All You Need to Know About Purchase Cooperatives and How It Can Improve Cash Flow

Run Your Business Jul 16, 2020

Regardless of whether you're a business owner looking to reduce overhead costs to free up resources or a new company struggling to secure reliable suppliers as soon as possible, you can consider forming your own or joining a purchasing cooperative.*

*In this article, the term "purchasing cooperatives" refers to independent businesses collaborating to achieve higher purchasing power and better contractual terms with suppliers. This term is interchangeable with other similar concepts such as group purchasing organizations, cooperative procurement, and retailer cooperatives.

Cooperative procurement usually involve two or more entities that share similar requirements for goods and services.
Cooperative procurement usually involve two or more entities that strive towards the same goal: lower supplier rates. Photo by Sebastian Herrmann / Unsplash

What is a Purchasing Cooperative?

A purchasing cooperative is a group of organizations that share a common need concerning goods or services. The purchasing cooperative utilizes economies of scale by pooling their resources and demand to secure lower prices for products and services that come with bulk purchasing.

Cooperative procurement typically aims to mutually benefit businesses in the same industry (vertical market) by focusing on industry-specific requirements. However, some organizations cater to companies from different sectors that share the same needs (horizontal market).

Is it Free to Enjoy the Benefits Provided by a Purchasing Cooperative?

Some purchase cooperatives require a membership fee to join and charge additional administrative expenses, which maintains the cooperative operational cost. However, membership fees may be waived if the member partakes in multiple purchases or passes a spending threshold.

Some supplier partners absorb administrative fees to incentivize more businesses to join the purchasing cooperative and place orders with them, resulting in free membership. However, cooperative purchasing organizations may require a minimum order volume or other terms to be fulfilled.

Cash flow management involves increasing positive cash flow, and minimizing negative cash flow.
Managing your cash flow is a balancing act; you need to look for ways to preserve and improve cash inflows, while stabilizing or reducing cash outflows. Photo by Elena Mozhvilo / Unsplash

How Does Joining a Purchasing Cooperative Organization Help Improve my Business Cash Flow?

15-20% of the Fortune 1000 currently use buying consortiums and 85% of the time, they're seeing 10%+ of savings in the categories in which they put through a consortium model (Busch, 2011)

As part of a purchasing cooperative, you can enjoy preferential rates with suppliers for goods and services compared to working with the supplier directly. This will reduce your negative cash inflow and lets you redirect resources to other aspects of your business.

Some members of a purchasing co-op even receive patronage dividends at the end of each accounting period!

However, thorough research must be done before joining a purchasing cooperative. Read up on the various terms and conditions involved to decide if the benefits outweigh the fees incurred.

Other than reducing the cost of procurement, companies can look at different ways to maintain positive cash flow. Analysis of the cash flow statement always comes useful in identifying possible areas of improvement and cost-saving opportunities.

We cover the importance of the cash flow statement and share more ways of improving cash flow in our cash flow statement guide here.

In a purchasing cooperative, members from different businesses come together to establish what the goals are (better rates, additional value-added services, etc.)
Group purchasing organizations require coordination and mutual expectations based on each business's requirements. Photo by Antenna / Unsplash

Types of Purchasing Cooperatives

1. Joint Solicitation

The needs of each member of the cooperative are discussed and consolidated before signing an agreement. One or more entities within the cooperative will take charge and are involved in coordinating requirements. Equipped with this information, they can solicit proposals or seek out potential suppliers.

During the bidding process, suppliers will be screened to see if they meet the cooperative's requirements concerning technical specifications, price, contract terms, and value-added services such as maintenance and delivery time.

Piggyback clauses enable members of a purchasing cooperative to hop on the favorable terms in a supplier's contract that has already been awarded to a company.
Having piggyback clauses in your supplier contract allows other public agencies (such as the members of the purchasing cooperative) to ride on and enjoy the same price and benefits. Photo by Mohamed Nohassi / Unsplash

2. Piggybacking

One entity or more establishes a favorable deal with a supplier that meets their requirements. The contract signed with the supplier contains "piggyback" clauses that allow for other public agencies (members of the purchasing cooperative) to enjoy the same benefits detailed in the contract.

3. Third-Party Aggregator

An external organization establishes the purchasing cooperative and consolidates the various requirements of its members. Third-party aggregators typically charge a management fee to all members. In return, they take charge of securing a supplier, from bid solicitation to negotiation of contract terms.

Some third-party aggregators identify unmet demand for specific goods or services without being engaged by a purchasing cooperative. Once they secure a supplier, they sell the right to access the contract's terms to businesses that can benefit from it.

Time saved on unnecessary processes and redirected to support other aspects of your business can equate to more profit.
"Time is money, and when you waste time you waste money and success you can have." - Jeanette Coron Photo by Morgan Housel / Unsplash

Benefits From Working With a Purchasing Cooperative

1. Frees Up Time and Resources Spent on Securing Suppliers

According to a bi-annual 2017 survey conducted by Onvia among government procurement professionals,

...decline in performance is occurring in spite of 40% of the survey respondents stating that they are working longer hours than ever... In addition to 24.8% of the respondents saying that they are challenged by conducting pre-bid research and planning... (AMK, 2017)

Securing the best supplier is tedious: it involves intensive competitive market research, price analysis, and negotiation of contract terms. This results in a huge chunk of precious time and resources dedicated to procurement.

By joining a purchasing cooperative, you can enjoy the already-established client-supplier relationship that a purchasing cooperative enjoys.

Additionally, this frees up resources allocated to procurement-related processes that can be directed to other aspects of your business.

Stretching your dollar is one of the benefits of being part of a retailer's cooperative.
By forming a retailer cooperative, you are able to have higher purchasing power due to increased per unit demand, driving economies of scale. Photo by NeONBRAND / Unsplash

2. Grants Businesses More Purchasing Power

With multiple businesses participating in a purchasing cooperative, the combined order volume is used as leverage to negotiate for lower prices and favorable contract terms with suppliers.

Suppliers that are guaranteed a larger sales volume are more likely to accept lower margins to secure the increase in market share.

Members of a purchasing cooperative enjoy higher purchasing power than negotiating a supplier contract as an individual business.

3. Speeds Up the Procurement Process

Identifying suitable suppliers can be tedious, from competitive research to contract negotiation. Outsourcing your procurement process to the retailer cooperative combines the established supplier network of all members and their experiences with each supplier, which speeds up the process.

In purchase cooperatives that utilize piggybacking, you can enjoy favorable prices and contract terms while saving precious time spent on procurement.

4. Allows Your Business to Stay Competitive Against More Prominent Corporations

Small businesses often struggle against more substantial organizations that can afford a lower profit margin. However, utilizing group-buying allows you to acquire inventory and services at lower prices, resulting in reduced cost of goods sold per unit. Reducing expenses incurred will enable you to price your products more competitively to go toe-to-toe with larger businesses.

In conclusion, most businesses can stretch their dollar and improve their procurement process by joining a purchasing cooperative to enjoy better supplier rates on goods and services.

For business owners looking for more ways to maximize their cash flow, check out our Cash Flow Statement guide.

Addie Ho

Passionate about learning something new every day, Addie is part of Deskera's Product team that works on upcoming features and strives on improving user experience.

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