A Tale of Two Companies
Large businesses were early adopters of procurement services but it is still a foreign term to many smaller businesses. IBM even formed a business unit which is heavily utilized by large businesses around the world for indirect procurement. While IBM deals with a wide range of “back office” procurement tasks, a more accurate term to describe what LPS does was coined by the U.K. procurement consulting firm GEP who in their July 26, 2016 post titled “Developing a Sourcing Strategy for Lab Consumables” uses this description:
“...organizations have an opportunity for cost savings in shifting from a preferred supplier model to an aggregator model. In an aggregator model, a preferred vendor acts as an intermediary or channel partner between the buyer and the local suppliers of products they don’t supply.”
This blog post discusses how smaller companies can utilize procurement services to save money and make better utilization of their available resources.
Two manufacturing businesses will be compared. Company A buys lab supplies in the traditional way. Company B buys lab supplies with the help of a Procurement Services organization.
In this example, we will explore how the two companies do two routine procurement tasks:
1. Routine weekly order. They need seven different items this week that source from three different vendors. One of these items is needed urgently but is on backorder for 3 weeks. A second item on the order is a burette that comes in broken in the package and a replacement is urgently needed.
2. Capital equipment order. The lab has budgeted for a new centrifuge. They have $6,000 in the budget and would like to purchase the unit soon to help with workflow.
This company's purchasing department places all the orders. The bench techs tell the lab manager what they need, and the lab manager submits a requisition to purchasing. Purchasing has purchased all but one of these items before and the items are set up in their purchasing system. The last item was specified to come from a global distributor “F” by the lab. However most of the company’s business is done through another global distributor “A”. “F” does not have a rep calling on them.
Purchasing does not place orders on the vendor’s web sites. Their system faxes an order to the vendor. For items already in the system, this works well. But for new items, a whole new more complex workflow is required:
1. Sourcing - Procurement looks on the recommended vendor’s web site for the item. Assuming the company has an account with the vendor (“F”), the order is placed using the price from the web site. If the item is particularly expensive (e.g., >$1,000), then they contact the primary vendor, give them the part number and see if they can cross reference it to one of their items. If so, and it is less expensive, they go back to the lab manager for approval before ordering.
2. Dealing with a backorder – One of the items ordered from “A” is on backorder. The only way to know this is by looking on the order acknowledgement. Purchasing is far too busy to do this and relies on the lab manager to spot these by having them copied on the order acknowledgement. The lab manager is often too busy to review and most often discovers that a backorder exists by looking at the packing slip. Once it is discovered, it is the job of procurement to reach out to the vendor (“A”) and expedite the item if possible. If this is not possible, then “A” may recommend an alternative they feel would do the job. Purchasing communicates this to the lab who determines if it will work. If not, then the process is either repeated or the task to find a substitute is delegated to the lab manager who must look on other vendors websites for something that will work. Finally it’s the job of purchasing once this is all sorted out to generate another purchase order. to a new vendor, cancel the item on the “A” purchase order, and place the order with the alternate vendor.
3. Dealing with a damaged shipment – Items broken in shipment under $100 are typically replaced by major vendors upon request. However, this burette was $250 and this is a problem. Was the burette broken by the carrier (UPS) or was it mishandled once it was received? Was the package inspected upon arrival? Was there damage to the outside of the box? Was the bill of lading signed indicating the damage? Has your account experienced a lot of damaged shipments? (Vendors track how many damaged shipments customers claim!) All of these questions/answers must be dealt with by someone and this generally falls on the purchasing person.
Capital Equipment Order
The lab manager does an online investigation of options. He chooses the one he likes and contacts the company to find out what options he will need he works with the technical support department and they develop a quote.
This quote is received and sent to purchasing. Purchasing then prepares a formal RFQ document and sends this out to Distributor “A” and “F” as well as any other vendor selling the unit that can be found online.
Bids are returned, compiled by purchasing, and sent to the lab manager for evaluation. If the lab manager does not select the low bidder, then a justification letter must be written. The item goes to a capital purchase committee where it is approved and sent back to procurement to be ordered.
This company utilizes a channel partner / aggregator (LPS) so purchasing resources can be focused entirely on buying raw materials. The responsibility for ordering lab supplies has been delegated to the lab manager.
1. Sourcing - The lab manager logs onto www.labproservices.com where all of the items used in the lab are already sourced. These items are added to the shopping cart. A purchase order is assigned and the order is placed. The aggregator (LPS) sends a single order confirmation and places the orders with the three different vendors.
2. Dealing with a backorder - LPS checks the order confirmations and sees the backorder. Other vendors are contacted for availability. If the item is identical and the price is not impacted, the lab manager may never realize the backorder happened! If no other vendor has stock, a potential replacement is identified and the lab manager is notified and asked for approval to substitute.
3. Dealing with a broken items - The lab manager discovers the buret is broken. She photographs it with her cell phone and emails the image to LPS. LPS handles all dealings with the supplier and shippers and a new buret is provided with little or no further involvement from the lab.
Capital Equipment Order
The lab manager contacts LPS to discusses their equipment needs and the application. He has been online and has seen a preferred unit. He tells LPS that he would like to look at cost saving alternatives.
LPS returns with the various options and approximate costs. The lab manager specifies which unit(s) he would like to see pricing and delivery. LPS negotiates pricing and terms with the vendors and provides a final quote. The lab manager shows the various options offered and once he has decided on the best, obtains approval from management to purchase then places the order on the LPS website just like any other item.
Today we rely on Uber to bring us our meals, Kroger to pull our groceries off the shelf, and have our accountants do our bookkeeping. Concierge services at hotels make our reservations! Larger companies have for many years placed an emphasis on reducing the cost of acquisition by using experts.
Does the scenario describing Company A sound similar to your company? If so, we invite you to see how easy it would be for your company to be more like Company B. It’s not just about the reduced stress levels; you will save a ton of money too!