When companies are faced with the need to lower part and material costs, they sometimes join a purchasing cooperative. Several small businesses simply don’t have the volume to compete with their larger competition and therefore see cooperatives as a way to reduce their operating expenses. Most small businesses know that when it comes to being serviced, sometimes they have to suffer at the expense of their larger competitors.
Being big does have its advantages. Large companies have the ability to drive down costs on parts and materials, and when they need support, they are often the first to be serviced. If your business is a small one, it can be extremely frustrating to compete on this stage. However, you can lower your purchase price on parts by joining a buying group. These buying groups are often called “cooperatives”. While your company can benefit from a cooperative, there are several reasons why it may not be what your company needs.
Leveling the Playing Field by Joining a Buying Group
The main goal of the cooperative is to lower the costs on parts and materials by combining the volumes of many small, and medium sized companies, into one large buying block. With some cooperatives there are monthly or yearly membership fees. There are some benefits of joining a cooperative, and your company can lower its purchase price on parts and materials. There are several examples of cooperatives that have succeeded, and become extremely large players in certain markets.
They have managed to turn the tables and forced suppliers to chase their business, where in other instances the individual members would never be given the same level of service and pricing. Regardless, is it always in the best interest for companies to join a cooperative? It really depends upon the cooperative you join, its purpose, and your market. While the benefits are relatively clear, there are some serious drawbacks of joining such a group, and it is incumbent upon your company to be cognizant of these potential pitfalls.
1. Lowering Your Competitor’s Costs
Within every cooperative, there are small and medium sized companies. While each company combines their volumes to lower the overall pricing for all members, some members can get even better pricing because of the volume they bring to the cooperative. In a number of cooperatives there are levels of membership, each granting a certain privilege. So, even in a cooperative, those companies with larger volumes can still get better pricing than smaller members.
Granted, everyone’s price is better inside the cooperative, but driving down your competitor’s pricing is likely not the outcome you had in mind. Companies often have a singular purpose when joining a cooperative. They want to drive down their own costs. However, when they realize just how much better it can be for their competition, there can be some resentment.
2. Increasing Your Competitor’s Market Share
While your membership does drive down your part and material costs, your contribution to the cooperative is also driving down your competitor’s costs. This could lead to them increasing market share. Unfortunately, being so close to your competition can prove problematic. Certain members inside the cooperative can make arrangements to benefit one another at the expense of other members.
These groups within the cooperative end up forming their own little cooperative on information. If you don’t think this happens, then take a few minutes to think about all the information you don’t want your competitors to know about your operation, and how damaging it would be for them to find out.
3. Higher Fees for Newer Members, Impeding Growth of Cooperative
As the cooperative grows, the administration fees tend to grow as well. As such, newer members are forced to pay higher membership fees. While some companies have no issues with this, others will be reluctant to become new members if those costs are too high. Without newer members, the cooperative’s growth can slow down, and with flat volumes, the savings on costs for members can also become flat. Over time, members can leave the cooperative. This will only drive down the cooperative’s volumes, and raise the costs for its members.
4. Vendor Revolt Against Cooperatives Can Lead to Collusion
Collusion is the worst possible outcome of a cooperative. Collusion occurs when companies decide to fix pricing in order to control the market they sell into. When cooperatives become so large and powerful that they can dictate terms to vendors, those vendors can become extremely vengeful when they lose the cooperative’s business.
When so many companies are inside the cooperative, and that business is no longer available, vendors will either abandon the market, refuse to bid on business, or worse, enter into collusion with one another on pricing. Instead of lowering pricing for members inside the cooperative, it can eventually lead to price fixing amongst the vendors bidding on that business. For instance, let’s assume that out of 100 companies, 70 are members of the cooperative. If you are a vendor who services the cooperative, and you suddenly lose the contract, will you be at all satisfied with trying to make it work with just 30% of the market remaining? Certainly not! Every business needs a viable market to sell into, otherwise, why be in that market?
Over time, even the vendors that have the cooperative’s business end up being indifferent to the value of the business itself. Imagine if you were one of those companies supplying the cooperative. One year you have the business and have access to 70 customers, and the next, you have access to 30. Would you be able to plan growth based on such a fluctuating market?
It’s important to be aware of the conditions of the cooperative, and take the time to understand the possible outcomes. At the end of the day, your company may just decide to forego joining the cooperative altogether.
The above video explains the pros and cons of consignment inventory.
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