An article in the New York Times(July 12,2012) describes the private equity firm, the Blackstone Group, which owns 74 companies with a combined 700,000 employees. Across its companies, the firm buys 15 million reams of paper, 35 million FedEx shipments and 900,000 car rentals. Centralized buying through a group purchasing program called Coretrust has enabled savings of 10 to 50%, but requires companies to switch to a common supplier and specifications. Is this switch to more detailed operations a new capability of private equity firms ? Could the focus on savings through common specifications destroy revenues at the individual companies ? How should such programs be managed so that they do not hurt individual firm preferences – should participation be made voluntary ?
Tags
- agriculture
- Amazon
- Apparel
- Apple
- automobiles
- Capability
- Capacity
- China
- Collaboration
- competition
- consumer
- Consumers
- Coordination
- Cost
- Costs
- delivery
- demand
- Demand Surge
- Design
- disruption
- Dual Sourcing
- Ecommerce
- Efficiency
- emb2019
- emb2020
- Environment
- exports
- Fast Fashion
- Food
- Global
- global supply chain
- grocery
- Growth
- healthcare
- hospitals
- imm2018
- Imports
- India
- Infrastructure
- Inventory
- Japan
- Legal
- logistics
- Low Margins
- Loyal Customers
- manufacturing
- Margins
- mgmt5612018
- mgmt5612019
- mgmt5612020
- mgmt5612021
- Outsourcing
- pharmaceutical
- prices
- Quality
- rail
- Rare Earths
- regulation
- Retail
- Retailers
- Risk
- river transport
- Service
- ships
- software
- Suppliers
- Supply Chain
- Survival
- Sustainable
- technology
- transport
- Trends
- US
- WalMart
- Water
-
Recent Posts
Archives
- February 2022
- September 2021
- August 2021
- August 2020
- December 2019
- November 2019
- February 2019
- January 2019
- November 2018
- October 2018
- September 2018
- August 2018
- April 2018
- March 2018
- December 2017
- November 2017
- September 2017
- August 2017
- June 2017
- May 2017
- March 2017
- February 2017
- January 2017
- December 2016
- November 2016
- October 2016
- September 2016
- June 2016
- April 2016
- March 2016
- February 2016
- September 2015
- August 2015
- April 2015
- March 2015
- February 2015
- November 2014
- October 2014
- September 2014
- August 2014
- July 2014
- June 2014
- May 2014
- April 2014
- March 2014
- February 2014
- January 2014
- December 2013
- November 2013
- October 2013
- September 2013
- August 2013
- July 2013
- June 2013
- May 2013
- April 2013
- March 2013
- February 2013
- January 2013
- November 2012
- October 2012
- September 2012
- June 2012
- May 2012
- April 2012
- March 2012
- February 2012
- January 2012
- December 2011
- November 2011
- October 2011
- September 2011
- August 2011
- July 2011
- June 2011
- May 2011
- April 2011
- March 2011
- February 2011
- January 2011
- December 2010
- October 2010
Categories
- Africa
- Air
- airport
- California
- Capacity
- car
- cash
- chicken
- China
- cobalt
- Collaboration
- competitiveness
- congestion
- consumer
- Coordination
- Cost
- delivery
- disruption
- Ecommerce
- emb2019
- emb2020
- emb2021
- fairness
- flash memory
- Global Contexts
- Grain
- hospital
- imm2018
- imm2019
- Innovation
- intellectual property
- IoT
- labeling
- Liability
- logistics
- loyalty
- Made in USA
- manufacturer
- mgmt5612018
- mgmt5612019
- mining
- Operations Management
- ordering
- Prices
- product
- productivity
- queue
- Railroad
- recycling
- retailers
- Service Operations
- ship
- shoes
- Starbucks
- supplier
- Supply Chain Issues
- Sustainability
- technology
- Tesla
- toy
- Train
- transport
- truck
- Uncategorized
- Variety
- vehicles
- waste
Meta
Global Supply Chain Musings 
Private equity firms, like the Blackstone Group, make their money by investing in startups and poorly managed companies and guiding them through performance improvement strategies and then selling them. Centralizing buying between the companies owned by Blackstone Group on commoditized products such as paper and car rentals would not destroy revenues at the individual companies. Centralizing the purchase of commoditized products will help cut their costs because the individual companies will see larger volume discounts. However, trying to centralize the purchasing of more specialized products could destroy the revenues at specific companies. There are a lot more variables to consider when purchasing a specialized product and more people involved in the purchasing decision than just purchasing. Therefore, centralizing the purchasing decisions of specialized products across all of the individual companies could leave employees at the individual companies unsatisfied and effect their overall work performance which would affect that companies revenues. Introducing a large-scale program like this would need to be managed carefully to prevent complete failure. To start, Blackstone Group should start with a sample of voluntary individual companies that see value in the centralized buying process and collect data on the improvements those companies saw over a period. When Blackstone has that data, they can present it to other individual companies that have not joined to try and persuade them. Once all the kinks of the program have been worked out and they are sure that it will not affect individual firm preferences, Blackstone Group could make it mandatory to join.
