Procurement is a critical business function that directly impacts a company’s bottom line. As businesses strive to operate more efficiently and cut costs, procurement teams are constantly seeking ways to streamline their processes and maximise their efficiency. One powerful technique that has gained popularity in recent years is demand aggregation. That’s where demand aggregation in procurement comes in.
This approach involves consolidating demand for a particular product or service across different departments or locations within an organisation to achieve better pricing and more favourable contract terms. On that note, let’s explore the concept of demand aggregation and how it can help procurement teams achieve their efficiency and cost-saving goals.
What is demand aggregation in procurement and how it works?
Demand aggregation is a procurement strategy that consolidates multiple buyers’ purchasing requirements into a single group to negotiate better prices and contract terms with suppliers. It is a cost-saving technique that leverages the collective buying power of multiple entities to achieve economies of scale and more favourable supply chain outcomes.
The process of demand aggregation involves several steps, which are:
- Identify a common need among multiple buyers for a particular product or service.
- Form a group of buyers willing to aggregate their purchasing needs and sign a common contract.
- Develop a request for proposal (RFP) to be issued to potential suppliers, which outlines the buyers’ requirements. Including product specifications, quantity, quality, delivery schedule, and pricing information.
- Evaluate the proposals from suppliers, with a focus on quality, price, delivery timelines, and other terms.
- Negotiate the contract terms with the selected supplier, which includes pricing, delivery, quality standards, and any other conditions.
- Distribute the purchased goods or services to participating buyers based on their respective share of the total purchase.
What are the benefits of demand aggregation?
Demand aggregation is a procurement strategy that involves consolidating the demand for similar goods or services from various departments, locations, or organisations to achieve economies of scale and other benefits. Some of the benefits that procurement teams can achieve through demand aggregation include:
- Lower costs: By consolidating demand for goods or services, procurement teams can negotiate better prices and terms with suppliers. This can result in cost savings for the organisation.
- Improved supplier relationships: Consolidating demand can help to build stronger relationships with suppliers. By increasing the volume of business with a supplier, the procurement team can become a more valued customer, which can result in improved service and support.
- Reduced administrative burden: By consolidating demand, procurement teams can streamline the procurement process and reduce the administrative burden of managing multiple requests from different departments or locations.
- Better quality and consistency: By aggregating demand for goods or services. Procurement teams can ensure that they are buying from a smaller number of suppliers. It can help to ensure better quality and consistency of the products or services being purchased.
- Improved risk management: By working with a smaller number of suppliers, procurement teams can better manage risks associated with supply chain disruptions, supplier bankruptcy, or other unforeseen events.
- Streamlined procurement processes: Aggregating demand simplifies the procurement process by reducing the number of purchase orders and suppliers.
Best practices for implementing demand aggregation in India
To effectively implement demand aggregation, procurement teams should follow these best practices:
1. Identify products or services for aggregation
Procurement teams should identify categories that are relevant for demand aggregation. Such as products or services that are commonly used across different business units.
2. Create a demand profile and forecast demand
They must create a demand profile that accurately reflects the needs of all business units and forecast demand based on historical data and market trends.
3. Build a cross-functional team
Demand aggregation requires input from multiple departments, such as finance, operations, and legal. So, procurement teams should build a cross-functional team that includes representatives from these departments to ensure buy-in and support.
4. Develop a supplier engagement strategy
They should engage suppliers early in the demand aggregation process to ensure they understand the objectives and benefits of the initiative.
5. Negotiate favourable contract terms
They should negotiate favourable contract terms with suppliers, such as pricing, delivery, and payment terms.
To sum up
Demand aggregation has emerged as an effective technique for achieving procurement efficiency and cost savings in India. By consolidating demand and negotiating favourable contract terms, procurement teams can achieve significant cost savings and streamline their processes.
However, to successfully implement demand aggregation, organisations must follow best practices and address challenges such as resistance from business units. Difficulty in forecasting demand accurately, and balancing centralised procurement with decentralised business unit needs.
By doing so, Indian businesses can harness the potential of demand aggregation to achieve their goals and drive greater value for their organisations.
