Volume leveraging benefits – Where’s the evidence?

Public sector Procurement organisations of many of today’s recession-hit territories are responding to demands for savings in various ways, including increasingly desperate attempts (in many cases) to deliver Procurement savings by pressurising suppliers to deliver lower prices, on the largest possible scale. Over the last few years public and pri vate sector volume leveraging strategies have been evolving worldwide, very quickly indeed. However, it is generally unknown if the greater the volume to which a buyer is able to commit lowers the unit price the buying organisation will be quoted. Is volume leverage ad infinitum a valid proposition when designing public and pri vate sector purchasing structures and strategies? Wally Johnson of Purchasing Index (PI) speaks to SmartProcurement.

“Management may soon be asking questions such as, ‘where is the evidence to support the adoption of volume leveraging purchasing strategies?’ and, ‘how does a purchasing person working for an organisation in, say, the public sector, create additional purchase volumes?’ None of these questions seems to have ever been addressed by any top management I’ve known,” says Johnson.

“To the best of my knowledge (and I’ve been looking for some hard evidence of the effectiveness of volume leveraging propositions, for at least a couple of decades), there really is no (nor has there ever been any) hard, empirical evidence in the public domain anywhere in the world, that would independently support Big Purchasing’s often self-serving proposition that the adoption of volume leveraging purchasing structures and strategies has delivered purchasing savings on any scale, let alone the kind of savings public and private sector organisations are looking for in today’s recession-stricken world

“Big Purchasing’s often over-simplistic, but still top management seducing, volume leveraging purchasing strategy propositions, simply are not working for most organisations that have already adopted them. Corporate and Business Unit managements, however, now have a growing focus on ‘doing something about’ the growing proportion of their incomes that is directed to purchase goods and services (mostly the latter), because outsourcing expenditure is accelerating much faster than most people realise. Outsourcing really is just about additional Procurements (usually a very big ones) which, in most cases, are only exceptionally being managed by Purchasing Departments anywhere in the territories in which the PI Group operates. If they were independently measured it would very likely be the start of top management ‘lifting the curtain’ on Big Purchasing’s promises and their failures to fulfil them. If that is what is happening, from a measurement point of view, Outsourcing propositions, which are usually very complex indeed, are also likely to be welcomed by top management many of whom don’t understand Purchasing as well as they should.”

South Africa vs. Other Territories

The South African Government’s plans to increase local Procurement and Supplier development in respect of its R846-billion infrastructure development plan, have been highlighted in the UK by Supply Management, the Chartered Institute of Purchasing and Supply’s international supply chain magazine for Purchasing professionals, and “didn’t include comment on their strategy’s implications for other countries such as the UK,” says Johnson.

“The South African Government is, in PI’s view, moving in the right direction for a country at its current stage of economic development. An interesting – and very relevant – comparison is to be found in what is happening in the UK, which, according to a recent Treasury paper on public sector purchasing, has 45 public sector Professional Purchasing Organisations whose Services are accessible to the UK public sector’s 30 000+ business units. It is particularly interesting, as well as highly relevant, that the UK public sector is now proposing to direct additional business influence to the UK’s Small to Medium Enterprises (SMEs), which by definition are most likely to be regional or local operations. The $64 000 question about these developments must be ‘how do you reconcile simultaneous aggregation and devolutionary purchasing initiatives?’

Further interesting perspectives of the many current volume leveraging purchasing initiatives world-wide is found in Big Purchasing’s strategies for increasing the volumes its members are able to offer to ‘the Market’. In most cases Big Purchasing’s answer to its volume increasing dilemma appears to be extending the corporatisation of the purchasing of those Goods and Services that have not, as yet, been outsourced to one or more of the many third party intermediary purchasing organisations (or collectives as some are referred to), already operating in many countries. The big name Consultancy organisations too, are moving into the purchasing outsourcing game. The picture emerging overall is that the more common features of today’s corporatised purchasing operations include:

• Multiyear framework agreements, many of which are based on catalogues covering more than 10 000 items, and still growing. (How do you control the prices of multiyear frameworks covering 10 000+ item catalogues that are refreshed annually? It is in PI’s experience that this is “mission impossible” for buyers, but can, and often proves to be, a very lucrative arrangement for Suppliers.)
• An often over-estimated projected usage of goods and services by the responsible contracting bodies is seldom queried by suppliers awarded contracts through reverse auctions i.e. the winner has made it and won’t be facing too much competition for say, the next five years.
• The progressive elimination of business unit purchasing operations is already reducing competition from local suppliers. Business units nowadays do not have the purchasing resources to do their own sourcing according to their delegated authority “rules” and ad-hoc order placing as they once did. There is also growing evidence that in many territories, after a decade of progressive corporatisation of public and private sector purchasing, many supplier infrastructures have changed irreversibly, i.e. the number of SMEs and regional suppliers in today’s ‘market’ has reduced dramatically and it seems highly unlikely that those SMEs and regional suppliers that have already departed will ever return to the role they once played.

Over the next few months Wally Johnson has promised to continue this constructive critique of whether or not (or how) volume leveraging purchasing delivers promised savings. He will be presenting analyses of the downsides of some very specific purchasing strategies (as measured by the PI Group over the last 25 years), including quantitative comparisons, comparative pricing outcomes from local and corporatised purchasing operations, and related analyses of the pros and cons, of further collectivisation of purchasing. He will also aim to forecast where public sector purchasing is going organisationally.

Wally Johnson welcomes readers’ contributions to the volume leveraging debate including questions, denials and refutations. Contact him at wally@pricetrak.com