Aggregation of supply means: when the aggregated demand is presented in a consolidated way to the market, a single supplier, or fewer suppliers than before, may respond and contract with us – leading to a supply base for our new requirement that is rationalized to a greater extent than . Indeed in many cases this is a likely market response to aggregated demand presented in a consolidated way to the market.
Potential advantages of aggregation
1. Better management information through aggregation of demand
The aggregation of demand can deliver benefits through better quality management information. As well as providing opportunities for aggregating supply, aggregation of demand can also allow price benchmarking within an organization and with others in the market. Aggregating demand can enable more consistent application of best practice, and can reduce the procurement costs associated with gathering price and market information. It can also create opportunities for learning, through collaboration with other organizations.
2. Greater leverage
Aggregation may facilitate improved management of suppliers at a strategic level – for example by enabling buyers to discern patterns and raise issues in a coordinated way at senior level in companies. Aggregating requirements can strengthen departments‘ negotiating position in contracting with their suppliers. The ability to realize these benefits depends on the competence of the buyers and
3. Lower prices through reduced production costs
Opportunities to achieve economies of scale can be exploited, including enabling smaller organizations to benefit from the same advantageous deals achieved by larger ones if the contract is set up to allow multi access. However, it is important to understand how the potential for economies of scale varies between different markets.
4. Lower transaction costs
Aggregation across or within departments can simplify the tendering process leading to reduced procurement costs for buyers and reduced bidding costs for suppliers. Reduced project management and contract management costs can be achieved – as long
as project managers, negotiators and contract managers are sufficiently skilled and adequately resourced. Process savings can free up (scarce) front line procurement staff to concentrate on the most strategically important issues.
5. Better management of the market
Aggregation of demand can allow capacity constraints in the market to be identified and managed across government. There may be potential to transfer more risk to suppliers – which may result in better certainty around cost and delivery (as long as the right risks are transferred). Aggregation can result in simplified stock management and logistics – placing responsibility with a single supplier.
6. Better management of the supply chain
Aggregation (or more specifically bundling) may place the responsibility for managing the supply chain with a prime contractor. In some cases this may result in better supply chain management and better overall value for money. There may be opportunities for exploiting economies of scope through bundling. Economies of scope occur where there are significant costs common to different goods or services in a supply chain (eg the cost of gaining specific technical expertise) – so it makes sense for these to be integrated within the same firm.
Potential drawbacks of aggregation
1. Need for highly-skilled procurers and contract managers
Procuring and managing very large, complex contracts requires highly skilled procurement, project management and contract management staff. Aggregation and analysis of demand also requires significant expertise. Without people of the right calibre
many of the potential benefits of aggregation can be missed. Demands on resources may not be evenly spread between the beneficiaries of the aggregated deals, for example the lead departments on collaborative contracts may require considerable extra resource. However, this drawback can be overcome by sharing the resource burden amongst participating bodies or by considering other incentive structures. Centrally managed and large contracts may not be responsive to local needs of front line staff. Moreover, it may be difficult to extract the necessary information on quality of service. Large and complex contracts can often entail lengthy and costly procurement processes – and complexity increases the potential for delays to procurement timescales. It is possible
for the total costs of a consolidated procurement to exceed those that would have been incurred if parts of the total requirement had been procured separately. It can be difficult to develop a specification that addresses the needs of all members of a buying ‗consortium‘. Unless the critical requirements of all members are met, including the less influential ones, better overall value for money in whole life terms may be achieved by contracting separately.
2. Distorting the market and missing out on innovation
Aggregation across government could distort markets, by developing a situation where too few suppliers are operating. This may lead to a situation where suppliers can singly or collectively raise prices above competitive levels and harmfully exploit their market
power. In most markets there is a point at which it is no longer possible to exploit further economies of scale. Aggregating supply beyond this point would not be advantageous. Very large contracts may pose significant barriers to entry for smaller firms, or those
wishing to diversify into the market. A combination of the evolving strength of incumbents, size of contracts and high bid costs can lead to less competitive marketplaces. Smaller companies may be automatically excluded from large contracts for capacity or geographical reasons – despite sometimes being able to offer innovative products or services, specialist or niche offerings and a more responsive service through direct access to decision makers within their organizations.
Bundling of large portfolios of products or services, for example on electronic catalogues, can lead to suboptimal prices by restricting the ability of smaller specialist suppliers to compete in the first tier. Although transaction costs may be reduced by bundling, eprocurement techniques could be used to support a more limited bundling that maintains competition. Where aggregation results in fewer, bigger procurements, suppliers that lose out are more likely to be locked out of the public sector marketplace for a prolonged period. Buyers may risk becoming over-reliant on very large suppliers who are not themselves reliant on their government contracts and therefore have strong negotiating positions. It may be difficult to engage with innovators e.g by means of pilots, because ideas,
opportunities and innovative progress can be lost in large-scale procurement and rollout processes. Awarding smaller contracts can allow more managed risk-taking to pilot new ways of doing things, for example using a ‗proof of concept‘ stages
3. Invisible supply chain
Potential loss of visibility of the constituents of the supply chain may result in difficulty with identifying the associated risks and costs (mark-ups) and ensuring value for money. Insufficient attention may be paid to attracting the best sub-contractors, with negative
consequences for quality or value for money. Moreover, the potential benefits (e.g. of innovation and high quality service) through SME participation as sub-contractors may be lost unless positive action is taken to facilitate their involvement.