The switch to these detailed operations is not a new capability that was just discovered. These saving plans have been in existence, but why have the companies just started implementing them? The plans have proven to be helpful for both parties because it allows the customer to get a lot of products cheaply, even though the supplier has placed restrictions on what they are able to order. Then supplier is not losing money because they are able to make enough a large enough quantity to make the amount of money, they receive worth it without having to make specific items the customer may have ordered. With the focus on savings through common specifications, I believe this will not destroy individual company’s revenues. Individual companies will want their primary focus to be on the general population and smaller companies to sell to. These are the market players that will be interested in specialized products and services. For these pricing agreements to not kill individual firms’ revenues it is important to understand what market these firms attract. The participation in these agreements should be voluntary and only offered to companies that can sustain this pricing agreement for a long period of time. Companies that try to focus on what is best for them in the short run end up losing sight of what its goals are as a company.
The switch to these detailed operations is not a new capability that was just discovered. These saving plans have been in existence, but why have the companies just started implementing them? The plans have proven to be helpful for both parties because it allows the customer to get a lot of products cheaply, even though the supplier has placed restrictions on what they are able to order. Then supplier is not losing money because they are able to make enough a large enough quantity to make the amount of money, they receive worth it without having to make specific items the customer may have ordered. With the focus on savings through common specifications, I believe this will not destroy individual company’s revenues. Individual companies will want their primary focus to be on the general population and smaller companies to sell to. These are the market players that will be interested in specialized products and services. For these pricing agreements to not kill individual firms’ revenues it is important to understand what market these firms attract. The participation in these agreements should be voluntary and only offered to companies that can sustain this pricing agreement for a long period of time. Companies that try to focus on what is best for them in the short run end up losing sight of what its goals are as a company and that is to maximize the performance of all areas in the company.
I think centralized purchasing has a lot of advantages if applied correctly. Based on some of the items mentioned in the article (e.g. paper, car rentals), it can be inferred that these are indirect purchases, which are probably not related to the value proposition of these companies. Centralized purchasing of these indirect items can potentially save money without affecting the customer value creation. However, it is not a one-size-fits-all solution. Detail care should be taken when these items are directly related to the business purpose (e.g. FedEx shipments). Scraping these inefficiencies out of the supply chain can be a new capability of private equity firms, allowing them to be more profitable through proper coordination.
Jorge,
I was thinking the same thing. If these are indirect and highly commoditized then why not centralize the purchase to allow for savings. I do not think many people are going to be upset that their brand of white printer paper has changed, in fact they would likely never notice. With that being said, many things can contribute directly to the value generating aspects of certain businesses. You mentioned FedEx, but I was even thinking about the rental cars. Many companies use specific vehicles with specific logos for advertisement. Would this be interrupted if forced to participate?
However, for this system to work best participation is a necessary evil. If given the choice, and many firms opted out then the cost reduction would be far less significant.
I think that the centralized purchase method might can reduce the price, but at the same time, it is necessary to pay attention to the purchase price is not all the components of the cost. As mentioned in the lecture, in addition to considering the purchase price, the procurement cost also needs to pay attention to the cost of the entire use process, such as transportation, staff training, destruction, and so on. So I think that when making decisions, you can first classify all procurement items according to different characteristics, prices, bargaining power, etc., to formulate corresponding strategies. When choosing to change suppliers, all possible costs other than prices should also be considered. On the other hand, the replacement of suppliers may indeed affect the operating conditions of individual companies within the group. In the face of this situation, we should communicate with them in a timely manner to understand their real needs. The replacement should also start from a small-scale attempt and be carried out gradually without harming the interests of both parties.
Scale is one of the most straightforward methods to achieve procurement cost savings. Companies that negotiate volume discounts and allow suppliers to take advantage of economies of scale are able to achieve significant material cost reductions. Historically, only large individual companies could achieve large supplier cost reductions thanks to scale, but Blackstone demonstrates a new method of reaching this scale.
This cross-company collaboration is enabled by the private equity firm, and is thus a new capability of such firms. These efforts would only decrease company revenues if the centralized purchasing process did not allow individual companies to purchase crucial specialized parts. The program should be managed so that it does not cause significant interference with existing companies’ other business processes, and it should first focus on standardized, common supplies (paper, pens, etc.). Participation should be mandatory for companies with large scale and/or struggling management. These are the firms that would most benefit from the collaboration. Some flexibility should be given for smaller, specialized firms. Especially those heavily involved in R&D.
Private equity firms are focusing more on operational work rather than just financial issues. And procurement is an important operation activity to consider. Centralized buying, or we call it bulk buying enables equity firms to take advantage of the economies of scale for a lower price. As suppliers, they are forced to compromise with the low-profit margin because they don’t want to lose large contracts. Also, more competition among suppliers will increase suppliers’ service quality. For individual companies, I would say smaller companies benefit more than larger ones because it’s a chance for small companies to increase operation levels and save much more money. Meanwhile, especially for large companies, centralized buying may affect their unique requirements and push them to share more resources. I think voluntary participation works well enough because if companies think they can get more benefits, there’s no doubt that they will join. But once members are in the program, it’s necessary that everyone is willing to find better suppliers and to have a standardized process to promise efficiency.
Is this switch to more detailed operations a new capability of private equity firms?
