermore, by joining together in a consortia, organizations can (effectively) streamline procurement processes. This not only reduces unit cost, but also reduces the overall transaction costs since only one contract needs to be negotiated and implemented.

Economies of Process

The sharing of purchasing information on suppliers, new technologies, market developments, internal users, and historical spending behavior not only avoids redundancy and reduces transaction costs but creates an economy of process above and beyond what each organization could generally achieve on its own. Since the consortium handles a number of buys on behalf of the organization, the organization has a (significantly) reduced workload, especially on the tactical side, and the buyers are freed up to focus on more strategic categories. Furthermore, individual members units are able to improve their results by sharing best practices in certain business processes, leveraging expertise in functional areas, and pooling knowledge about how to succeed in specific regions with the consortium and with each other.

Economies of Information

The consortium of the future offers the benefit of expertise more so than it offers the benefit of scale. Eventually, especially with constantly rising raw material prices, the best practices employed by a competent consortium will squeeze all of the fat out of the supplier’s margins and the best price will be obtained. Once this occurs, the consortium will use its expertise to assist its members in advancing purchasing technology, reducing wasteful consumption, and improving the application of the goods and services they purchase. Since a consortium has access to all of the knowledge of its members, it can tap this knowledge to identify the best potential suppliers with the best potential products and services to meet member needs. Furthermore, this gives it a much better chance of identifying and qualifying low risk suppliers.

For more information on Purchasing Consortia, check out the “Purchasing Consortia: The Emerging Collective” wiki-paper over on the e-Sourcing Wiki [WayBackMachine], which will review different types of classifications, various benefits, potential drawbacks to watch out for and avoid, common fears to quell, selection criteria, consortium success factors, and best practices to get the most out of your membership.