One of the challenges of trying to promote thoughtful Procurement is that everyone is a "buyer" when they go shopping, so everyone knows that Purchasing is simply a matter of economy of scale…right? Well, sometimes, maybe! Indeed, it has been said that if you reduce variety, consolidate suppliers and manage maverick Purchasing then you will be able to leverage spend to get the best deal! Well, again, maybe.
However, this statement has the same validity as saying that reverse auctions will cut your sourcing costs by 18%.

The impact of an auction will depend on a number of factors including the nature of the supply market. Would you expect to get an 18% reduction from a monopoly supplier? Probably not. Even if there is a competitive supply market and prices fall, if all buyers are trying to exercise leverage, some of the value released to buyers by sellers will come from the seller’s margin. Of course, this is not a bad thing in the short term. But in the longer term, if the seller’s have simply cut margin they may either go bust or exit the market.

If you are looking for a cost reduction this year and a similar cut next year then leverage is just one of the tools that can be used to produce such a result but it may not be sustainable.

Whilst it is true that Procurement can be subject to simple economies of scale, the idea that "strategic" Procurement is that simple is clearly naïve.

Paul Rogers is a Senior Consultant with PMMS Asia Pacific based in Melbourne.