The Four Purchasing Paradigms

 

>Trust Your Primary Supplier

 

>Contracting With A Primary Supplier

>Group Purchasing

>Open Competition

 

How would you rate your success?

 

The Trust Paradigm

 

As humans, we most often take the “path of least resistance.”   We often justify our actions by repeating the mantra:

 

“If it isn't broke, don’t fix it!”

 

“The effort we would spend to achieve savings would be greater than the savings!”

 

Lab managers know that there are ways to save money, but there are several ways they go about it.  The Trust Paradigm is perhaps the most popular.  Seemingly out of habit, they buy from Thermo Fisher or VWR International.  Sometimes this is done because they have a long standing relationship with a local rep who has served them well.  However for many small to mid-sized labs there is only a telesales rep or a web site and just the hope that "vendor consolidation" will lead to cost savings.

 

How do you know you are paying a reasonable price?

 

So how is it that people who do all their business with a single, primary vendor, year-upon-year conclude that the price they are paying is competitive and that they are saving money?


1.       By looking at the percent discount from list price.


2.       By periodically doing a “market basket” price check with the other major distributor.


3.       Simply by taking the word of the sales rep that “you are getting a great deal.”


4.       By over-valuing the offer of “free freight.”

 

Big distributors figured this out long ago.  Imagine the overhead to support gigantic warehouses, hundreds of field sales reps and all of the freight costs associated with distribution!  Imagine the profit required to support an organization this large!  Does it come from volume buyers like major universities that have hotly contested contracts every five years, or the small to mid size buyer with blind trust or lacking the resources or motivation to find new sources?

 

How can LPS help?

 

For LPS to assist the Trust / Relationship lab manager achieve cost savings, we must:

 

>Minimize the number of product/brand changes to achieve savings

>Function as partners with current Procurement personnel

>Respect and enhance existing preferred vendor preferences or relationships

>Ensure changes are done at minimal/no cost and with minimal workflow interruption

>Provide hard evidence / documentation of cost savings

The Results

 

>Dramatic improvements in your labs Procure-to-Pay cycle lowering the cost per P.O. by as much as 80%

>Product cost savings that average in excess of 20%

>Complete and accurate spend metrics

>The security of knowing that the price you are paying is a “fair” price because it has been verified by an independent
3rd party (LPS)

>Reduced errors and time required to follow up on orders and problems

>A new, deeper trusting relationship with a partner who is non-aligned with any specific vendor

The Contracting Paradigm

 

The appeal of contracting as a purchasing strategy stems from the following assumptions:

[1] By concentrating your purchasing volume with a single, large distributor, that distributor will have the incentive to give you lower prices.

[2] “One stop shopping” is more convenient and therefore less labor intensive.  One web site to log into, one vendor to deal with, fewer numbers of invoices to process and pay, etc.

[3] A single point-of-contact.

As organizations grow to a certain size, the risk of doing business on a purely relationship basis becomes  too risky.  Managers are now responsible to boards and attorneys who rely on contracts to ensure corporate integrity and responsibility.   The benefits of contracting are:

 

[1] What the vendor promises, he is now legally obligated to provide.

[2] It restricts on-the-fly price or policy changes (e.g., mid-year price increases.)

[3] Depending on the size of the contract and the expressed willingness of the lab to reward a contract to the successful contractor, it can yield huge pre-bates, incentives and/or rebates.

So what are the downsides?  Why doesn't everyone just contract out their business?

[1] Size matters.  Volumes of business <$250,000 per year will never stimulate a big distributor to give up much margin.
Contracting is fraught with legal minefields.  Done wrong, the company issuing an RFP can end up in a costly legal battle.

[2] In most cases there are few labs who solicit proposals that actually reward a contract to a bidder other than the incumbent.  Many labs go through the exercise every 3 – 5 years and never change vendors.  There is a point where the award is a foregone conclusion and competitors may not even offer a proposal.

[3] Contracts switch off competition during the period of the contract.  In the lab business, electing to only deal with core suppliers to Fisher or VWR may put blinders on your organization to the increasingly large number of vendors who sell direct or only as 3rd party vendors to Fisher and VWR.

[4] Successful contracting requires someone on the contracting team with an extensive inside knowledge of the lab industry.  Without this you may as well save yourself the expense and just keep renewing any existing agreement you may have now.

[5] Some vendors interpret a signed agreement as a binding contract and view purchasing supplies from other vendors as a breach of contract.  Lawsuits can and have been the result.  If you are going to contract, hire an attorney before you sign!

