Purchasing cooperatives have become an essential tool for many businesses and organizations. Purchasing cooperatives help members improve their competitiveness, and leverage their combined purchasing volumes into savings and efficiencies. In this four-part educational series, co-op developers will learn the strategies and the development process for starting a purchasing cooperative. Attendees will learn how to: Recognize the benefits of purchasing cooperatives Define the types of cooperative purchasing Define key factors in the feasibility of purchasing cooperatives Understand major steps in starting a purchasing cooperative Part III: Feasibility of a Purchasing Co-op Economics of starting a purchasing co-op The chicken & egg situation Ten qualifying questions

1. Part 3
Feasibility of a Purchasing Co-op

2. • Welcome!
• The webinar will be recorded and available at
www.ncba.coop
• We welcome your questions! Submit them
anytime by typing them into the chat box in
the control box on your screen.

3. Ian Gray Carl Hammerdorfer Lisa Stolarski
President & CEO
Director, Global Social & Sustainable Director
Enterprise MBA
Executive Director, Center for Advancement
of Sustainable Enterprises
Part 3: Feasibility of a Purchasing Co-op

4. • Economics of Starting a Purchasing Co-op
• The Chicken & Egg Situation
• 10 Qualifying Questions

5. • Purchasing co-op must cover all its expenses and
distribute a “rebate” to its members
• Suppliers must receive enough benefit to be willing to
pay “rebates” to the co-op
• Members must receive enough “rebates” to cover any
of their co-op fees and incent them to change buying
patterns

6. Income:
Rebates
Member Fees
Less Expenses:
Co-op Operating Costs
Legal / Accounting / Banking
Insurance
= Net Income
(Rebates to distribute to members)

7. Income:
Rebates Let’s focus first
Member Fees on expenses
Less Expenses:
Co-op Operating Costs
Legal/Accounting/Banking
Insurance
= Net Income
(Rebates to distribute to members)

8. Co-op Staffing Requirements
• General Management
• Member Recruitment
• Accounting and Rebate Tracking
• Supplier Recruitment and Negotiations
• IT Support
• Member and Supplier Support
Budget a minimum of $150,000 per year
• Minimum of 2 Full Time Equivalents
Costs are estimates only

9. • Legal
• $20,000 Legal for start-up
• $5,000 per year on-going
• Accounting
• Some jurisdictions require audit
• $10,000 (Range $8,000 to $18,000)
• Purchasing Co-op Specific Software
• $100,000 up front plus $40,000+ annually
Costs are estimates only

10. • Offices / Rent: $10,000
• AR Insurance: $15,000 minimum
(1/4 of 1% of sales)
• Website / Marketing: $5,000 start-up
$5,000 on-going
• Travel and Living: $15,000 (Depends upon
geographic spread of potential members)
Costs are estimates only

11. • Total Start-up Costs: $125,000
• Total Annual Costs: $250,000
Year 1 Year 2 Year 3 Year 4
Start Up Costs $125,000
Annual Costs $250,000 250,000 $250,000 $250,000
Total Costs ($375,000) ($250,000) ($250,000) ($250,000)
Cumulative ($375,000) ($625,000) ($875,000) ($1,125,000)
Costs
Costs are estimates only

12. Income:
Rebates
How much income
Member Fees do you need?
Less Expenses:
Co-op Operating Costs
Legal/Accounting/Banking
Insurance
= Net Income
(Rebates to distribute to members)

13. Rule of Thumb: Co-op expenses should be no
more than 2% of Purchases
So..
Year 1 Year 2 Year 3 Year 4
Total Co-op $375,000 $250,000 $250,000 $250,000
Expense
Purchases at 2% $18,750,000 $12,500,000 $12,500,000 $12,500,000
Cumulative ($375,000) ($625,000) ($875,000) ($1,125,000)
Purchases at 2% $18,750,000 $31,250,000 $43,750,000 $56,250,000
Costs are estimates only

14. The number of members needed to get to
$20 Million in Purchases depends on the
size of their purchases:
Individual Member Purchases Number of Members Needed
$1,000,000 20
$500,000 40
$250,000 80
$100,000 200
$50,000 400
$10,000 2,000

15. Average Member Purchases Per Year
Multiplied by
Average % of Purchases through Co-op
Multiplied by
Number of Members
Equals
Estimated Purchase Volumes

16. Average Member Purchases will depend on the
sector and type of business.
Examples:
– A hardware store that has retail sales of $1,000,000
with a gross margin of 25% will have purchases of
$750,000
– A printing shop that has retail sales of $1,000,000
with a gross margin of 85% will have purchases of
only $150,000 (large labor component)

17. Purchases put through Co-op will depend upon:
• How incented ($$$) the members are to switch
• Cost of switching suppliers (re-tooling, marketing, etc.)
• Ability of co-op to track and monitor progress
• How much of the member’s required purchases can be
sourced through the co-op
• How busy the people are who have to make the changes
• Does the member purchase from many or few suppliers

18. Number of members will depend upon:
• Number of potential members
• Return on Investment = savings vs. membership
fees
• Amount of cost savings through rebates, price
reductions and improved terms
• Effectiveness of new member recruitment program
• Impact of savings on the business
• Does the Co-op have “leading or influential”
members

19. Hardware Store Print Shop
Average Purchases per location $750,000 $150,000
Multiplied by % through Co-op 60% 75%
= Average Member Purchases $450,000 $112,500
Purchase Volume Required $12,500,000 $12,500,000
Calculate Number of Members 28 111
Required (Volume divided by Ave)

20. • Don’t get caught up in emotion: do the math
• Getting purchases through the Co-op will
take longer than planned (3 times rule)
• The sector has to be “right” or it won’t work
If it was easy.. Everyone would do it!

