Small paints and coatings manufacturers have it tough. Not only must they compete for sales dollars with giant, international conglomerates, such as Sherwin-Williams, Glidden Paints, and Imperial Chemical Industries (ICI), but they are also experiencing serious competition in their sales territories from big-box retailers like Wal-Mart and Home Depot. These major retail players have enough buying power to negotiate low prices for the materials that make paints and coatings, putting smaller market players at a disadvantage when it comes to pricing their finished products.

So, to survive in this climate, more than 70 paints and coatings manufacturers worldwide have banded together to form Guild CPO (central purchasing office), a not-for-profit raw materials buying consortium headquartered in Medina, Ohio.

Guild CPO is an offshoot of Color Guild International, a consortium started in 1978 to aid small regional paint companies by developing color card display systems, which can cost up to $200,000 and take seven years to research and create. "By pooling their resources, the founding members of Color Guild International found they could spread out the cost of developing the system while retaining the value," says Dan Kerr, executive director of Guild CPO.

"In the paints and coatings market, about half of total sales dollars are allocated to raw materials purchases," says Guild CPO President, David Hood, who is also president of Induron Coatings Inc., based in Birmingham, Ala. "An additional third of sales dollars go toward overhead and production, leaving a relatively small fraction [for profit]. This is very strong incentive for smaller paint manufacturers to cut raw materials costs," Hood says. "If we can save 3%-4% on raw materials, it can equal up to 2% of our total sales, and that's a lot of money."

Guild CPO is organized by committees, which are elected by its member buyers. There is one committee for each type of product group used in paints and coatings formulations, for example, pigments, resins, solvents and others. The committees determine the sourcing direction, financing aspects, and technical requirements of raw materials to be sourced, based on input gathered from the Guild CPO membership using product specification surveys. The committees then propose and approve suppliers, and decide which raw materials will be sourced.

Leadership of the consortium is maintained by a board of directors, which is also elected by the Guild CPO membership. The board of directors appoints officers, who oversee the activities of the committees. Executive Director, Dan Kerr, and his staff handle administration of the organization.

"One of my main functions as executive director of the consortium is to sit down with suppliers and negotiate rebate programs for our buyer members. These rebate programs essentially make it more attractive for the members to buy from our approved suppliers," Kerr says. While all pricing is negotiated by individual member buyers, Kerr says Guild CPO provides "the icing on the cake, above and beyond the negotiated price of the contract."

Guild CPO negotiates several kinds of rebates, depending on both the nature of the raw material and the supplier. Some of the rebates may be annual or quarterly, and may be based on volume or dollar value spent with the supplier. For instance, if a Guild CPO buys more than one million points of titanium dioxide (TiO2) pigment from a preferred supplier, then Guild CPO might receive a 1% rebate. Two million pounds of material purchased might result in a rebate of 2% or even a little higher. Similarly, if a certain dollar value is reached, (such as $1 million spent with a preferred supplier), a corresponding rebate percentage is given back to Guild CPO. Rebate monies are then distributed to Guild CPO member companies based on their participation in the raw materials buy.

"Guild CPO, member buyers and preferred suppliers all keep track of the buys, and we all reconcile at the end of the rebate term," Hood says.

Rebates vary considerably based on commodity. "If it is a pure commodity being purchased, such as a solvent, the rebate is generally a small percentage of volume. However, if it is a more specialized raw material or custom-manufactured resin, the rebate percentage may be higher," Hood says. "Usually, the rebates range from 1% to 6%," he adds.

To promote competitive pricing and rebate schedules, Guild CPO's goal is to have at least two preferred suppliers for each commodity material used in paints and coatings formulations.

To attain preferred status, supplier candidates are reviewed by Guild CPO purchasing committees. If the suppliers meet minimum requirements for doing business, (as outlined in survey responses from member buyers), the committees have the power to negotiate rebate programs.

Of course, buying from Guild CPO preferred suppliers is not mandatory. Participating buyers have the option of buying from their own nonpreferred suppliers, but only purchases from suppliers approved and designated preferred by the Guild CPO organization qualify for group rebates.

Preferred suppliers are invited to Guild CPO annual meetings to make presentations to their respective purchasing committees and to the membership as a whole. Typically the presentations involve discussions of products and services offered, technological capabilities, special product development projects and strategic business directions.

Being a preferred supplier to Guild CPO has its benefits. Preferred suppliers essentially get the first crack at bids for the collective business of the consortium. Also, preferred status gives suppliers an opportunity to showcase their products and service capabilities to a large group of buyers. "This has proved to be very valuable to suppliers on more than one occasion," says Hood.

In addition, Guild CPO meetings have been used as a sounding board for new product concepts. According to Dick Olsen, senior vice president and general manager for OPC Polymers, based in Columbus, Ohio, "Several suppliers have talked about getting together to provide product packages to Guild CPO buyers. That way, buyers won't have to transact with pigment suppliers, resin suppliers, etc. They can buy all these products together.

Guild CPO President David Hood says the aggregated buy competes on volume and price with the buys of large paint manufacturers while simultaneously providing advantages to the raw materials suppliers. "With our collective buy, the supplier doesn't have to put all their eggs in one basket," he says. "Also, because we're mostly smaller and regional paint manufacturers, we tend to be more flexible and willing to cooperate with suppliers," he adds, "whereas the bigger companies are typically more rigid because they are accustomed to getting their way in negotiations."

Aside from the obvious advantage of reducing buyers' raw materials costs by aggregating demand for commodity materials, Hood says Guild CPO provides other benefits on both sides of the transaction. "We have made significant headway in improving our suppliers' communications with us, as well as taking significant costs out of the raw materials buy," says Hood. "Ultimately, we're trying to drive down the suppliers' costs of doing business with us, so that everyone can win," he says.

Another benefit of the buying consortium is improved information transfer and best practices among buyer members. According to Dick Cunningham, president of Pasonno Paints, in Waterlviet, N.Y., the Guild CPO meetings provide member companies with a way of tracking developing trends in the industry. "You can't help but get a sense of what's working for some members, and what's not," he says.

Executive Director Dan Kerr says that while the consortium's primary concern is the raw materials buy, the organization is exploring the possibility of expanding collective buying strategy to other areas, including car rentals, health benefit plans, MRO items, and computer systems.

"E-commerce is another one of our long-range plans," Hood adds. "Currently, we have about 12 beta-sites testing an electronic data interchange (EDI) system that will allow protocol compatibility among the many buyer member companies and our preferred suppliers," he says. This system will allow Guild CPO to collect relevant rebate data automatically. Guild CPO expects to roll this system out to its members by early 2002.