A consortium is a short-term arrangement in which several firms (from the same or different industry sectors or countries) pool their financial and human resources to undertake a large project that benefits all members of the group. A consortium lasts for a period that is usually shorter than that for a syndicate.
Benefits the parties to an agreement or arrangement are entitled to receive from one another. A purchasing consortium can be defined as two or more independent organizations that join together, either formally or informally, or through an independent third party, for the purpose of combining their individual requirements for purchased materials, services, and capital goods to leverage more value-added pricing,
Modern Consortia often go beyond just helping a member‘s buying power and ability to achieve low prices, many offer other benefits such as technology and support as well so there is no need to develop in house specialists. While the economy continues to try to find its legs and most people are focused on what is wrong, there are leaders and innovators busy creating the market and leading companies of the future. At this very moment, people and companies are innovating paradigm-shifting products and services, climbing to the top of their own industries. The procurement leaders of the future are busy too. They are taking stock of their supply base, working with their engineers to tweak product designs so they use less of more expensive raw materials, and they are evaluating new savings and value opportunities. In this challenging environment, procurement leaders are also seeking additional strategic competitive advantage, especially around re-evaluating past decisions, moving toward using the input of new information about
commodities, markets and global competition.
One opportunity that remains largely untapped is the use of consortiums for the purchase of MRO (maintenance, repair and operating supplies) as well as a number of costly yet important services and employee benefits. In spite of proven savings, many companies and their procurement leaders have simply not taken advantage of the purchasing consortium opportunity.
There are advantages of being part of such a consortium, which include:-
- Economies of scale – allows members to benefit from a larger scale purchasing power than they could achieve individually.
- Lower transaction costs – The consortium can therefore negotiate much lower prices for goods and services and these savings can be significant (ranging from around 10% – 35% cheaper according to the buying support agency).
- Reduction of process time and work load – The consortium handles a number of buys on behalf of the organizations within it when searching for and ordering standard items so this streamlines the process and frees up time for the buyers to do other tasks.
- Better practices and shared expertise – this can be achieved because individual members can gain knowledge about how to succeed in particular functional areas or regions.
- Higher quality – this expertise helps make sure an organisation is using the best processes and information to make its decisions.
- Lower supply risk – the consortium is able to tap into all its members‘ knowledge therefore having a better chance at identifying low risk suppliers.
However there are also some disadvantages to consider, which include:-
- Serving the needs of the majority – the consortium will be treated as a whole and is less likely to fulfill the specific needs of an individual member when dealing with one supplier.
- Set up costs – there are initial costs of identifying a consortium, negotiating a contract and developing a relationship with that consortium.
- Longer lead times – it may take longer to negotiate contracts when it has to be adapted to many different institutions.
- Need to communicate and monitor – liaising with the consortium and monitor the procurement process will ensure consistent results.
- Reduced flexibility – this is because individual members will not have full control over the term and conditions of the contract and member have to agree on which supplier is used.
- Resistance – There may be resistance internally if members believe the consortium does not know he business well enough to negotiate the best contracts for them. There may also be supplier resistance if they do not want to work with a consortium as the profit margins maybe smaller even though there is a bigger sale to be had overall.
- Loss of supplier relationship – the above may lose the personal touch of supplier relationships and result in working with suppliers that members have never worked with in the past