During periods of economic uncertainty, people tend to find ways to band together and minimize their fixed costs. Cooperative purchasing is like carpooling for small businesses. When you combine purchasing power with other businesses that have similar economic interests, you reduce costs and your money goes farther.
“A lot of [cooperatives] get started during economic recessions, because there is a real economic need,” says Paul Hazen, president and CEO of the National Cooperative Business Association. “Local store owners can remain independent in their communities, yet have the economic power of national buying, marketing, and advertising with their own brand.”
Cooperatives can help small business owners take advantage of cost savings on commodities, like food, office supplies, or janitorial supplies; and services, like high volume credit card or payroll payment processing, marketing and advertising, shipping, or wireless phone services. Also called shared services cooperatives, purchasing co-ops can even negotiate better terms on loans for members, helping them to lease or buy vehicles and equipment.
Co-ops are run democratically, members elect leaders, and each co-op adheres to a series of bylaws and governance procedures. Depending on how the co-op is set up, members will pay an annual fee or buy a one-time share and submit an application to join; some co-ops vote their members in. The payments provide the capital, which makes the bulk purchasing possible.
A purchasing cooperative is owned and controlled by independent small businesses, not stockholders, meaning that equity in a co-op comes from members, not outside investors. Since they are not formed to draw a profit, surplus revenue is reinvested into the co-op to help lower prices or return dividends to members.
However, purchasing cooperatives are not fool-proof. Here are three advantages and disadvantages of joining or forming a co-op:
Greater bargaining power with suppliers: “There isn’t a magic number, but you have to have economic clout to have an impact in the market place,” says Hazen, who has worked with the NCBA for 22 years. Some suppliers only sell their products in bulk, so they are incentivized to work with co-ops rather then individual businesses. Suppliers will also be willing to negotiate prices with co-ops for fear of losing the co-op’s large customer base to a competitor.
Opportunity to learn from others and maximize staff resources: Co-operative purchasing gives individual business owners the opportunity to leverage the knowledge and experience of the co-op community and procurement professionals. This releases them from the responsibility of dealing with the specific details of procurement contracts for every product they purchase, or from negotiating aspects of a contract that might be outside of their frame of knowledge. With purchasing responsibilities outsourced to the coop, business owners can redirect attention to other facets of their companies.