21. If the Co-op’s Costs aren’t covered it will fail!
Options available:
• Membership fees
• Share capital / Member loans
• Joint ventures
It has been done by all Purchasing Co-ops that
operate today!

22. Income:
Rebates
Member Fees
Less Expenses:
Co-op Operating Costs
Legal / Accounting / Banking
Insurance
= Net Income (Rebates to distribute to members)

23. Income:
Rebates
Member Fees
Less Expenses:
Co-op Operating Costs
Legal/Accounting/Banking How do we estimate
Insurance the rebates?
= Net Income
(Rebates to distribute to members)

24. Supplier Rebates Minus Co-op Costs
= Rebates to Members
If Co-op costs are 2% of purchases – then any
supplier rebate greater than 2% should flow
to members as rebates.

25. • Negotiating “the Group Deal” on behalf of all the
members, saves marketing costs
• Centralized Billing & Pay Model lowers
administration costs
• Co-op guarantee of members’ credit risk lowers
bad debt and AR collection costs
• Increased sales at the expense of other suppliers

26. • Marketing Costs - 0.25% (1/4 of 1%)
• Central Billing / Pay – 1.00%
• Credit Risk Reduction – 0.25% (1/4 of 1%)
Total Efficiencies Benefits = 1.5%
What can the “benefit” be for increasing sales at
the expense of a competitor?

27. Two Suppliers: Supplier A Supplier B
Sales $6,000,000 $4,000,000
Gross Margin % 20% 21%
GM Dollars $1,200,000 $840,000
What would happen if all the Sales
went to Supplier A or Supplier B?

28. Two Suppliers: Supplier A Supplier B
Sales $10,000,000 $10,000,000
Gross Margin % 20% 20%
GM Dollars $2,000,000 $2,000,000
Less Original GM $ $1,200,000 $ 840,000
Rebate Potential $ 800,000 $1,160,000
(8.00%) (11.6%)

29. • Higher margin products can pay more for
increased sales and lower margin products
yield less
• Suppliers with existing sales to the members
will want to pay less
• Sales must be significant to the supplier for
them to even want to participate

30. • 1.5% Central Billing Allowance – a must!
• Getting 10% on a low volume product isn’t as
important as getting 3% on a high volume
product ($$$ are important- %%% are not)
• Minimum goal should be 5% including CBA
(that leaves 3% for Member)
Focus on Rebates and
not on face of invoice price reductions!

31. • Suppliers will pay good rebates if the
Purchasing Co-op can increase their
sales
• Members will support the Purchasing
Co-op’s designated Supplier if there
are good rebates.

32. #1 Who is the target member for the Purchasing Co-op?
– What is their business
– Are they independently owned
– What is the average revenue per location
– What are their purchases as a % of revenue
– Are they experiencing a business threat from
large multi-national corporations

33. #2 What is going on in their business sector?
• Is the sector under financial pressure
• Is consolidation occurring rapidly
• Are there one or two dominate players

34. #3 What are the buying patterns of the
potential members?
• What are the key product categories
• How many product categories are there
• Do the majority of the target members buy the
same product categories

35. #4 For each product category, what does the
supply chain look like?
• Many or few suppliers
• Purchases direct from manufacturers or
through distribution
• Are alternative products available
• Are there significant barriers to switching

36. #5 From a member’s operational perspective, how
do they deal with each purchase category?
• How are suppliers selected
• How are orders placed
• How are prices negotiated
• How are goods paid for
• How are returns and adjustments processed

37. #6 Are there any Buying Groups or
Purchasing Co-ops currently in this sector?
• If so, who are they and what is their target
member
• If not, has one been tried in the past

38. #7 Who exactly are the potential members?
• Who are the “influential” potential members in
the sector
• Is there an active industry association
• Is there a directory available of potential
members

39. #8 Have you identified a potential General
Manager?
• Do they have experience running a
Purchasing Co-op or Buying Group?

40. #9 Have you identified your preferred
operating model?
• Central Bill and Pay
• Direct Bill and Pay
• Direct Bill and Central Pay combination

41. #10 Who and what are the driving forces
behind wanting to start a Purchasing Co-op?
• Is there a committed group of potential members
• Is this group willing to invest money to make it
happen

42. • Major Steps in Starting a Purchasing Co-op
• Technology Strategy
• Purchasing Co-op Expertise
• What is available
• How to access it
• Typical costs

43. Ian Gray Carl Hammerdorfer Lisa Stolarski
President & CEO
Director, Global Social & Sustainable Director
Enterprise MBA
Executive Director, Center for Advancement
of Sustainable Enterprises
Part 3: Feasibility of a Purchasing Co-op

44. Part 3
Feasibility of a Purchasing Co-op
Prepared by
Ian Gray, President & CEO Meredith Rafferty, Co-op Development
Buying Group Services, Inc. Northwest Cooperative Development Center
Lisa Stolarski, Executive Director
Don Collyard, Principal
Co-ops USA, NCBA
Main Street Cooperative Group
Spring 2012
Diane Gasaway, Executive Director
Northwest Cooperative Development Center