Colleges procure a wide range of goods and services, including office supplies, information technology, research materials, food and related services, waste management, employee benefits, marketing services, construction and repairs, and more. Public and private non-profit higher education combined spent a total of $343.37 billion in the 2005-06 school year. This figure has been increasing by about five and a half percent a year, and currently comes to 2.6 percent of gross domestic product. It is difficult to determine exactly how much of these expenditures went towards the purchase of goods and services, as the percentage varies widely among institutions and is not publicly available in many cases. After reviewing economic impact reports for several major institutions, we have prepared an estimate that the purchase of goods and services typically accounts for between 15 and 30 percent of total expenditures, excluding construction projects and employee benefits. 311 This implies that public and non-profit higher education combined procured between $60.5 and $121 billion worth of goods and services during the 2007-08 school year, or between $4,800 and $9,600 per full-time equivalent student.
Goldie Blumenstyk suggests that,
“Most colleges don't take full advantage of purchasing cooperatives, don't fully exploit e-commerce opportunities, and don't track what they are buying or from whom. They also don't do a very good job of concentrating 80 percent of their spending with 20 percent of their suppliers, a common industry tactic that helps companies exploit their buying clout.”
Pennsylvania State University professor of supply chain management Richard R. Young notes that rather than meeting with their on-campus clients to understand their needs and negotiating with their suppliers, many universities are simply engaged in transactions, essentially just pushing paper. Engaging in consortium purchasing agreements could save colleges large sums of money.
How Consortia Purchasing Works
The context for consortium purchasing is a basic application of scale economics – the larger the quantity of a product being acquired, the bigger the discount. Wal-mart is able to offer low prices on thousands of products because they purchase large volumes from their suppliers. Organizational units or separate organizations can enter into a consortium agreement with others that procure similar goods and services in order to increase their buying power and receive volume discounts. Individual colleges purchase a large mix of similar goods and services, but often in limited quantities, especially if independent departments at a college are responsible for their own purchasing. Through consortium agreements, colleges can team up with not only other colleges, but also other organizations with similar needs, in order to maximize their savings and reduce the costs associated with purchasing
The benefits of consortium purchasing agreements are many. Collaborating with other institutions that are procuring similar goods and services increases buying power, due to a larger quantity of goods or services being purchased. As most shoppers are aware, the more you buy, the lower the price. This is because suppliers selling a larger quantity of goods are often able to achieve economies of scale. In the case of services, suppliers are willing to offer a discount to customers providing them with repeat business. Collaborative purchasing also reduces the transaction and information costs associated with procurement. Determining specifications, soliciting bids, and negotiating contracts are among the many activities involved in procurement. Collaborating with other organizations that are purchasing similar goods and services can reduce administrative costs, as these activities only need to be performed once for all participants, as opposed to each individual organization undertaking them. By adjusting its purchasing strategy to take advantage of purchasing arrangements, New York University estimates that it has saved $1.2 million annually.
While collaborative purchasing arrangements can result in a lower price and reduced transactions costs, they are not without their drawbacks. The primary one is that they reduce the flexibility with which participating organizations can purchase preferred goods or services. If participants procure a large quantity of a product or service from a certain supplier, individuals may accept their non-preferred product in order to achieve cost savings. For some goods and services, such as construction, it may also reduce the opportunity for customization.
Another limitation is that public institutions are typically restricted by state acquisitions regulations. They are bound to follow solicitation, competitive bidding, and evaluation procedures when procuring goods and services. This somewhat limits their ability to join consortium purchasing groups to negotiate contracts, but statewide and regional agreements have become more commonplace.
Types of Consortium Agreements
Purchasing agreements among a consortium of organizations for a variety of products and services permit member institutions to purchase goods and services from participating vendors at a group discount rate. Such agreements provide individual organizations with additional buying power, as well as reduced administrative and transactional costs. There are several general types of consortium purchasing agreements that are currently in practice in higher education. These include inter-institutional, statewide, and regional agreements among colleges and other organizations.
An inter-institutional collaborative agreement is one that exists among a number of independent institutions that permits members to purchase goods and services at a group discount, as well as to reduce the administrative burden involved with procurement at the individual institutions. The Independent Colleges of Indiana (ICI) has a Collaborative Services Initiative that permits its 31 member colleges to reduce the prices for goods and services through leveraged contracts, improve the business terms and services with commonly used vendors, reduce duplicated efforts by members to research and implement new services and programs, and simplify the processes of purchasing.
ICI members have access to more than 80 different collective purchasing agreements, including agreements for the purchase of computers and software, office and maintenance supplies, furniture, waste management services, and cell phones. ICI is seeking additional agreements for vehicle purchases and leasing, employee benefits, and more. By making purchases through ICI collective agreements, members save between 5 and 15 percent off what they would have paid by negotiating an individual contract. President Hans C. Giesecke estimates that ICI members saved over half a million dollars last year on purchases made under its agreements.
A state-wide purchasing agreement permits public institutions to partially overcome the limitations imposed by state acquisition regulations in order to benefit from collaborative purchasing. Under such an agreement, public institutions can collaborate with one another on the purchase of similar goods and services. In 1996, public institutions in the state of Washington formed an inter-local agreement that authorized the sharing of information and contracts for the purchase of similar goods and services. The purpose of the agreement was to “share and cooperate in preparing specifications, sourcing, competitive bidding, and negotiating specific terms for goods and services that are required by the institutions.”
Under the inter-local agreement, a lead institution (LI) will solicit participants among member institutions for the procurement of specific goods or services. After determining intended and potential participation, the LI will follow state acquisition regulations in soliciting bids from vendors and make an award to the “lowest responsive and responsible bidder.” Once a contract is issued, participating institutions may issue delivery orders from the successful supplier.
A regional agreement is an expansion of the statewide agreement that encompasses a larger region or a bloc of states. The Western States Contracting Alliance (WSCA) is a good example. It was formed in 1993 by the purchasing directors of 15 western states for the purpose of allowing participating states to team up for cooperative multi-state contracting. The WSCA permits states, cities, counties, public schools, and institutions of higher education to benefit from regional collaborative purchasing. It follows a lead-state model, similar to the leadinstitution model described previously.
Collaborative purchasing allows organizations to achieve greater efficiency in the procurement of goods and services, as well as savings associated with economies of scale, increased buying power and a reduction in information and transaction costs. Institutions already belonging to consortia should take full advantage of the existing negotiated agreements, as well as push for an expansion of coverage and encourage other institutions to join.
The ICI consortium contends that it is feasible to shave 5 to 15 percent off the price of goods and services through the use of an inter-institutional purchasing agreement. We have estimated that colleges spent between $60.5 and $121 billion on goods and services in 2007- 08. Thus, reducing the cost of goods and services by just 5 percent would save between $ 3 and $6 billion annually, or $240 to $480 per full-time equivalent student.