Supply Excellence — Can Consortia Work?

Can Consortia Work?

October 10th, 2006 · by Tim Minahan · No Comments · supply management

When Airbus CEO Christian Streiff resigned this week after just three months on the job, he blamed the “current governance structure has insufficient delegation t lead Airbus through the crisis successfully.” That so-called governance structure is a consortium created in 1970 by technocrats in France, Germany, Britain, and Spain. Even Airbus’ parent company, EADS, is split by a Franco-German consortium structure of which DaimlerChrysler holds a leading 22% stake.

It remains to be seen whether Streiff is a power-hungry exec (as Airbus board members are painting him) or whether the company’s politically charged governance structure is really broken. (Although most market-watchers have fingered the latter as the likely culprit.) The issue raises the bigger question, can consortia really work?

Supply managers have been grappling with this conundrum for years, debating the pros and cons of buying consortiums or group purchasing organizations (GPOs). Julie Murphree, founder and former editor-in-chief at Supply and Demand Chain Executive magazine, reenergized the debate in a recent article in her former publication.

In the article, Julie takes the issue to Pierre Mitchell, Senior Research Fellow (whatever that means) at Hackett Group and AMR Research’s former go-to guy on supply management, SpendMatters Jason Busch, and yours truly.

My take: “GPOs have traditionally suffered from the same factors that have plagued enterprise procurement organizations: high transaction costs and poor compliance. Of course, with multiple, disparate, and often, competing constituents, GPOs have had this problem in spades.”

However, “advances in procurement automation and new On Demand application delivery models have helped mitigate these factors by providing the visibility and control requirement to effectively leverage spending, monitor execution, and measure and enforce compliance. On Demand has reduced the costs and implementation barriers to driving such visibility and control across multiple, disparate enterprises.” (Even Gartner in its somewhat reluctant endorsement of Software as a Service (SaaS) noted that On Demand solutions have found a stronghold within business process outsourcing (BPO) offerings.)

In the article, Jason aptly points out that GPOs have been most widely used within the healthcare sector, where spend attributes – from syringes and IVs to defibrillators – are common across hospitals. With ever-increasing pressures to curtail costs without degrading service levels, healthcare GPOs are leveraging technologies – from sourcing automation to contract lifecycle solutions – to increase spend leverage, streamline contracting cycles, and improve visibility and compliance.

I am working with one the nation’s largest contracting services provider (read: GPO) that is automating its sourcing, contracting, and supplier management processes to improve spend leverage and compliance across thousands of hospitals and affiliates. The GPO is also using optimization to satisfy unique requirements, inventory management, and allocation strategies across constituents. The GPO says the use of automation has more than halved its contracting cycles and has improved its ability to monitor, report, and encourage compliance across its members.

Julie correctly concludes that GPOs will always have a strong play in indirect spend categories – such as office supplies and equipment, cleaning supplies, etc. — which are commoditized and non-strategic to most organizations. However, with the visibility and control afforded by supply management automation, consortium approaches are being extended to more strategic spend categories.

For example, one airline consortium I’ve worked with recently used an optimization tool to source global ocean freight services for its constituents. Optimization enabled the consortium to evaluate thousands of lanes, service levels, and complex rate and tariff schedules – all within the “constraints” or buying preferences of individual members. For example, one participating airline wanted to consolidate with a global carrier for all its ocean freight needs, while another wanted to get the best value by dividing its business between a global provider and several local carriers.

Pierre sums the consortium trend up best when, in the article, he recommends that supply management professionals evaluate GPOs within the larger procurement outsourcing landscape. He notes that the major BPO players have incorporated GPO-like attributes within their offerings, such as aggregated buying and pre-contracted pricing as part of their outsourcing menu. Says Pierre: “This becomes critical for the customer wanting a complete mix of options in his spend management goals.”

Email Forward & Bookmarks