For those large private equity firms, it makes absolute sense to centralize their procurement division to use the full company’s leverage to obtain better contracts. At the level of Blackstone, it can easily represent tens of millions of dollars of savings per year. However, it is very complexed to effectively centralized the procurement of a private equity because historically, companies that composed those groups operate mostly individually.
Could the focus on savings through common specifications destroy revenues at the individual companies?
It is easy to imagine that a centralized procurement team that does not work very closely with every single companies, engineering team and so on could not procure the right service or product to match the need of those companies. It could therefore destroy value and generate extra cost for those companies. Understanding closely the need of 74 different companies is a tremendous work for a single team.
How should such programs be managed so that they do not hurt individual firm preferences – should participation be made voluntary?
The program should identify products and goods that are procured, and which does not significantly impact the operations of those companies. For example, procuring office supply for the all group make sense because those products are fairly standards and does not impact the way business are done in all those companies.
Centralized purchasing can create more efficiencies and less complexity among the firms that Blackstone operates. Many of Blackstone’s investment are in companies that are struggling to operate effectively and efficiently due to poor management practices or just overall performance issues. In terms of more basic/commoditized products such as paper and car rentals, it makes sense to incorporate a standard, centralized purchasing operation for those companies. By offering a centralized platform, these companies are able to follow a specific guideline for purchasing that will enhance their ability to operate at a higher potential. However, this strategy may only be effective for the less complex products. Companies that are operating with highly intricate or individualized items may face problems with a centralized purchasing platform, mainly due to the complexity involved in the process. Purchasing can become more difficult for a firm that is focused on various sorts of products a large assortment of suppliers.
By switching to more detailed operations, it adds a new capability for the company. Millions of dollars can be saved by simple measures for giant private equity firms like Blackstone. The savings can turn into the capital to acquire more companies and sell them for profit. However, depending on the context, it might damage the revenues at the individual companies. For example, by switching to a different supplier, it might decrease the productivity and morale. For such programs to succeed, they need to distinguish the critical and non-critical goods. Items like toilet paper, rental cars or office suppliers are usually used in huge amounts and they do not generally impact the revenue. Those items can generate a large amount of savings by just switching the suppliers. More specialized items like manufacturing equipment or remote area delivery services will have great impact on revenue if not chosen thoughtfully. The key is the communication among suppliers, individual firms, and parent company.
From my perspective, the buck purchasing for the private equity firm saves cost with no doubt. Since the firm has large demand of the paper and each purchase generates the shipment which takes long time of every purchase. The buck purchasing is a good way to get the discount price and short delivery time. While, before they buck purchase million paper, they also need to consider that the offices have enough space to store. Besides, this kind of purchase need upfront fee at first but won’t destroy revenue if they take the long view. And switching to different purchasing habits depends on the features of products. The individual company still have change in other purchase.
The article elaborates how big companies cooperated as a group called CoreTrust and do centralized buying to decrease their cost. I think one of the biggest advantages of centralized buying is that it can effectively make cost down by gathering huge amounts of units. It can also reduce redundant administration process to save the lead time. However, does it truly build up a good relation ship with the suppliers in the long run? Do suppliers manage the delivery with the same quality as the normal cases all the time? Does every company have such a big negotiation power to do the bargain? I think there are many things for the company to leverage. Among the whole process, the fully coordination is required.
Centralized buying of standard products like office supplies, computers is no doubt the most cost efficient way of sourcing. Switching to more detailed operations might bring complexity in the system. There could be a delay in operational activities in case of an emergency due to shortage of materials because of restrictions to localized purchasing.
The discussed practice in the article would definitely destroy revenues at the individual companies since a single supplier cannot work effectively with 74 companies, especially in procuring specialized products. Expertise of departments like Engineering, logistics is certainly required otherwise there could be a supply of wrong products, thereby increasing the costs.
To manage programs like Coretrust, participation should be made voluntary at the beginning. After analyzing the effectiveness of the program over time, showing the results to the rest of the companies, and satisfying those companies in every way possible. It could be made mandatory. Having said that, if an individual company still want to procure goods from a preferred supplier to maintain the quality and availability, it should be allowed to do so.
From my perspectives, if the centralized purchasing can be further applied in an appropriate manner, there will be more benefits than inconvenient especially for a flagship company has the capital and influences like Blackstone. As we can see in this article that Blackstone are buying huge amount of paper, shipping tons of mails, and renting in a high frequency. For example, if Blackstone decides to let all the companies it owned to adapt the same shipping method through FedEx, then Blackstone as a whole can have a direct huge bargain power to the FedEx, since the volume is too high for FedEx to say no. Blackstone can have a better play in the perspective by dragging down the shipping cost and in the meantime to keep the business professional under the same guidelines. It’s definitely a capability for private equity firms. However, some companies owned by Blackstone might not get benefits from these common specifications directly especially when those companies are not financially competitive or flexible enough to get into new transitions. From a large scale’s perspective, the large contract indeed can bring the cost down and increase the net income, but the smaller ones won’t have enough response to the new specifications from the perspectives of income statements comparing to larger firms. In my opinion, the goal for new specifications should not only consider about the cost, but also about the feasibility about the plan. If there are some business that can not be fully covered in these specifications, I don’t think force them to obey will be a good idea. Instead, only do the necessary changes rather than forcing changes.
