Leveraged Buying — Success Even in Tight Commodity Markets

Last week, I penned a short entry talking about some of the benefits of group purchasing and leveraged buying. The research for this post got me thinking whether or not the time is finally ripe for leveraged models to take off. And upon further analysis, I believe that it might be. Consider, as evidence Corporate United's growth announcement from earlier this year where they noted having added 24 members and grown staff by 20%. Others, such as Enporion, have also announced that they will be offering leveraged contracts as well.

But perhaps the most interesting example that suggests the time may be right for leveraged buying comes from a consulting firm that I was talking with who is working with a client that is in the process of aggregating direct materials spend from many of their suppliers, creating a volume-based rebate program with a single commodities supplier. This happens to be in a category which has realized material price inflation recently, but despite this hurdle, they're managing to achieve significant savings -- which they're sharing with their suppliers -- by bringing more spend to a single strategic supplier. Everyone benefits in the end -- the company saves millions (in theory, once the project is implemented), its suppliers save on every purchase and the material's supplier is delighted to get large volume quantities from dozens (or hundreds) of companies and facilities.

At the start of this project, perhaps the most knowledgeable person I know when it comes to leveraged contracts said it could not be done. "Direct materials aggregation plays rarely work," he said. Well, my colleague now admitted to the consultant running the project that there might be something to leveraged buys and rebate programs after all, even in rising price markets. It turns out that one of the divisions / plants of the company that tried their hardest to kill the project by providing baseline numbers that were not exactly correct eventually came on board and is now more than willing to participate.

Implemented properly, leveraged buying -- whether it is through an industry consortia/marketplace, a traditional GPO or by aggregating volumes from different divisions and lower tier suppliers and creating rebate programs -- can pay off. But no one said it was easy. An astute Spend Matters reader raised the question last week in a comment that change management can be a significant hurdle to success when it comes to GPOs, specifically. But if companies can get past the change required internally, there's significant savings to be found in them there leveraged hills!

- Jason Busch

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