Procurement teams are managing a diverse range of spend categories. Industry insiders say many are missing out on opportunities in those undermanaged spend categories and as a result, increasing risk.
Organizations are experiencing an influx of challenges leading to a lack of control among spend and overall strategy. In order to overcome market volatility and supply chain disruptions, organizations are looking to procurement and supply chain leaders as a guide through the chaos.
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While navigating the risks and challenges of the current market, procurement is still expected to deliver savings to their organization. Partnering with a group purchasing organization (GPO) empowers your team to gain control of undermanaged spend and mitigate different types of risk which results in overall savings.
In part 2 of our series on undermanaged spend, we dive into the different types of risk your organization may face and how a GPO can help you thrive and save amidst disruption.
Value Leakage: Inadequate Contract Management
Contracts and service level agreements (SLAs) provide the foundation for cost savings, top-level service, and long-term partnerships. Unfortunately, for many, they also remain paper-based and, once signed, are stuck in a drawer to be looked up again only if a problem arises. When poor visibility of contractual obligations, terms, and conditions hinders performance monitoring, many fail to realize the benefits and cost reductions they negotiated.
GPOs can help manage procurement risks by making contract management an iterative process where their team of professionals constantly works on assessing and improving agreements and searching for opportunities for deep level discounts.
"Some of our members aren't able to see spend across their entire organization,” Bryan Zickafoose, OMNIA Partners Managing Director, Facilities Management • Supplier Development said. “So when we're able to consolidate their spend with one of our MRO suppliers, we can capture that data and provide it back to them, showing them that they have a large spend in a certain category, for instance. We can then work with our distribution partners to receive specific pricing agreements with the manufacturers to receive additional cost support from that manufacturer. As we add more leverage through those agreements, day in and day out, we begin to expand them and from time to time renegotiate as we hit certain milestones or thresholds, making those programs even stronger by adding additional discounts or core level items. And then, of course, reaching even further benefits through additional backend rebates and the like."
The Many Faces of Risk
Spurred by the need for cost reductions, the world's supply chains have long since transitioned from linear, primarily domestic value chains to intricate global networks. Along with longer supply chains that cross many international borders comes higher risks to your operations, brand, and financial outcomes.
Without proper supplier vetting and onboarding, your operations may be opening themselves up to higher regulatory and compliance, quality, and service level risks.
Potential impacts on your organization include:
- Damage to your brand reputation
- Decreased operational efficiencies
- Impaired service levels
- Increased cost of working
- Loss of revenue
- Customer complaints and chargebacks
Working as an extension of your team, a GPO can help you mitigate the risks that stem from inadequate supplier vetting and selection, poor contract management, lack of supply chain visibility, inefficient supplier communication, and a lack of best practices throughout the procure-to-pay processes.
However, as more and more customers begin their shopping journey by researching companies online and looking at reviews before making a purchase, it no longer takes a scandal to impact your brand or your sales. Customers upset by stockouts and late shipments can have a detrimental effect on both B2C and B2B businesses simply by posting online or through word of mouth. Conscious consumers and investors are looking to align with ethical, sustainable companies. By educating its members on the contract offerings within their portfolio, a GPO can help them reach their ESG objectives.
As global supply chain disruptions meet pent-up consumer demand, skyrocketing costs continue to trickle through every level of the supply chain, making their way to consumers and pushing up inflation to a 40-year high. Without procurement to negotiate and ensure you're getting the best price, organizations risk paying more than they should, leaving dollars on the table and putting you at a competitive disadvantage. Price risk will only escalate with time, as certain products without proper monitoring may be highly volatile and susceptible to extreme price fluctuations.
Holding strong supplier relationships, a GPO can play a valuable role in mitigating inflation risks, providing you access to preferential pricing and service through strategically sourced and highly competitive GPO contracts.
How GPOs Can Help
Unfortunately, a lack of actionable data and a shortage of resources hinders leaders from attacking these less visible areas of spend, leading to value leakage and leaving companies vulnerable to various areas of risk as teams outside procurement are left to order what they need from whom they want.
Reigning in Your Tail Spend
As Trowbridge, Principal at Strategic Procurement Solutions, states, “An amazing part of working with a GPO like OMNIA Partners is that membership is free. That’s because your company’s expenditures help them leverage deeper savings with 200+ solution providers for all their member companies. With membership, you receive access to internal analysts who compare your current supplier costs in a secure confidential manner. Usually taking no more than 15 – 20 days to analyze an entire category, this is like adding several new category managers to your own staff.”
OMNIA Partners Director of Partner Development Conner Reed takes the same concept and brings it to the shipping dock, where procurement decisions often get made due to lack of control over spend. "Just like every other kind of procurement program, the supply chain is definitely subject to tail spend,” Reed said. “When you have different locations, you may, for instance, have dock managers who've used certain suppliers forever. And for whatever reason, they may not want to use the programs that are being set up by headquarters. In some instances, that may create a more expensive and less reliable supply chain. Using programs that are set up through a GPO, you can work through some of those challenges and decrease that tail spend.”
Group purchasing can bring great benefits outside of undermanaged spend categories, helping members bring home cost savings.
“Unless a buying organization is massive, membership in a GPO is actually an excellent strategy for many spend categories – not just undermanaged ones. For example, one of my clients is a medium sized retailer with 350+ store locations. They had a decent office supply spend above $2 million a year. And their procurement group had done an RFP three times in the last 12 years. They also carefully managed which office supply items their stores that staff members could buy. So, they had a solid program. They were amazed when we had their spend compared to the OMNIA Partners office supply agreement valued at almost $1 billion with a major distributor and found an annual cost reduction of $520,000.”
To bolster your procurement efforts, seek a GPO partner that offers the following:
Stronger buying power = Stronger pricing and contract terms
Reduced volatility with contracted pricing
High-quality products and services from well-vetted suppliers
Preferential status to receive goods and services during volatile times
Seek a GPO that can help you futureproof your organization, strengthen your supplier relationship management, mitigate your risks, and reach your goals. Doing so can have a dramatic impact on the resiliency of your organization
Did you miss part one of this series? Go back and read it: How a GPO Can Mitigate Your Risks in Undermanaged Spend Categories