Platt Perspective on Business and Technology

Online store, online market space – part 28: developing B to B partnerships and collaborations to gain better collective terms from suppliers 1

Posted in startups, strategy and planning by Timothy Platt on October 6, 2013

This is the twenty eighth installment in a series on building an online store as a new business (see Startups and Early Stage Businesses, postings 20 and loosely following for Parts 1-27.) And this posting is also a continuation of a line of discussion that I began for this series in its Part 20 and Part 21, where I wrote of business to business collaborations as a source of revenue and sales-based competitive strength for startups and early stage businesses.

My goal here is to flip this around and consider how business to business collaborations can bring value to the expenditures side of a startup or early stage business too. And I begin by noting a phenomenon that every small business becomes very familiar with and certainly if it competes in any way with larger organizations that purchase raw materials, preassembled parts or completed inventory items in large volume from their suppliers.

When a business purchases at a sufficient level of volume from a provider so as to account for a notable fraction of their overall sales, it can usually negotiate special terms for their business with them. That can mean lower per-unit costs, more favorable terms of payment, the option to buy specially name-branded versions of items more generally sold, better service support or any combination of these and other special benefits. This, of course, puts smaller purchase-volume businesses that do business with these same providers at a competitive disadvantage, as their larger volume competitors start out in a position where they can undercut all of their competition for that they can charge their customers and still gain the same returns and profits per unit on what they sell.

The basic principle that I would write of here is very simple:

• When smaller businesses can work together and collectively enter into purchasing agreements with suppliers as if they were a single large company with its unified buying power, they can together, negotiate the same types of major purchaser agreements that a major corporate competitor can get.

My goal for this posting is to at least discuss some of the issues and challenges that have to be addressed when actually attempting to implement this type of collaboration and make it work. And I begin by asking three very basic questions:

1. What types of business would benefit from this type of collaborative agreement?
2. What criteria should they use when selecting potential partners and negotiating with them in setting up and running these agreements?
3. What types of goods and/or services would make the most sense for them to collaboratively buy together and under what terms?

My goal for the balance of this posting is to at least begin to address the first of those questions, though I add that their answers all connect together. And I begin this by putting collaborative purchasing power per se in context.

• Supply chains are collaborative business to business partnerships in which system members systematically and contractually outsource functionalities and capabilities that they require for their individual businesses, but that fall outside of their own specific core requirements for producing and offering their sources of competitive value to their marketplaces. This can mean outsourcing their end-product shipping and even large portions of their overall logistics management to supply chain partners where those functions would fall outside of their own core business functionalities. Or this can mean turning select areas of their product assembly or any of a wide range of other services to specific supply chain partners where each participating business fills in gaps for others, focusing on their own core capabilities and strengths as marketable services within the supply chain group.
• I wrote earlier in this series, in Part 20: vetting and brokerage as business expansion -1 and its Part 21 continuation, about how businesses can collaboratively vet and market what they offer, and how they can collaboratively create new sales channels for themselves in the process, and for their mutual benefit. End-user sales are often a functional area that specific supply chain partners perform too, so the two postings that I cite here primarily just discuss an alternative approach for reaching that same functionally focused end result – but here, for businesses that do not seek to formally enter into supply chain systems per se. So think of their discussion as widening the range of collaboration options available.
• This posting adds in a third such arena of potential collaboration and combined value creation. Franchising systems are built around shared brand name and marketing strength, and often include organizational support and best practices sharing from the parent corporation. They essentially always offer at least some quality control oversight and that enters into marketing strength as well as into operations and particularly where a franchise system is known for its consistently high minimum standards of quality and quality control. And one of their biggest strengths for franchise holders is that they can offer big business buying power, though some parent companies that own franchise system brands and brand names charge their franchisees for use of their name and for other services rendered, at least in part by requiring that they buy supplies and materials from them – and at a profit to the parent company. The collaborative systems that I write of here do not in general offer business process support or big-name branding benefits but they do allow more strategic and operational independence, and they are built around maximizing savings for purchases that partnership members make through their collaborations.

And this brings me to that first question which I rephrase here:

• What types of business would most benefit from entering into this particular form of business to business collaboration out of the range of options touched upon in the above three numbered points?

An immediate, if only partial answer would be that this approach would make sense where competitive buying power in the face of big business competition is a primary goal, for in effect leveling the playing field that they have to operate on.

I am going to continue this discussion in a next series installment where will focus on question two of the three I listed towards the top of this posting. I will among other issues, consider:

• Possible antitrust considerations, where business to business collaboration might be legally construed as creating restraint of trade problems, and
• Possible competitive conflicts between potential purchasing collaborators within these systems.
• For purposes of the second question raised at the top of this posting, this is all about risk management and cost/benefits analysis.

Meanwhile, you can find this series and related postings at Startups and Early Stage Businesses and also at Business Strategy and Operations and its continuation pages Business Strategy and Operations – 2 and Business Strategy and Operations – 3.

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