From #105, March-April 2003

Joint Purchasing, Ready or Not!

How to Sing "The Night They Drove Expenses Down" in Three-Part Harmony

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D A V E   S C H E R M E R H O R N

Much discussion is taking place in our sector regarding our ability to leverage purchases as a group. Supply agreements are a hot topic locally, regionally, and nationally. Approximately 60 percent of an individual store’s purchases could be leveraged for better pricing than a store could accomplish on its own. Everything from "core cost of goods" (our primary food supplier) to operational supplies and inventory services could improve our stores’ bottom lines if purchased jointly.

But are we ready? Have we asked ourselves the questions beyond "Do we want better pricing?" Of course we do; that’s easy. But are we prepared for the operating changes necessary to achieve this better pricing?

Our sector has limited experience in leveraging our buying power as a unit. While CAP (the Co-op Advantage Program) is proving to be a successful promotional program for our stores, purchasing agreements with suppliers of business services and products require a significantly different approach. In order to gain the highest benefits we need to work toward preparing ourselves for standardization at the retail level. Standardization does not mean "cookie cutter" or that "we will all look the same." It refers to standardizing how we retailers interface operationally with our suppliers.

Leveraging our buying power as a collective unit requires relationship-building and understanding the roles that stores, associations, and suppliers must play to positively effect our ability to earn the best possible pricing. The experience of Midwest co-ops in joint purchasing activities is helping to define these roles. The cooperative grocers associations, both regionally and nationally, are working to create a system that can provide participating stores the best service and pricing available. Individual stores, the associations and the suppliers each have a role to play in developing joint purchasing.

Stores

Communication with suppliers for day-to-day needs, ordering products and credit retrieval.

Communication with associations for program development, implementation, and improvement. This includes replying to surveys and communicating supplier performance to the association.

Participation and standardization: Effective purchasing requires volume (participation). Program participation requires stores to be flexible and in some cases to change internal operating procedures. One of the strengths of the Midwest’s programs for operational supplies–items such as paper handle bags, deli containers, plastic bags, receipt tape, bathroom supplies, twist ties, etc.–is the willingness of the stores to purchase items specified by the association. Reducing the total number of products we ask the supplier to "hold" or warehouse for our stores reduces the suppliers’ operating costs. This "specification" creates a domino effect. Not only is the supplier willing to reduce our costs per case of items X, Y, and Z because we help reduce holding

(operating) costs; when the co-ops are purchasing enough cases of X, Y, and Z to bump the supplier’s purchases from their manufacturers to the next pricing tier, the co-ops also contribute to reducing the supplier’s wholesale costs. This too results in lower cost to the stores–category management applied to paper bags!

Specification of packaging items has allowed the Midwest co-ops to custom print a number of items such as paper handle bags, soup cups, and coffee cups. The cost per unit for printed items is often less then their blank counterparts.

Improving the ordering process at the store is another example of increasing efficiencies. Having one person from the store ordering operational supplies, rather than having each department manager calling in orders to the supplier, improves the process and reduces costs. One of the golden rules of purchasing: the fast track to reducing a store’s expenses is to partner with the supplier and help the supplier reduce costs. This is the effect of "standardization."

Associations

Needs assessment: The association assembles a needs assessment that results in a prioritized list of programs to be developed. The association defines what is needed in a program to make it successful.

Supplier selection and program development: Once the program has been defined, the association selects the best-suited supplier to implement the program. Many inputs are used to select the supplier, including references, a weighted criteria model, and knowledge of current store suppliers. After the supplier selection is completed, the association refines program requirements, negotiates pricing, and creates an agreement with the selected supplier.

Program implementation: The association acts as a conduit to link the supplier to the store, based on the above findings.

Program evaluation: Periodic evaluations are required to ensure that the supplier is delivering as agreed. Surveys measure participant satisfaction regarding interface with the supplier. Compiled results are used at semi-annual or annual supplier evaluation meetings to strengthen both store and supplier performance and to correct areas of underperformance.

Communication with both the stores and suppliers must underlie every step of a successful purchasing program.

Suppliers

The supplier must deliver the agreed upon program within the terms negotiated. The supplier has a responsibility to inform the association when stores are not meeting the agreed upon terms of standardization.

Communication: If the supplier is intending to make any significant changes in program services or products, the supplier must first clear the changes with the association before communicating the information to participating stores. Communicating new product opportunities, program updates, and order guide procedures to the association for approval and implementation at store level are built into the supply agreements.

If each entity fulfills its role, the stores will receive excellent pricing on operational supplies, as well as great service, research, and selection of the packaging choices that best suit our stores. Customized order guides and image enhancement through printed packaging options are made possible by working together.

Not every store wants to standardize or change how it interfaces with a supplier, since it may seem less efficient for the store’s process. However, we are finding that while this is true at times, it is also true that the main barrier to standardization is change and control. Determining the areas that we can change and are willing to change is often only discovered through trial and error.

So, are we ready to take advantage of leveraging our buying power? Yes, we are, because as we experience more joint purchasing activities, we are learning every day as associations and stores how to be better prepared and to understand what this means.

Corinne Shindelar works on behalf of Twin Cities Natural Food Co-ops and Cooperative Grocers Association Midwest; she can be reached at [email protected].

Dave Schermerhorn works on behalf of Twin Cities Natural Food Co-ops and Cooperative Grocers Association Midwest; he can be reached at [email protected].

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