Industryweek 1261 19385 David Clevenger

Can GPOs Help Ease the Pain?

June 16, 2009
As manufacturers look for cost-cutting that won't cripple them in a recovery, group purchasing organizations let them "swing a bigger bat."

Procurement departments have rarely been under as much pressure to achieve cost savings for their companies, but as David Clevenger, a vice president with Corporate United points out, this is "complicated by the fact they are being asked to do this with fewer resources than they ever had before."

Help is at hand with group purchasing organizations (GPOs) such as Corporate United that provide member companies with sourcing, contract management and networking opportunities. Corporate United works with its 145 member companies to identify high-quality suppliers, negotiate group purchasing rates and serve as an ongoing resource to manage the supplier relationship.

Corporate United serves a wide variety of industries, providing group agreements for products and services ranging from office supplies to material handling equipment management. While the size of its members vary, Clevenger says they typically have sales of about $4 billion and 12,000 employees.

Clevenger stresses that Corporate United does not just provide savings for its members but also resource flexibility in that the company provides management of the contract and the supplier on an ongoing basis. As a result, he says, members can devote their time to more specialized procurement issues or other business needs.

At Prime Advantage, a GPO serving midsized industrial manufacturers, officials are seeing an uptick in the number of large companies inquiring about their services. Mike McDonald, vice president, new business relationships, says companies that, for example, have grown through acquiring several midsized companies want to consolidate these operations and leverage the supply chain to get better deals. Rather than go through the time-consuming work of reviewing contracts and deciding on suppliers, they can use the suppliers already vetted by Prime Advantage. "They can focus on more strategic items and not do the tactical work we have already done," observes McDonald.

David Clevenger

McDonald says Prime Advantage members not only get better prices, but also the assurance that suppliers are subject to a formal evaluation and auditing process that keeps tabs on their performance. Regional account managers work with resource-strapped members to help them map out purchasing strategies and expose them to potential savings in areas such as energy that they may not know about. Members also develop relationships with suppliers and gain value-added services that they typically would not receive on their own. For example, he notes that Prime Advantage is one of Grainger's top accounts. When Grainger started a vendor-managed inventory program, Prime Advantage members were included and able to benefit from the resulting reduction in cash flow needed for inventory. Members also are eligible for free freight when they make any online purchase from Grainger. "That is something that a $30 million manufacturer would not get on its own," he points out.

In a recent survey by Prime Advantage, manufacturers said costs for raw materials such as metals and plastics were the top cost pressure they faced. Asked why that was the case in light of lower materials costs, McDonald says manufacturers are concerned that as soon as suppliers are able to raise prices in reaction to increased demand, "they will and at an accelerated rate."

Other costs concerns cited were overhead costs (50%) and logistics/supply chain costs (49%), followed by health care (43%), energy (27%), foreign competition (27%), inflation (25%) and labor (23%).

With the pressure on buyers to get the best deals, notes Clevenger, some are reacting in the traditional manner by pursuing a "get everything you can" course. But in many cases, he says, purchasing managers are keenly aware of the pressure on suppliers and want to manage those relationships so that both parties are ready for a recovery. "We see more and more companies take the approach, 'Look, times are tough for us and for you too. Let's come to the table and see what we can do to put both of us in a better position,'" he says.

For his part, McDonald says there has been such a focus by manufacturers over the last several years on increased efficiencies, improved processes and taking waste out of the system that they will be able to switch gears in the initial stages of a recovery with fewer people. But he notes, "At some point, the balloon is about to pop and you say, we have to add a second shift, add 13 more people or whatever. There is an excess of talent out there. When that happens, I don't think manufacturers will be caught behind the eight ball."

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