Group purchasing helps leverage decentralized spend
Wayne Forrest -- Purchasing, 11/4/2004 2:00:00 AM
With 93 divisions and offices in the U.S. alone, the decentralized structure of Parker Hannifin's operations make a coordinated purchasing strategy challenging, to say the least. The $6 billion Cleveland-based maker of motion and control technologies realized gradually in the mid-1990s that its volumes were not being leveraged and the corporate structure was limiting the consolidation on indirect spend areas across business units.
With that in mind, Parker Hannifin became one of the founding members in 1997 of Corporate United, a group purchasing organization (GPO) which has grown to 53 members that spend $150 million annually through Corporate United contracts.
"Being part of the GPO has helped us go to suppliers with a little more on the table than we historically have been able to do," says Heather Greep, Parker Hannifin's corporate procurement integration manager. Parker Hannifin spent some $3 million on goods and services in one year through the GPO and realized a savings of $450,000, or 15%, on the base cost. Through Corporate United's initial savings analysis, the GPO also helped implement a process of online ordering and catalog use to reduce maverick spending by 40%.
Parker Hannifin has purchasing contracts through Corporate United for office products, janitorial supplies, electrical components and copiers, as well as temporary labor agreement for light industrial and office personnel. Through its affiliation with Corporate United, Parker Hannifin's savings have varied depending on the commodity from single-digit percentage savings to as high as an average 30% on safety products supply. The company initially projected a $7 million annual savings in temporary staffing this year. Greep could not confirm if that figure has yet been realized, but did estimate the company has saved approximately 10% on its temporary labor in terms of mark-up, with some locations saving as much as 70%.
Greep emphasizes that purchasing through a GPO or a specific distributor has not hindered Parker Hannifin's choice of products. In the case of janitorial supplies, the consortium negotiates with the supplier, Kimberly Clark, to pass on the savings to the distributor.
"It doesn't necessarily lock us into anything. It gives us deeper discounts," Greep says. "It depends on the commodity. Many times it is a dual award to two different companies. We have a dual contract arrangement for copiers. That gives our locations a choice and we still have some control over purchases."
Broadening coverage
As one of the founding members, Parker Hannifin attends Corporate United's meetings and makes suggestions on the direction of the GPO. It also allows Parker Hannifin the additional benefit of networking with companies in other industries to share best practices on how to approach sourcing and how it may differ between markets.
Since its start in 1997, Corporate United has broadened its area of coverage to include pharmacy and life insurance benefits, two areas of rapidly increasing costs for corporations. One spend area that Corporate United's members are seeking solutions to is healthcare. Buyers are getting hit so hard with increasing healthcare costs that Corporate United is exploring the possibility of adding dental and vision care coverage to meet buyers' demand and complement its current pharmacy benefits program.
"There is a clear-cut base of suppliers [in dental and vision benefits] with national capabilities that can take on a larger piece of business, such as Corporate United would bring to market on behalf of our members," says David Clevenger, Corporate United's vice president of strategic operations. "Also, there is incrementally less complexity to that [coverage] than there might be with a full-blown health plan."
Overall, Corporate United estimates that savings range from 5% to 30% among its members, depending on the product or service. The GPO also provides a benchmarking service to help the clients calculate potential savings.
Corporate United also serves—as Clevenger describes it—a "supplier manager function" to help its members achieve a "continuing cost saving throughout the term of the contract." The GPO works to forge a partnership with suppliers and identify the savings as a result of demand management, optimizing a program of reengineering members' requirements and purchase specifications.
When to outsource
One question for many companies is which items, supplies and services to outsource to a GPO. Clevenger uses a hypothetical example of an automaker which will dedicate its own procurement efforts to its most critical purchases—buying steel and components, for example—and leave the less crucial buys, such as office products to an outsource partner.
Clevenger describes the Corporate United model as "something of a hybrid outsourcing solution, because you still maintain a relationship with a supplier and still have access to the [purchasing] information. At the same time, you have given up responsibility for the negotiation, analysis and contract management. So, I think ultimately a GPO like ours will act as a unique bridge between an insource solution and an outsource solution."
Clevenger sees outsourcing as a natural part of the purchasing landscape among companies of all sizes and industries. The direct spending decisions that relate more to a company's core business will continue to be maintained in-house "because it is much more strategic and not the kind of thing you would think to outsource."
The amount that outsourcing some purchasing decisions will benefit a company will depend on the commodity, as well as a careful cost-benefit analysis.
"A lot of companies think [a GPO] is a 'be all.' It is another resource for corporate purchasing," Greep says. "I don't think you can put all of your purchasing through a GPO; I don't think that would be realistic, but it certainly is a very, good resource for certain commodities."
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