Is this switch to more detailed operations a new capability of private equity firms ? Could the focus on savings through common specifications destroy revenues at the individual companies ? How should such programs be managed so that they do not hurt individual firm preferences – should participation be made voluntary ?
PE firms would have the scale of economy for sure because of the buying power they hold through companies under their control. It would be foreseeable that they will switch to corporate purchasing for cost reasons. For individual companies, most likely their revenue would not be affected if the switch happens with enough planing and thinking. This ultimately leads to the process of those programs. First all purchase needs to be evaluated identifying their supplier information and their usage in business – if they are critical to success of the business or not. Then a plan for a combined purchase can be created focusing on areas that would not affect companies’s key business performance – such as postal cost and office supplies. Companies should be suggested to use this service rather than being forced to at early stage of the project, but to achieve scale of economy some sort of incentive should be given – like a lower price for using same material and shipping service. If the result of this switch turns out to be cost-effective then further implementation including force implementation might good to go. However, there should still always be room to negotiate with PE if the standard service cannot satisfy company needs and special orders need to be placed.
It is a new capability specifically for private equity firms, and it does make sense to centralize procurement because it will allow for customers to get products more cheaply and make the most out of their the companies’ contracts with suppliers. Large savings, in theory, can be obtained with more detailed operations.
Individual companies usually have their focus on large masses and smaller companies to do business with. Common specifications will go against these very intentions, and destroy revenue and value. Such a change from the mission of an individual company can leave its employees with low morale and dissatisfaction, which will translate to less productivity.
Yes, Blackstone Group should first look at a list individual companies that voluntarily want to participate in this new capability, and for a period of time, through trial, error, research and development, they can monitor the centralized buying process and collect data to assess and evaluate how it is working on the revenue and value creation side. After a lot of research and optimization, they can then introduce the centralized procurement process to the other individual companies, where Blackstone can speak of the benefits with data to back it up. Individual companies will be more comfortable with this proposition once they can see the benefits and data collected. Only then should Blackstone consider making it mandatory to join.
To centralize procurement or not is a big question. In my opinion, the answer to this question depends on the types of goods that the company wants to consolidate.
Firstly, if large companies have the opportunity to collect all the needs in a bulk, and conclude an annual contract with the attached execution schedule at the 30% cheaper rate than if each company would purchase the same product or service separately, then, why not use this? The numbers of savings speak for themselves: $27 million on paper, $105 million on FedEx, $7.8 million on car rentals (if you rent 900,000 cars for $ 29 per day). Total savings of $140 million.
Secondly, of course, the companies that are more efficient will be able to provide a better deal for clients like the Blackstone Group. In the meantime, less efficient companies will be forced to leave the market, or provide a higher level of service to customers in other market segments. For instance, through such coordination and product and service utilization fewer vehicles will be idle.
In conclusion, in my opinion, for clients in subsidiaries for such highly commoditized products as paper, car rentals, or mailing, the brand does not really matter. The main thing for them is that the service was provided with high quality and on time. This is exactly what the Blackstone Group needs to work on since they want $140 million in savings.
Whether or not to centralize purchasing is a big question. In my opinion, the answer to this question depends on the types of goods that the company wants to consolidate.
Firstly, if large companies have the opportunity to collect all the needs in a bulk, and conclude an annual contract with the attached execution schedule at the 30% cheaper rate than if each company would purchase the same product or service separately, then, why not use this? The numbers of savings speak for themselves: $27 million on paper, $105 million on FedEx, $7.8 million on car rentals (if you rent 900,000 cars for $ 29 per day). Total savings of $140 million.
Secondly, of course, the companies that are more efficient will be able to provide a better deal for clients like the Blackstone Group. In the meantime, less efficient companies will be forced to leave the market, or provide a higher level of service to customers in other market segments. For instance, through such coordination and product and service utilization fewer vehicles will be idle.
In conclusion, in my opinion, for clients in subsidiaries for such highly commoditized products as paper, car rentals, or mailing, the brand does not really matter. The main thing for them is that the service was provided with high quality and on time. This is exactly what the Blackstone Group needs to work on since they want $140 million in savings.
This switch is highly unlikely to take place in a publicly traded equity firm. It is not new, however, as a capability of private equity firms. One of the goals of acquiring new companies to an enterprise is to leverage the advantage of mass procurement, where the company would have strong bargaining power against suppliers.
Savings through bulk purchasing basic operation products are less to no harm to individual companies as long as these functions have no direct impact on customer or products. In this case, bulk purchasing office supplies, logistics services and fleet services will do hardly any impact to companies under Blackstone.
I believe participation should be made mandatory to ensure fairness and savings across all companies. But a committee should be setup to review request of change if the standard products are impacting business and service.
Centralized purchasing can certainly improve process efficiencies, reduce supplier base and reduce spend through bulk ordering, only if it aligns with company’s business strategy and affect its competitive advantage negatively. Here, Blackstone group did a great job adopting this strategy for office supplies, package deliveries and car rentals and saw savings of 10-50%. Private equity firms like Blackstone have a business model that attracts investors based on the firm’s ability to get a higher rate of return for their investment and their individual portfolio. Therefore, centralized purchasing strategy may not have added much value to the customer, apart from the cost savings.
