Magazine article Ivey Business Journal Online

Chain Reactions

Magazine article Ivey Business Journal Online

Chain Reactions

Article excerpt

The Great Recession didn't just adversely affect financially troubled companies. After all, every time a bankruptcy is filed, shock waves travel along supply chains and often take healthy companies by surprise. In other words, when companies share suppliers, especially with major global corporations like General Motors, they share operational risks.

Now, businesses can simply accept this risk. But with the global economy still on life support, it really makes more sense for managers to at least think about using a group purchasing organization, or GPO, to insulate their operations from the ongoing business failures that are a natural result of any financial crisis or economic downturn.

And let's not forget the risk posed by black swan events like Japan's earthquake/tsunami disaster in 2011 - when, as a Forbes article noted, a significant portion of the Japanese disaster's impact on global supply chains was not even caused by physical damage at the epicentre of the catastrophe. "Instead, rolling brownouts in southern Japan delayed production at many firms, costing even more in business interruption and recovery expenses. This surprising cause and effect taught multinational organizations some hard lessons about supply chain sensitivity, and caused some to rethink their procurement interdependencies from [a] risk perspective as well as a cost calculation."

Partnering with a GPO isn't for everyone. In fact, managing your own supply chain seems to be in line with the entrepreneurial spirit. It certainly allows for quick adjustments when market conditions or business needs change. And it enables one-on-one relationships with supplier partners. But GPOs insulate companies against downturns and disasters and mitigate the risks associated with independent supply chain management as a result. And there are other advantages.

Better pricing: GPOs use the collective buying power of their members to negotiate for better prices. Independent businesses often have less purchasing power and, therefore, have to settle for less favourable prices. This means they are at a competitive disadvantage when pitted against bigger corporations or GPOs. Partnering with a GPO saves money and allows companies to pass savings on to consumers, improving both their value proposition and their bank balance. …

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