How to Use Group Purchasing as a Cost Reduction Strategy
By Mackenzie Oakley | May 5, 2020
Beyond the tragic toll in life, COVID-19 is having a dramatic impact on U.S. livelihoods. 49% of companies are considering layoffs, while over 33% have frozen new hires as a way to implement some sort of cost reduction strategy in the middle of a pandemic. The economic fallout could cost 47 million jobs, sending the unemployment rate rocketing past 32%.
With GDP predicted to fall at an annualized 30% in the next quarter, organizations in every state are faced with the difficult decision to immediately cut costs or downsize through staff layoffs.
In this article, we’ll explore a procurement strategy you can use to help mitigate costs and, hopefully, prevent your company from having to go down this route.
We’ll cover the following:
- How the financial health of businesses has been affected by the pandemic
- What some businesses are doing right now to save money that isn’t working
- How to address budget issues and avoid downsizing and layoffs through the power of group purchasing
- How group purchasing organizations can help by becoming an extension of your procurement team
Financial health has taken a hit
The hardest-hit industries are those in which consumer demand has plummeted: restaurants, gyms, transportation, construction, theme parks, conventions, oil and gas, automakers, discretionary travel, live sports, hotels, and (of course), airlines. Retail has also been hit hard, although some online retailers are thriving in an unprecedented eCommerce boom.
Demand is falling not only because people under lockdown are not permitted to go out and spend their money, but Americans are also cutting spending due to the concern about the possibility of a looming recession. For most of us, this is no time to purchase a new car or book a future trip to Disneyland.
Likewise, manufacturers hit by falling demand also have to deal with impacts on the supply-side, particularly those who rely on China for key parts or components. The shuttering of Chinese factories over the past few months not only impacted Chinese workers are their local economy; it created a ripple effect along global supply chains that led to significant (and expensive) unplanned downtime in American businesses.
Businesses are failing to save money
There are two ways to keep a business afloat during a crisis – make more money, or cut costs. Unfortunately, the first option is proving to be difficult due to the reasons outlined above. But this hasn’t stopped many businesses from doubling down on advertising in an effort to attract a customer who is unwilling to part with their money.
The burden of cost-cutting has traditionally fallen to the CPO and the procurement team, and the coronavirus crisis is no different.
Three of the strategies taken to cut costs (that aren’t necessarily working) include:
- Shifting sourcing countries – While many supply managers scramble to move production out of China to other low-cost countries such as Vietnam, this cost reduction strategy has challenges like having to upskill a new workforce. It may also be a premature move as China has transitioned into its pandemic recovery phase, including the reopening of manufacturing plants. Other professionals are bypassing lengthy supply chain delays by reshoring their sourcing to the U.S., but face higher costs in doing so.
- Cutting training costs – While it’s tempting to cut costs by slashing the training budget, this is a short-sighted approach because many of the skills being trained for will be crucial in the aftermath of the pandemic when businesses begin to recover. Many companies are discovering that online learning is a convenient and affordable training option for a remote workforce.
- Freezing digital transformation – Digital transformation and implementation is a major expense, but this is no time to abandon the digitalization of your business. It is already clear that retailers (for example) with strong eCommerce systems are doing the best during the crisis, while those that rely on brick-and-mortar stores are struggling. Similarly, manufacturers with automated production lines can continue to operate no matter what labor force challenges the company faces.
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A GPO (Group Purchasing Organization) leverages the collective buying power of its members to obtain bulk discounts from suppliers and retailers. The GPO uses its large database of members to negotiate volume-based discounts with suppliers, then shares the contracts back to its members to provide savings (sometimes up to 80%) on products and services that they wouldn’t be able to negotiate on their own.
But, how will this save a company from having to lay off staff? The average savings generated through GPO membership puts an extra 22% straight back into the budget and, depending on the size of your organization, that could be the equivalent of saving one, ten, or one hundred jobs from being lost.
“Saving” doesn’t just refer to money, either. Joining a GPO also unlocks savings in terms of time (outsourcing the lengthy RFP process), and saves weeks of search time otherwise spent gathering all the data needed to make an educated decision on the best suppliers. GPOs, in other words, do the heavy lifting. They free up a procurement team to focus on the important job of keeping the company afloat in a time of crisis.
Una can help
In the current crisis, it’s understandable that companies are unwilling to spend money joining new programs. The great news is that membership with Una is free. At Una, we’re paid by the suppliers themselves and we use that fee to fund our program, ensuring membership is always free for our members.
More importantly, we strive to be an advisor to your business, helping you find customized solutions for your procurement needs. We offer our members a cost comparison analysis tool and supply chain management support as well.
Una membership is not about replacing a procurement function. Instead, we can be an extension of your procurement team, quickly connecting you to savings for your indirect spend categories and improving your bottom line so other measures (such as layoffs) can hopefully be avoided.
You shouldn’t have to navigate a crisis alone. Una’s sourcing advisors can help quickly connect you to savings, now and always.