Individual company preferences would have been affected if procuring office supplies affected their long term strategy to serve investors effectively. But, in this case, centralized purchasing is a non-core activity that will now let individual companies at Blackstone Group to focus more on its investors.
Centralized purchasing allows firms to purchase a large volume of products with better prices. Especially in this case, Blackstone Group has a large demand for paper, FedEx shipments, and car rentals, centralized purchasing eventually leads to 10% to 50% savings by switching to a common supplier and specifications. This switch may have some negative impacts on individual companies. Once decide to switch to a common supplier, it means the demand faced by that supplier is significant. As we know that Blackstone owns many companies, it can be very hard for a single supplier to manage the inventory and coordinate with this number of customers. For general products such as office supplies, switching suppliers and specification does not really hurt the revenue of individual companies. But for more specialized products, companies need to consider carefully before taking action. Therefore, I think individual companies should be allowed to participate voluntarily. Each individual company needs to sufficiently evaluate the benefits and risks of participating in this program. If from a long term perspective, the companies believe this step can bring them benefits, they can participate in the program. If companies think they cannot take the risks, then they also have the right to refuse to participate.
This switch to more detailed operations is not a new capability of private equity firm. It’s a usual thing in order to save the cost. It’s also a good thing for the suppliers because they can get the specific categories and size of products and the huge amount can make them achieve economic of scales. But if they switch to a common supplier, they may run the risk of shortage at the same time if there’s something wrong with the supplier so that their revenues may be infected. And that part of lost in revenue could be much more than the savings. Also, although those companies are in the same group, they might have their preference in choosing the products. Paper, for example, have many different categories, like A4 or B5, and there’re a lot of differences in the way to use them. They may also have special requirements for the paper, like extra small or extra large, and that’s different among companies. If they switch to centralized buying, suppliers may not want to offer that small part of products compared with the total volume. In order to apply this method, the group needs to figure out the categories and size of the products companies use and tell them to participate voluntarily.
As my friends have pointed out many of the advantages of centralized purchasing especially when it’s incorporated for more commoditized or standardized products, that are not core to the business, I would agree that centralized purchasing has amazing scope to realize great values for organizations like the one in this case. It would reduce a large chunk of the cost, fewer overheads, better control of inventory, and many more benefits. However, one point I would like to bring in here is would it restrict individual companies to take advantage of local discounts? How big are those discount offers that we are missing on? To what extent would that affect the margins? What if the individual companies are very geographically diverse? Shouldn’t these be important factors to consider in determining if a business should opt for bulk purchasing or not?
I believe, to decide on the yes/no for a centralized purchasing plan we need to have a closer look at the detailed context & the operations of a business like the placement of the individual firms, the kind of products we are procuring, and how critical is the product to my business. After a thorough analysis of all the factors, a decision could be made on if centralized purchasing is creating more value than otherwise.
For a private equity company, this switch to a more detailed operation is not a new capability. Such a switch is similar to “Design for manufacture” which adjusts design to decrease manufacturing cost and lead time or increase manufacturability. For the Blackstone group, they adjust their procurement standard to reduce purchase cost, this implementation may hurt some revenue at individual companies. In some cases, some customers may require faster delivery or luxury car, but in most cases, centralized procurement could meet the requirement of customers. To avoid destroy individual company preferences, Blackstone Group can slightly reduce the amount of centralized purchasing and give individual company authority to do procurement by themselves for satisfying special requirements from customers. From my perspective, participation should not be voluntary. Centralized procurement not only reduce purchasing cost but also decrease management workloads, for a huge group like Blackstone owns 74 companies with 700,000 employees, it is necessary to implement centralized buying.
Switching to more detailed operations would give private equity firms would allow exploring more tools to achieve efficiencies that large conglomerates enjoy. As others have mentioned, the easiest targets for the bulk buying program would be commoditized goods that all the companies use. One way to help manage company participation could be to have different levels of centralization to tailor participation in the needs of the individual company. Companies with mature products where cost-cutting is a source of competition would be more willing to give up purchasing power to a centralized program. For companies that don’t want to opt-in, the group purchasing program gives them a list of trusted buyers that could serve as for any new items that they wish to procure.
In my opinion, it is a win-win situation for both the supplier and the customers. The customer’s get a substantial discount on bulk purchase, whereas the suppliers get a large amount of business which can offset the discounts provided. However, the real question is whether all the individual companies associated with Blackstone Group be able to switch to centralized buying. For example, I do not think any of the companies would be really worried about centralizing paper purchase, but on the other hand these companies may have built years of trust and relationship with a preferred shipping partner. Given a situation where they are forcibly moved to FedEx, may affect the entire supply chain setup. Hence, it should be carried out gradually in phases. If the individual companies can realize a substantial amount a savings, they themselves will have the incentive to switch to centralized buying.
Therefore, centralized buying should be broken down into each product type and then analyzed based on savings and ease of business it provides.
