Influence of Group Purchasing Organizations On Financial Situation Of SMEs

Zimon, Grzegorz Working Paper Influence of Group Purchasing Organizations On Financial Situation Of SMEs Institute of Economic Research Working Papers, No. 148/2017 Provided in Cooperation with: Institute of Economic Research (IER), Toruń (Poland) Suggested Citation: Zimon, Grzegorz (2017) : Influence of Group Purchasing Organizations On Financial Situation Of SMEs, Institute of Economic Research Working Papers, No. 148/2017, Institute of Economic Research (IER), Toruń This Version is available at: https://hdl.handle.net/10419/219970 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/3.0/ Institute of Economic Research Working Papers No. 148/2017 Influence of Group Purchasing Organizations On Financial Situation Of SMEs Grzegorz Zimon Article prepared and submitted for: 9th International Conference on Applied Economics Contemporary Issues in Economy, Institute of Economic Research, Polish Economic Society Branch in Toruń, Faculty of Economic Sciences and Management, Nicolaus Copernicus University, Toruń, Poland, 22-23 June 2017 Toruń, Poland 2017 © Copyright: Creative Commons Attribution 3.0 License Grzegorz Zimon [email protected] Rzeszow University of Technology, Faculty of Management, Department of Finance, Banking and Accounting Al. Powstańców Warszawy 10, 35-959 Rzeszów Influence of Group Purchasing Organizations On Financial Situation Of SMEs JEL Classification: A11; A14; B16 Keywords: group purchasing organization; finance; commercial enterprises Abstract Research background: SMEs often operate in markets where they compete with large companies. A fight for the customer, payment backlogs, problems with debt collection and new branches make management seek solutions that will influence positively on the situation of financial companies. Maintaining liquidity and generating income are the primary steps to build a competitive position and a progressive development of enterprises. One of the most popular methods that allows companies to do profitable business and increase their chances for safety is operation within group purchasing organizations. Currently in the market there are many different types of GPOs ( Group Purchasing Organizations). The choice of the right one is a chance to improve their financial situation. Purpose of the article: This article presents functioning of enterprises within group purchasing organizations and their impact on financial situation of enterprises. In the article the classification of groups is done and there are shown the benefits that commercial enterprises operating in them gain. The article presents some obstacles to join specific group purchasing organizations and difficulties faced by companies operating in them. Methodology/methods: The studies will be carried out on the basis of 60 SMEs. These companies operate in five Polish GPOs. The groups were divided into branch and multi-branch ones. The study period covered the years 2013-2015. In order to analyze the impact of purchasing groups on the financial situation of enterprises there were used selected groups of financial ratios and a preliminary analysis of financial balance sheets and profit and loss account was conducted Findings: The analysis showed that the choice of an appropriate group purchasing organization has a large impact on financial situation of companies. Different opportunities can be offered by a sectoral purchasing group than the multi-sectoral one. Research has shown that better results relate to dynamics of revenues, costs, liquidity, profitability that gives the operation within the sectoral purchasing groups. Introduction Small and medium-sized enterprises are forced every day to fight for contracting parties with big corporations. Competition about a customer is difficult because very often companies, when choosing a supplier, take into account only a price. SMEs acting alone in the market are not able to compete with the big players. They do not have too many options in terms of price reductions, and when buyers choose their supplier they pay attention to three items: a price, a merchant credit and quality. Price is still a key element in choosing a supplier. Next there are negotiations that deal with the merchant credit. Quality is often overlooked for price but lately it has been noticed that buyers are increasingly starting to take this element into consideration when deciding to choose a supplier. However, more and more attention is paid to the fact that many tasks are performed better when working in groups. This is why the popularity of small and medium-sized enterprises is being won by an organization called a group purchasing organization. This form of organization is already available in every industry. The joint operation gives a great opportunity for companies operating in the group purchasing organizations, which positively influences their finances, the prices of offered goods and the opportunities for the merchant credit. Method of the research In order to determine the impact of group purchasing organizations on the financial situation of a company, companies were divided into two types of groups, i.e. branch and multi-branch. Then the appropriate analysis methods were chosen to answer how functioning within the group purchasing organizations influences the financial situation of enterprises. The analysis was carried out in two stages. The first one concerned the preliminary analysis and the second the indicator analysis. The study period were the years 2013-2015. The research covered 60 retail businesses operating in 5 GPOs. The financial data of individual entities were from the public financial statements of the audited companies. Group purchasing organizations A groups purchasing organization is a unit composed of companies and a group holder called an integrator. The integrator is the central unit that manages the entire organization, most often it is a specially appointed company that make up the GPO. The central unit may be an external company. A consolidation of members of a given group is the basis for negotiations with producers (Blair, Durrance, 2014, pp.433-443). Its degree has a big impact on the success of the group. The purpose of GPOs is to defend individual companies against strong competition and to increase negotiating power. (Prakash, 2009, p.22). This is possible because joint operation and economies of scale give for businesses many opportunities to improve their financial situation. Purchasing group is an entity that uses collective purchasing power to obtain a discount (Yang, Cheng, Ding, Li, 2107, pp. 581589). This is the effect of scale which is characteristic for GPOs. A group purchasing organization can be defined as a group of companies from the same or another sector that combine to make a joint purchase. They are managed by a specially created central unit, which aims to carry out the tasks assigned by the purchasing groups (Zimon, 2017, pp.675-682). The broader definition of a group purchasing organization is based on Martin Christopher's logistics and supply chain definitions and it is as follows: The group purchasing organization is a group of cooperating companies that jointly control and streamline the flow of goods, information and money from suppliers to final recipients. Participants in such a system form a separate central unit, whose main task is to meet