How can LPS help?

 

The first question we will answer is if contracting is the right strategy for you?  If the answer is yes, then on a consulting basis, LPS can help you formulate your RFP and evaluate the responses as an expert adviser.

 

For many of our clients, a better strategy is simply to negotiate a pricing agreement with the primary vendor but skipping the costly and time consuming step of pretending that it is a true bid with the low bidder getting a contract.  In these negotiations, LPS can provide you with expert advice during the negotiations yielding you a far more favorable agreement than you could negotiate independently.

 

The Result - Maximized Vendor Consolidation

 

LPS believes that vendor consolidation is one of the best, most cost-effective strategies to lower your total cost of acquisition, if it is done correctly.  Contracting with a single vendor and shutting out competitors is like running a race with a quality running shoe on only one foot.

 

LPS offers the ultimate in vendor consolidation.  One P.O. from you -> Any number of vendors or supplier.  And better yet, one invoice for you to cut one check and pay.

 

This paradigm puts the running shoes on BOTH your feet again.

 

The Group Purchasing Paradigm

 

Group purchasing is the predominant method used in the hospital laboratory environment since the 1970’s.  This “classical” model of group purchasing only works if you have nearly 100% compliance by all labs who participate.  There are stiff financial penalties for labs that do not.  But it does yield lower prices and stimulates competition – worthy goals.

 

In the Research / Industrial and the state government market sectors certain organizations have negotiated with vendors to provide discounted pricing and terms to members of their organization.  But compliance is completely optional.

 

The problem with this model is that, with few exceptions, laboratories concentrate their spend on different categories of products making it nearly impossible to individually price the items labs spend the most money on (the Pareto principal otherwise known as the 80/20 rule.)  All encompassing contracts like these yield only mediocre pricing, often with prices that can be changed at any time and with terms that most people could beat with only a little negotiation.

 

In practice, most people who sign on to these agreements do so out of loyalty to the organization or simply because it is a free benefit which might apply to a currently used vendor.

 

 How can LPS help?

 

Every client that utilizes LPS adds to our overall purchasing volume and therefore to our ability to leverage better pricing with existing vendors or to add new vendors.  Since LPS sells the majority of its products directly from the manufacturer to the end user, we drastically reduce the huge markups the big distributors must add due to their overhead.  In practice, LPS functions as a virtual GPO (Group Purchasing Organization) for our clients.

 

With each new client, our vendor list increases and so does our knowledge of negotiated prices.  LPS uses this knowledge to benefit our entire client portfolio.

 

The Result – Group Purchasing Benefits without GPO costs.

 

Group Purchasing is a very effective way to control and reduce costs.  LPS provides its clients with most of the benefits of Group Purchasing, but without expensive membership or contract access fees.

 

The Open Competition Paradigm

 

If a poll were conducted on how to get the best price on a given item, the vast majority would say “open it up to competition!”  Get multiple vendors to compete with each other (sometimes in real-time such as in reverse auctions) and it’s well documented that you WILL get the lowest price.  But at what cost?

 

Putting a $100 item out for bid is intuitively prohibitively expensive.  In general, nobody would dispute that putting out a $10,000 item was worth the effort.   In our experience, the lab with an open competition paradigm typically enjoys very low pricing obtained at a very high cost.  In most cases, it is obvious that if the time spent on the phone negotiating with vendors, on the computer searching for bargains on online auction sites could be far better spent if focused on producing lab results or at least, reducing the number of purchase orders issued!  And the added cost of all these additional P.O.’s further negates the savings.

 

How can LPS help?

 

Competition is the best way to lower the cost of an item, what if your lab could afford to dedicate a team of people to continually monitor what you buy, keep an eye out for a vendor willing to supply the item at a lower price or with better terms?  What would your prices be?

 

Now imagine if this team did all of this work for you at no cost to you.  You just sit back, decide if they made a good choice and enjoy the savings.

 

Nothing is free, of course.  How does LPS get paid?  LPS negotiates a lower cost so that every time we make a recommendation, it is a win-win.  You get lower prices, LPS earns a small profit margin on the item.  In other words, if we can’t save you money, we don’t get paid!

 

The Result – Continual savings

 

The beauty of the LPS model is that we have the incentive to keep looking on your behalf.  We are never satisfied with the results!  And best of all, with each lower price or additional vendor, your cost per PO is not impacted.  You issue one PO and get one invoice.