Centralized buying through a group purchasing program is a good method to achieve cost saving (especially for small companies), large amount of ordering would help them to get a relatively low price, and thus reduce inventory cost. Since companies would have to switch to a common supplier and specifications, so this is a good method for those companies that do not have specific inventory requirement. For example like stationaries such as paper and pen, cleaning supplies. For those companies that have specific requirements, centralized buying would not be a good choice. However, since many companies join together as a group to order inventories, they should have a standard that everyone should obey, a contract with standards to make sure that centralized buying could go on smoothly to avoid conflicts. Also, this program should be voluntary, companies should have the ability to choose to join to not based on their individual situation.
The sourcing strategy for any product depends on the nature of the product and the trade offs within. Considering two broad perspectives (axes) as risks and complexity on the supply end, and the business impact of the product on the customer end, each product falls within one of the 4 quadrants. If a commodity product with less direct impact on the business is sourced centrally, we can leverage volume bundling discounts and competitive bidding with common specifications, and hence is a major cost saver. Specifications won’t matter in such type of products. For products that have a highly complex market, but limited impact on business, common specifications increase avenues and opportunities for global sourcing, cost being the only priority. So centralized strategy can still work. But for products that directly impact business and customers, the specifications and product performance is pivotal to success. In these conditions, expertise of the individual companies and their relations with their supplier base should be leveraged. Indeed, the same part may fall into different quadrants for different companies and hence common specifications will not work. Revenues will surely be impacted if specifications for parts that directly impact customers are lower than the benchmark. Hence, sourcing needs to be more functional than prescriptive here.
With that being said, I think a hybrid strategy within a centralized purchasing can make the group more efficient while maintaining its competitiveness.
If the products are office supplies and low-price/low-standard products, centralized buying can help to manage the cost and the whole procurement system well, negotiate better prices and have longer relationship with suppliers, and keep the inventories low level. The disadvantage can be late delivery and less flexibility. However, Blackstone which owns many companies and attracts investors may hurt some revenue at individual companies by not immediately achieve the customers’ requirement. Thus, centralized buying should be based on the category of the products.
In the case of commodities, it makes sense to have a centralized purchasing system. A centralized system will allow more comprehensive control and optimization of inventory since there is more data available to analyze. A company can then use this understanding in the development of tactical planning processes for the intensive negotiation phase with the supplier. This means better deals and discounts, thereby driving cost and time savings.
On the other hand, every firm has its own unique specificities (geographic location, regulations of the countries, specifications of operations/products, etc) that must be taken into considerations before opting to utilize a centralized purchasing system
Centralized strategy always works better for reduction of costs, through a common-used management system and integrated information system. In many cases, many comapnies started to make savings through this method. Of course, they unify the specification of sourcing can also be simple to process procurement, and if they add more requirements to the specification, they probably could find out a supplier who can satisfy all these requirements. However, this method also conpromise flexibility. If sourcing teams work independently, they get more chances to find out variable suppliers with different capabilities so that company could make use of their capability someday, but in centralized procurement strategy, it will be hard to do that because within the common specification, some companies will not be qualified, even they’ve got some capabilities of another field. In addition, it might hurt revenues of suppliers because company will refer to benchmark price to bargain the price. With different background and conditions, suppliers might give different price quote to sourcing team. This will hurt individual supplier, especially the smaller one who does not share economy scale. Therefore, I think company should widely accept suppliers specification but at the same time keep their common specification. Suppliers could volunteer to join their group but need not to absolutely follow the common specifiaction. Company should analyze suppliers through their capabilities and performance by using variable type of methods.
Switching to more detailed operations is a new capability of private equity firms. Because the centralized purchasing can greatly reduce the total cost of the group on these projects and thus obtain greater profits through coordination.
For individual companies, their revenues might not be destroyed if they have detailed preparation before switching. Otherwise, it may be affected. For example, as the case mentioned: The original supplier UPS could give them favors, such as deliver things at odd hours. If the new supplier was not able to provide this benefit, it will result in additional expenses for the company to meet the demand.
For areas that do not affect an individual firm’s particular business, such as paper(office supplies), such projects can be enforced across all firms, thereby gaining economies of scale. However, when it comes to a particular project of a single company, it may be better to allow the company to have a customized product or service if the standard service does not meet the needs of the individual firm.
For any company or the subsidiary company the goal is the most important factor. If their goal says best quality and if that doesnt get hurt by moving to a centralized buying, they should seriuosly consider this option. 10-50% savings is a lot and the three categories that are mentioned are not very customizable products or services. I do not think the revnues of the individual companies will be hurt unless the savings are not shared with the individual companies.
Individual firm preferences will not be hurt if their end goal is satisfied. If these firms resist to change even when there is no clear reason, they have to be changed forcibly as 10-50% savings is extremely high.
Centralization is a great tool for cost savings and also a tool for bringing in the sense of branding. It makes sense to centralize day to day non-core products which can bring in huge savings to the private equity firms. Every vendor would try to bag a huge corporations along with its regional offices and therefore offering huge corporate discounts. But to what extent and who all can be brought under this umbrella? The article mentions about choosing FedEx as their courier agency,but in a hypothetically example what if FedEx turns out to be a extremely costly option to a certain branch? I would suggest run a cost-benefit analysis before choosing such options. And clearly for Blackstone group it has worked out very well.
As long as these changes are non-core such as printing paper, renting etc this will not effect the core-services/products of an organisation . I do not see it effecting their revenue at individual company level.