the goals set by the companies operating in the system (Zimon, 2014, pp. 319-327 ). There is a flow of information, money and goods between the central unit and the individual companies. The same possibilities of co-operation and organization of flows have businesses among themselves. Such actions should strengthen the competitive power of enterprises, operational safety, and affect positively the financial position of a company. Faced with increasing pressure to meet short-term financing needs, companies are looking for ways to unlock potential funds from within the supply chain (Lekkakos, Serrano,2016, pp. 367-392). This way to do this is to create a purchasing group. Figure 1 Organization scheme Source: own research The central unit of a purchasing group is often referred to as a purchasing group. This is the most important part of any group because it deals with the organization of the purchase of strategic goods or materials. It is an ideal situation when the central unit of a purchasing group is a company formed by all participants in a given group. This is a very good solution because it is strictly controlled by all participants, and most importantly it is not geared to profit. Its main task is to negotiate terms and conditions of the transaction with manufacturers. When analyzing the functioning of purchasing groups, it is worth dividing them into branch and multi-branch ones. This is an important division due to the effect of scale that these groups can achieve. In the branch GPOs, the number of suppliers is limited, so the scale of the negotiations is strong. In multi-branch ones this effect is "blurred." Many suppliers divide businesses into smaller groups, which makes purchasing power smaller. In the case of a purchase of certain services or materials these divisions may not occur, but such a division exists in the multi-sectoral groups in the situation when a purchase of strategic goods or materials for the unit is made. Significant cost decisions are made in the area of logistics of group purchasing organizations. Companies operating in marketing and purchasing groups may organize deliveries in several ways, depending on the fact that they have the central warehouse that can serve as a distribution point. Choosing the right procurement method has an impact on costs. A rational strategy is to improve the profitability of a company.(Rushton, Croucher, Baker, 2010, p.27) In purchasing groups with the central warehouse, organization of delivery can be divided into four variants. It is not easy to join a purchasing group. There are some entry barriers to be followed if companies operate in this type of organization. The most imporCompany A Central Unit of GPO Company B tant barriers for branch and multi-branch groups are (Zimon, 2016, pp.219229): • Territorial barriers, this restriction is related to the fact that there cannot be several companies operating in the same purchasing group in the same area. This limitation allows a company operating in a given area to compete effectively with other entities. The absence of this limitation would allow the creation of successive units in a given region with a similar competitive force, which would limit the financial performance of the two entities. • Economic barriers, there are restrictions on a turnover which companies should implement. • Environmental barriers, the environment of the enterprise is important. • Positive recommendation by members of the group, individual members of the integrated supply chain must accept the new unit. • Only those companies that operate in the same branch are allowed to operate in branch purchasing groups. There are no limits to this. The impact of group purchasing organizations on corporate finance Companies should grow and expand their position in the market. Functioning of GPOs just in terms of help is the norm. There are a number of finance areas where purchasing groups’ role is visible, especially in the financial management areas. See Figure 2 for details. Figure.2 The impact of purchasing groups on particular areas of corporate finance management Source: own research When analyzing fig. 2, one can state that functioning within GPOs has a positive effect on profitability and liquidity. Collaboration within the groups influences significantly on working capital and the individual components that make it up, i.e. receivables, inventories or liabilities. An efficiency improvement in these areas significantly affects the profitability of SMEs. (Pais M.A, P.M., 2015, pp.341-358). In addition, the central unit has an opportunity to negotiate long payment terms. The level of commitment will depend on the individual management strategy. The liability management strategy has a big impact on corporate profitability. (Madhou, Mossa, Ramiah, 2015). The effect scale allows to get a low price for goods, which directly affects the costs. Low prices are a weapon in the fight for business partners, there is a chance to win new customers, which should increase sales revenue.Running together reduces the risk of liquidity loss. Loans, mutual transactionsall this helps improve liquidity. Businesses in GPOs have a number of opportunities to improve the company finances. Their use and level of benefits in particular areas are already dependent on the straThe central unit - GPO Inventories Strong influence. It is conditioned by the chosen strategy of inventories management. Receivables Strong influence. It is conditioned by the chosen strategy of receivables management. Funds Strong influence. Transactions with deferred payment. Assets No influence. In commercial companies assets are on the low level. Equity Weak influence GPO reduces costs, which increases profits. Liabilities Strong influence concerns liabilities for suppliers). Good conditions to repay commercial credit. tegy that the business manager implements and on the type of a purchasing group. An analysis of the impact of GPO on the financial situation was presented in a group of 60 companies operating in 5 groups: • Branch group A - 26 companies • Branch group B - 7 companies • Multi-branch group C - 5 companies • Multi-branch group D - 6 companies • Multi-branch group E - 16 companies The first element that was analyzed was the dynamics of sales revenue. Joint purchases and an opportunity to get a low price and a long merchant credit gives an opportunity to encourage new buyers. Table 1 provides information on the dynamics of sales revenue. Table 1. Changes of sales dynamics in the years 2015-2013 GPO Growth Decrease A branch 19 7 B branch 5 2 C multi-branch 4 1 D multi-branch 4 2 E multi-branch 13 3 Total 45 15 Source: own research When evaluating the dynamics it is clearly visible that in most companies approximately 75% of revenue were recorded in the years 2015-2013. In other units, revenues declined. Another measure compared the dynamics of revenues and costs in enterprises during the period considered. And as with revenue, there was a greater increase in revenue over costs or a higher decrease in costs over revenue. In 75% of the surveyed companies, the dynamics of revenues and costs can be assessed positively. The details are shown in Table 2. Table 2. Change of costs and revenues dynamics in the years 2015-2013 GPO Revenues increase Costs increase A branch 19 7 B branch 7 0 C multi-branch 4 1 D multi-branch 4 2 E multi-branch 8 5 Total 45 15 Source: own research