Group Buying Appears Ready For Takeoff
<H1> Group Buying Appears Ready For Takeoff</H1>By Jay Campbell
<I>New York </I>- Consortium purchasing has not yet proven a successful strategy in the U.S. travel industry, but its acceptance in other areas of corporate purchasing has sparked new interest among many travel buyers here and abroad.
A recent survey by the National Business Travel Association found that 28 percent of 700 members polled are interested or involved in consortium purchasing.
According to the National Association of Purchasing Managers, consortium buying is the hottest issue among its members, although only 5 to 10 percent are doing it for any commodity. NAPM said companies typically save between 5 and 15 percent by pooling volume for purchase of some commodities.
While it is the Business Travel Contractors Corp. (<I>BTN</I>, July 29) that has been the most visible consortium in the travel industry, other groups of companies around the world also are beginning to target travel as an area in which to pool their volumes.
In Utah, 20 companies-including Salt Lake City-based Novell, Franklin Quest and Huntsman Chemical-have formed the Corporate Travel Alliance. The group has met twice to help members deal with the problems of negotiating with a hub airline-Delta-and plans to pool its volume soon.
"Together we have $135 million a year in T&E," said Jim Kimball, director of corporate travel for Huntsman Chemical. "That will get your attention."
Kimball anticipates that one representative will negotiate on behalf of all 20 companies, and the group will go after net fares. "Why should we pay a commission to the travel agent? Many of us are planning to take agency services in-house anyway," he said.
From Lab Supplies To Travel
Chuck Oehler, executive director of the nine-year-old Wisconsin Biotechnology Association, said a recent poll of members on joint purchasing priorities revealed that travel was one of the top areas identified. The 70-company group, which includes Upjohn and Abbott Laboratories, has set up a successful program to purchase lab supplies and is targeting travel next.
"We're still in the throes of developing a joint travel program, and there are some options as to how to do it, but it seems to be a smart thing to do," Oehler said. "I'd say it will get off the ground in the next six to ten months."
While group buying on its face sounds like a simple idea-volume for discount-there are several concerns that make it complicated. For example, while they are by no means illegal, consortiums do need to be monitored closely for legal concerns arising over price availability and restraint of trade. Although this takes work, the Department of Justice has been clear about what it will allow through favorable business review letters, like the one obtained by BTCC.
Some purchasing managers, however, fear losing control over their own purchasing power.
"We have talked many times about trying to pool our purchase powers," said Silicon Valley BTA president Susan Dupart. "But it was tough for us to know how it would be structured, added to the fact that different companies have different controls under mandate. In a group situation, you're depending on everybody to come up with their piece of the pie."
Despite those concerns, the group held an advisory board meeting on the subject this month, and plans to explore the benefits of setting up a consortium over the next two to three months.
Some say suppliers would not want to cooperate with groups. Considering what consortiums mean for suppliers-fewer customers asking for better discounts-that sounds understandable. But acceptable consortiums would aim to provide benefits to suppliers by reducing costs on both sides.
"The cost of distribution is the last frontier for many industries and offers a significant area of opportunity for consortium purchasing," said BTCC president Kevin Mitchell. "Distribution costs are ultimately passed on to the buyer in higher prices. Thus, there is a logical self-interest in helping the supplier radically reduce distribution costs."
Although Southwest was the only carrier to go for BTCC's first proposal, observers believe that was because the other carriers thought BTCC was trying to dictate their pricing, not because they are against group buying. After all, how could the airlines be against group buying? They, too, purchase fuel and other commodities together with their partners.
"This appears to be the wave of the future," said Joe Yacurra, director of worldwide purchasing for American Express. "The trend is definitely toward more consortium buying, and it is moving toward the non-traditional purchasing areas such as travel." Yacurra said Amex hopes to join a small consortium in France to buy things like office supplies, temporary personnel and software.
One driving force behind the trend is that it is truly global.
The Copenhagen-based Danish Travel Pool, with a volume of $8.7 million (not a lot by U.S. standards, but based on the exchange rate, worth a substantial amount in Denmark-50 million krone), provides all types of travel management services for its 10 members. DTP negotiates discounts based on volume and has a fee-based relationship with the travel agencies; all airline payments go to the companies.
In addition, the group uses frequent flyer points earned on business trips to purchase tickets and is developing an electronic travel accounting system with expense reporting and bookkeeping.
"No midsized company could get together their own corporate travel program," said Soren Schoen, DTP's general manager. "So we give them the extras."
The 12-member London Corporate Travel Council, based in London, Ontario, Canada, has just this year begun pooling its resources and is aiming to negotiate joint net fares, although the group is now "crawling before walking," said vice chairman David Batey, who is the corporate travel manager for Lac-Mac Ltd.
Germany's VDR, a buying group for midsized firms, has been successful with its year-old airline program. The group, which has 230 corporate and supplier members, paid about $230,000 in airline refunds to members last year (<I>BTN Europe</I>, May 6). The group has so far been unable to launch a similar program for hotels.
A Norwegian group, however, has managed to pool volume to gain hotel discounts. The Berg-Hansen Travel Agency (Carlson Wagonlit's Norwegian partner) has negotiated hotel deals for a group of 35 clients. The deals currently are in place for London hotels, but the group is planning to strike deals in other countries as well.
NAPM will release a study of 15 buying groups this fall, which should help travel managers through the formidable challenge of designing and implementing a consortium. Based on the preliminary results of that study, <I>Purchasing Today</I> magazine indicated that there are many models of consortiums, and each must be customized to the member companies' needs.
In addition, the magazine recommends that if the consortium is designed properly, antitrust need not be a concern. It noted that cultural fit among member companies is paramount.
"In this market, what we have in common is the unique problem that Delta is the dominant hub carrier," said Kimball of the Utah group. "We see that we've got to help each other, and we're not competitors. So, if every once in a while we have to smack Delta upside the head, this group helps us do that.