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Procurement Perspectives: The joint purchasing approach

Stephen Bauld
Procurement Perspectives: The joint purchasing approach

As with most commercial options, there are both benefits and costs in adopting the joint purchasing approach.

Such consortia have proven attractive as a way of saving money, particularly for smaller authorities. However joint purchasing will invariably restrict the scope of available products to an approved standard.

There is also a loss of local control over the purchasing process, and in the view of some, a reduction in the extent of oversight to which the purchasing function is subject.

In an ideal situation, the purchasing authority co-ordinating the consortia purchase would adopt a procedure that allows the selection of a competent supplier while respecting local policies. Purchasing would also be carried out in a way that is open and competitive in order to minimize the potential for abuse.

Since a handful of municipalities in each province control the lion’s share of municipal procurement, one might naturally assume that consortium purchasing would be the rule rather than the exception.

By using this strategy, municipalities might obtain a significant degree of collective purchasing power in at least certain markets (e.g., the purchase of fire trucks and buses). Yet surprisingly, the strategy is not widely employed.

A number of possible reasons may be advanced to explain this paradox, including:

The adoption of a consortium approach may be inconsistent with other more important local municipal policies, such as local preference in purchasing.

The diseconomies of scale resulting from the use of the consortia approach may outweigh the benefits thereby derived. Three particular diseconomies immediately come to mind:

The use of a consortia may be impractical, due to timing differences in the demand for the products that municipalities may require.

Unique requirements (or perceived requirements) which vary at the local level may not be satisfied if the consortia approach is adopted. This hypothesis may explain the relative low utilization of consortium purchasing where tailor-made products are to be purchased, but can hardly explain the lack of such use where the intent is to purchase products or services of an off-the-shelf or fungible nature.

Cost savings through the use of a consortium may be negated by the costs incurred in organizing the consortium.

Those municipalities that organize such consortia may not believe they are sufficiently rewarded, in terms of the distribution of the cost savings among participants, to justify the effort they put into the process.

Local purchasing officers may not feel it is in their personal best interest to utilize a consortium approach.

This possibility is essentially an outgrowth of the principal-agent problem, which is pervasive across all levels of collective economic activity. Where an economic actor (the “principal” — in this case a municipality) must act through another person (the “agent” — here the purchasing officer) there is always a risk the agent will put his or her own interests ahead of the principal.

Inter-municipality rivals may discourage the use of a consortium. Presumably, because of the greater resources to which they can devote to the procurement process and their proportionate share of aggregate expenditure, larger municipalities would tend to dominate consortium purchases.

Given the local focus of municipal policies, smaller municipalities may well have an incentive to avoid participation in an agreement that would effectively place control over expenditure in the hands of outsiders.

Unfortunately, this hypothesis does not explain why municipalities of roughly the same size do not participate more frequently in consortium arrangements.

Co-operative purchasing arrangements require strong leadership, which can serve as the basis for trust among the participants.

Securing that trust involves not only integrity and mutual confidence in the corporate control mechanisms employed to ensure integrity, but also confidence that all participants will remain in the program until its conclusion and commit adequate resources to the procurement process.

Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.

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