Dive Brief:
- Some companies, like Pernod Ricard, are requiring their brands to purchase from one supplier instead of a diverse set in an attempt to centralize and lower costs, The Wall Street Journal reported Tuesday.
- Such centralizing practices — including moves to establish "hubs" that combine a variety of a company's processes and operations — can save a company 6-10% a year.
- More companies are pursuing these kinds of practices to help increase profit margins and cut back on the bureaucratic and regulatory red tape that drives up expenses, the Journal reported.
Dive Insight:
Suppliers hate consolidated spend. They would much rather deal with fragmentation of demand from many customer divisions and operating units, maximizing margins by charging what the market will bear to each one. If the supplier thought they could maximize their margins by consolidating spend with large, multi-location suppliers, they would. But the local margins, and relationships, generally benefit the seller. Call it variable margin selling, different margins with different divisions, but fragmentation favors the seller. And they know it.
By aggregating spend suppliers are at the mercy of a centralized corporate contracts group, negotiating for strong discounts, but at the same time dislocating established relationships with buyers and requisitioners alike. And in some cases, incumbent suppliers might be losing the business altogether when a centralized entity sends those requirements out for bid.
From time to time a supplier enjoying fragmented demand might pitch a centralized agreement, but that may be in an effort to keep business in stormy times or when trying to displace an existing supplier.
A not so well kept secret is that most of the buyer’s operating units are not fans of centralized spend either. Often the relationship, and related service levels, changes when suppliers go the centralized account route. One of the tradeoffs of reduced prices can be reduced service levels or changes in account management. That wrecks havoc on hard-fought relationships. While smaller divisions might enjoy a higher discount level, they are often a minor player in the agreement. The larger users may actually find their discount levels reduced when demand is aggregated. This is often done ‘for the good of the agreement’ and not so much for the good of the division.
Another issue from the buy side is lack of local control. Operating divisions, with profit and loss responsibilities, often operate with a high level of autonomy, especially around procurement. Not many procurement managers are happy to hear that ‘corporate’ is coming in to help them save money. There is as much resistance on the buy side as on the sell side.
Yet, I am in favor of a centralized spend model. There are just too many opportunities for cost savings not to aggregate demand and negotiate strong agreements that not only address cost but supplier performance levels as well. Companies often begin consolidated spend programs with indirect spend categories. Office supplies, IT services, and travel are prime candidates for centralization. When these agreements begin to impact direct spend, products like hardware, electronics, and raw materials, nasty attitudes often rear their ugly head. That’s where strong management needs to step in.
