Friday 13 June 2014

#indyref and procurement part 3 - consolidation

One of procurement's value levers is consolidation. The premise being if you buy more from a supplier the price will come down because of the increased cost efficiencies that arise as a result.

The continuum over which consolidation may take place covers:
  • Individuals
  • Teams
  • Departments
  • Regional business units
  • Subsidiaries
  • National organisations
  • International organisations
  • One global organisation 
Stakeholders often tell procurement that as an individual they can purchase cheaper than central procurement negotiating on behalf of the national organisation. That may be but for standard and commonly required items once the total cost of sourcing, negotiation, order, shipping, delivery, receipt, payment, storage, use, maintenance and disposal is taken into account it's generally not the case. 

There does however seem to be a limit over which the benefits of consolidation no longer hold true and where that limit lies depends on:
  • The goods and services involved
  • The income/profit/loss involved for both parties (as £ or %)
  • The similarity between business requirements
  • Power of the buyer
  • Power of the supplier
  • Cost of research and development 
  • Cost of tooling or set up
  • Competitiveness of the market
  • New entrants coming into the market
  • Substitutes available 
  • Political, economic, sociological, technological, environmental and legislative factors 
For some goods and services therefore negotiation at an individual level might make sense, and for others negotiation at global level may be preferable. 
The Scottish independence referendum has similarities with this continuum. Up till now Scotland, a subsidiary of 6.5 million people, has benefited or otherwise from being a member of a bigger organisation of 65 million. 
The indyref debate centres on whether Scotland can benefit from being independant or not. 
  • For some unique requirements specific to living in Scotland then the best place to negotiate and decide on sourcing will undoubtedly be in Scotland. Whether all of these areas are currently within the Scottish parliament's control I can't say. 
  • For others, where Scottish negotiation power is likely to be low, I can't help but feel being part of a bigger organisation would be of benefit. This undoubtedly involves any relationships with the global market place. Surely a United Kingdon provides better bargaining power than Scotland alone whether based on GDP, population or some other factor?  
  • Another concern I have is around the size of the set up and running costs. Some of these costs don't increase proportionate to the size of population. So 65m people contribute less per head to these costs than 6.5m would to obtain the same services. I'm not sure yet we fully understand the set up and running costs enough to be able to fully understand the impact of this. 
As an English born, Scotland living procurement professional this is one of a series of blogs looking at the analogies between the Scottish independence referendum (Indyref) and procurement. The first blog tackled the need for facts and data to identify the increase and reduction in revenue, cost and risk for every aspect of running Scotland as an independent nation. The second blog considered the belief that  the grass isn't always greener on the other side. 

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