This is a pure game of change management, the approach any organisation should be either a discussion based approach or incentive approach, where the impacts it could bring in should be clearly stated and help them see the savings.
Every firm has the capability to switch to a more detailed operation, but the question is should they? This is something that is obviously dependent on each firm, but with even a 10% amount of savings for this volume of operations will be a significant enough amount to want to change to a more detailed approach in an attempt to cut up to 50% of their cost by switching over to supplier specifications. For many private equity firms, acquiring companies when they are at their lowest points and turning them around is how they are making money, centralized buying dependent on common suppliers and specifications may impact individual revenues because of the inherent differences of certain companies. Centralized purchasing will save a large amount of costs overall, but each individual business will have to adapt to the changes in their own catered ways. In order to manage these programs, similar products that are needed for every business should be grouped together, and business-specific supplies should be dealt with by each individual business.
If simply put, private equity firms buy today to sell tomorrow at a profitable margin and to achieve that, they invest themselves in the companies to create value.
But the definition of ‘value’ varies. For private equity firms, value is all about increasing the overall worth of the company, and that is measured in monetary terms. Whereas that could not be true for those individual companies, who have their philosophy, principles, and relationships with the supplier and consumers as the pillars of their foundation. Abiding by them, especially in times of financial crisis, might not generate short term profit, but it will generate long term growth and goodwill. So, when we talk about centralizing procurement, I believe it should be voluntary and not at all mandatory. When we look from outside, it makes sense for the firms to at least centralize the buying of generic products or services like paper, car rentals, office supplies, etc. But when the relationship with the suppliers is at stake, even for the least significant products like office supplies, centralized buying should be avoided.
Also, every company acquired by these equity firms were likely facing very diverse struggles. Reasons for struggle could be bankruptcy, inefficient operations, or negligence by the successful parent company. Equity firms should keep in mind the background of their struggles and take the decisions accordingly, so as to create overall profits for the firm and higher value for the companies.
In my opinion, I think that centralized purchasing has a lot of advantages. It would reduce a large chunk of the cost, fewer overheads, better control of inventory, and many more benefits. However, companies need to consider carefully before taking action. When choosing to change suppliers, all possible costs should also be considered. On the other hand, the replacement of suppliers may indeed affect the operating conditions of individual companies within the group. The program should identify products and goods that are procured, and which does not significantly impact the operations of those companies. Among the whole process, fully coordination is required.
Decentralized purchasing, more often than not, has lower efficiency in terms of resources used, prices paid for goods, and inventory managed. Centralized purchasing is a more efficient way to manage procurement in a company. It enables buyers to negotiate for better deals by placing bulk orders. Having said that, it also leads to an increase in inventory costs however, when large firms have a widely distributed network of warehouses, this cost can be accommodated for. Equity firms primarily financially back the businesses of small private companies and startups. The purchasing power that these firms have and the switch to more detailed operations add to the capability of private equity firms.
Highly specific products with different configurations that directly impact the business of a company would not flourish in the one size fits all model. But indirect materials like paper supplies, freight companies, packing supplies are indirect spend for most companies and this model to switch to different suppliers or order bulk, would be profitable.
Each firm has its own operating model and making this voluntary would give the firms flexibility for their procurement and sourcing methodologies.
Centralized procurement, while saving a lot of cost for the companies, comes with a cost of adhering to different standards and operating procedures. Changing a long standing supplier may cause participating companies to change their policies just to qualify the new vendor. While some changes may be insignificant and easy to adapt to, others may include tedious changes. At the same time, allowing the companies to decide whether or not to participate will not be helpful in negotiating due to reasons such as economies of scale. In such cases the equity firms can request a cost analysis from all companies and depending on the overall impact of changes decide on the course of action.
I think the right question to ask whether a particular commodity can be centralized or not is whether the customer experience will get impacted. It is likely that courier services, rental cars, office supplies are items that will have no impact on customer experience and hence centralizing them makes a lot of sense since any of quality, price, lead times can be compromised upon to achieve savings. At the same time, the organizations need to ensure that employee productivity is not hampered in the name of savings. This will give them benefits of economies of scale since volumes will get consolidated and number of SKUs will drop
Bulk purchasing of supplies and materials, by the virtue of the economies of scale, is cheaper and for a private equity firm to push for a standardized set of does have other advantages apart from the significant savings in the cost but I believe that this model is applicable to those materials that do not directly impact the functionality/ value proposition of a company or it is a ‘one size fits all’ kind of product. Let’s take the example of computers. If the group is procuring the same PC for all the functional groups for all the companies, then it will harm those groups, like the software development/ UI/UX, etc that need specifications. I believe that the private equity firm should aggregate the demand from the portfolio companies and place the orders so there is no harm to the value proposition of the product/ service and reduces cost.
Centralization and bulk purchasing are essential to big firms to significantly reduce the costs for operation supplies due to economies of scale. Companies that switch to more detailed operations and follow specifications can benefit from this if they are able to balance between free-standing products for retail customers in comparison to specialized products for private equity firms to ensure the revenue stream. The switch should be participated voluntarily accordingly to each company capabilities. The company could use a cost analysis before choosing supplier in order to make sure the can pick the best companies.
