Spend Matters welcomes this guest article from POD Procurement.
It is widely believed that achieving aggregation of an organization’s spend requires centralized procurement. This is incorrect. Achieving aggregation requires individual demand used collectively to secure higher supplier discounts.
We will now explain the subtle but important difference.
Many organizations that have undertaken the path to aggregation through centralization are now faced with the reality that it isn’t easy to achieve – catching a unicorn may be easier! The key to aggregation is demand management, unless you can identify what is required to procure, you cannot aggregate the demand. Local procurement teams are able to successfully service local business units because they can identify and address the demand. Centralized teams have to find a way to identify all local demand, and in large and complex organizations, this can be impractical. The inability to address local demand has led to most central procurement teams/hubs creating frameworks, the “fishing net effect,” by implementing frameworks they hope to address local demand.
Achieving aggregation of procurement spend requires two or more business units joining their requirements “to team” and procure as one. When the procurement spend is aggregated by teaming, it acts as a single entity with a higher committed volume thereby increasing supplier discounts. However, there is a risk associated with teaming as once the contract is signed, it is almost impossible to change individual commitment without impacting all of those involved. The local procurement teams have lost control to address their local business requirements, the increase in savings offered from teaming is outweighed by the risks resulting from loss of control.
“Let Economics Drive Aggregation Not Politics”
Some organizations are considering mandating the use of centralized procurement, which is a direct impact from centralization not delivering on its potential savings. By mandating its use, some people believe it will overcome the issues encountered to date “local business reluctance” yet in reality, if centralization is to succeed, it will need to find a way of addressing local business requirements.
We would like to provide the reader with a positive message to this article, and it is this: aggregation can be achieved.
Teaming can become a scalable and practical solution enabling local procurement teams to collaborate without the risks associated with teaming, by using POD. POD is a business model used within commitment based contracts and provides the ability for each participant (local procurement team) in the contract to remain in control of their own commitment, without impacting others. This means local demand can be aggregated to increase savings, yet each participant in the contract remains in control of their commitment and can reduce their commitment if required, without impacting the others.
“Aggregation Achieved Using What You Already Have Today, Your Local Procurement Teams”
Steps to aggregation success using POD:
- Local procurement teams continue to address their local business requirements
- Local procurement teams “team” up with others who want to procure the same goods/services
- Procure as normal (no change to standard procurement practice) with the “team” volume generating greater discounts than previously available
- Ensure POD is inserted into the contract (POD requires a contract committing to procure and POD’s inclusion in the contract does not impact supplier pricing)
- Each participant manages their own commitment in accordance with their local business requirements
- Participants enjoy increased individual savings, and the procurement team delivers organizational level savings
Summary: Catching a unicorn may be easier to achieve than delivering centralized procurement, unless the central procurement team can either dictate local demand or have visibility to manage and address it. If you are considering aggregating your organization-wide spend to increase savings, take care – “catching the unicorn” is tempting but will probably not work unless you can identify the local demand. Alternatively you could just use POD, it’s free to use.