By combining purchasing across all 74 companies, the Blackstone Group can now utilize volume discounts on these services. In the case of paper, FedEx shipments, and car rentals, the services which are pooled together are not items through which the private equity firm gains its competitive advantage. They are simply part of the supporting infrastructure, and as long as they meet the specifications, cutting costs on these will not hurt the revenues of the individual companies. It depends on the industry of the firm whether or not establishing common specifications will have an affect on the revenues. For example, a book manufacturer will care far more about the paper it purchases because it directly affects the finished good. Nonetheless, when so many stakeholders are involved in a decision, the company should communicate why the services are being streamlined and involve managers across the company in the decision of which specifications are set and which suppliers are selected.
Centralizing purchasing is the way to lower costs, and it is the fastest way to reduce inconsistencies that might exists with different suppliers bringing in different qualities. I believe that it is very beneficial if it is done right.
One of the risks, is that specific products with very specific needs can be bought in bulk and reduce the effectiveness of those said products. Another risk, related, is the different specifications for different regions that may make difficult buying in bulks of standard products.
But the benefits of this centralization often outweighs the risks and again, a well done implementations of this practice can save millions for the company,
As we know private equity firms are known for increasing the value of their investment and achieving high returns. In this case switching to more detail operations would improve they capability since centralized buying has shown to be a more efficient method when acquiring products and can provide with a big percentage of savings, and this increases revenues. The size of Blackstone Group gives them a power to buy in a huge quantity and be able to have bargain power during negotiation process with their suppliers.
Focusing on saving through common specifications could be a risk for small companies, but the fact to be part of a big Equity firm this could mean that they are financially supported by them, and this kind of changes would be performed with a previous planning process, leveraging this way the risk associated to this kind of changes.
Centralized buying enabled savings but requires companies to switch to a common supplier and specifications helps in more detailed operations a new capability of private equity firms.
Focus on savings through common specifications will destroy revenues at the individual companies but have risks sharing which is coordination in a sense.
Private Equity firms like the Blackstone group acquire companies to increase their value through the improvement of management and performance improvement initiatives that have shown to generate a tremendous value for shareholders. One of these opportunities is to procure common materials/services along the different to generate savings through economies of scale. I believe that if addressed correctly, this can generate a tremendous value for companies instead of destroying the value of each individual company.
There are great opportunities to not only generate saving in procurement but also opportunities to share knowledge across different industries. However, it is key to avoid consolidating bulk for the sake of saving only. It is important to analyze what is more convenient for both the company and the group as a whole to ensure that value to shareholders is being maximized. For instance, individual companies have to analyze how they can strengthen their value proposition and core capabilities to deliver sustainable growth. Having important savings like the ones mentioned in the article and strengthen relationships with suppliers might help to build a more resilient supply chain and improve the availability of cash to invest in other projects that will increase the value for the individual company.
Private Equity firms like the Blackstone group acquire companies to increase their value through the improvement of management and performance improvement initiatives that have shown to generate a tremendous value for shareholders. One of these opportunities is to procure common materials/services along the different to generate savings through economies of scale. I believe that if addressed correctly, this can generate a tremendous value for companies instead of destroying the value of each individual company.
There are great opportunities to not only generate saving in procurement but also opportunities to share knowledge across different industries. However, it is key to avoid consolidating bulk for the sake of saving only. It is important to analyze what is more convenient for both the company and the group as a whole to ensure that value to shareholders is being maximized. For instance, individual companies have to analyze how they can strengthen their value proposition and core capabilities to deliver sustainable growth. Having important savings like the ones mentioned in the article and strengthen relationships with suppliers might help to build a more resilient supply chain and improve the availability of cash to invest in other projects that will increase the value for the individual company.
When it comes to switching of products specifications and suppliers towards a more commonly framed guidelines, segment wise analysis needs to be performed. For example, for segments such as office suppliers, travel expenses, marketing etc. having common products and suppliers is justifiable (indirect procurement category). However when it comes to core product or SKU’s (direct procurement) suppliers can be classified into preferred (to be used compulsorily), qualified (alternate suppliers to be used incase there is a need to switch) and other partners (outside preferred/qualified). Firms should first try to attain maximum segments in which preferred suppliers are used and only if its not possible to use preferred, then qualified partners should be approached. This will ensure consolidated volumes go into the buying which shall ensure reduced procurement cost. Others option can be used based on complexity and internal stakeholder’s demand. This shall ensure balance between profitability due to commonality and reduced potential revenue loss.
The centralized purchase would increase the bargaining power for the buyer, which helps Blackstone to save 10 to 50%. However, the purchasing cost is just a component of the procurement cost. Other costs also would be considered, like transportation costs, holding costs, etc. Besides, the centralization would also decrease the efficiency and flexibility for individual companies, which can bring a negative impact on their competitiveness. By considering the impacts (advantages and disadvantages), participation should be voluntary. The decision can very vary based on different products and involving industries.
Centralising purchases would make sense for Blackstone group as it would allow the management to have more control, enabling efficient inventory control, lower staffing costs and a decrease in overheads. This would also allow for volume purchases that lead to better prices and terms as well as the ability to work with larger suppliers. hence the purchasing program called Coretrust at Blackstone group enabled savings of 10 to 50%.