When I began my career with Scientific Products in the fall of 1970, I trained in
the Indianapolis sales office. My training consisted of “working the bids.” Back
then, we received dozens of bid requests daily.
Every customer used the competitive bidding process for purchases, big or small.
Today, the bidding process in the lab is rarely used, even for major purchases.
Why did people ever use competitive bidding?
To increase competition - in 1970, there were 11 major lab supply distributors in the
US. Today, only two “major” suppliers have over $1 billion in annual sales. With
eleven independent companies, all vying for business, bidding was worth the
effort - if you weren’t competitive, you had no business. With just two major
suppliers today, these companies can, and do, ignore bid requests. It’s not worth
their time to respond. If they do, it is most often to say “check the website for
your price.”
To satisfy a regulatory requirement - For many years, many states required government
entities to obtain at least three bids before they could issue a purchase order.
Many large organizations such as hospitals and municipalities adopted this
approach as standard business practice.
To ensure they were getting the most for their dollar - Competitive bidding
makes the decision of where to purchase an item relatively easy. Who offers the
best price and delivery terms? There is no dependence on which vendor rep is the
most likable, which vendor provides box seat tickets to the big game, which
vendor offers the biggest rebates. C-suite executives knew they were spending
wisely.
Why did labs stop using competitive bidding?
To increase efficiency - Bidding takes time. In a just-in-time world, the time you
must invest in creating, issuing, evaluating and awarding bids far outstrips any
potential savings, except in cases of especially large purchases or multi-year
contracts.
Lack of competition - Imagine going to an auction with two bidders in the
audience. These two bidders happened to have a common set of friends. Would
the seller really expect to get a good price? What if the two bidders, both
billionaires, were the only people invited to the auction? If you were a seller, you
would rightly feel that you chose the wrong venue.
To shift the workload to the vendor - The need to know what is a “fair” price
for an item still exists. What no longer exists is the mandate or even the desire to
do anything more than spot check. More often than not, your supplier is tasked
with doing the spot checking for you because you don’t have the time or skill to
do it yourself.
To reduce unethical behavior - “If you award the business to me, I’ll buy you a
sailboat.” I’ll pay you a “prebate” of $X if you will award the bid to my
company. All of these were commonplace during the bidding era. Not everyone
was excited to see these opportunities for personal enrichment go away. Truth be
told, it never did.
Contracting - First came group contracting. For profit companies, for a healthy
fee, aggregated many customers' spend, negotiated contracts - often through
competitive bidding - and allowed companies who subscribed to their service to
buy off these contracts. These contracts had, and still have, stiff penalties built in
to ensure compliance. In the U.S. clinical market, this is how business is done
today.
Another option is to let nonprofits, for a subscription fee, aggregate the spend.
Members who sign up can utilize the contracts. These contracts are almost never
bid and just offered up by one or both of the two big distributors as a way of
gaining many smaller customers. Their only expense is a sponsorship, so it is a
win-win for the organization and the vendor. The companies utilizing these
agreements take it on faith that the offer is a good one. Compared to the inflated
online prices, it will always look like a good deal.
Customers who buy a lot, typically in excess of $1 million per year in lab
supplies, can actually get the two major distributors interested in creating a tailormade contract just for them. Unfortunately, few fall into this category.
Has this change solved the problems that we used
to address through bidding?
Bidding did one thing very well: It ensured that you got the best price possible on
the items you spend the most money on. New vendors often were discovered
when bids were publicized. Even with “hot lists” and group contracts, nothing is
as efficient as a competitive bid to ensure you pay the least for what you spend
the most money on, because hot lists are nearly always negotiated with no
competition involved.
Bidding forced buyers to be focused at the line-item level. They knew what they
were buying and were acutely aware of what price was reasonable. Contracting
relieved buyers of this “burden.” The consolidation of power into just two
competitors allowed buyers to make an “either-or” choice of vendors.
Outsourcing the responsibility of documenting cost savings to the vendor made
things so much easier for Procurement.
Buyers issuing bids nearly always have a preferred vendor selected, and have any
number of ways to ensure the bid is awarded to the preferred vendor. The same
applies to contracting. When bids were popular, there was a better paper trail than
there is today, but little else has changed. This is the primary reason that the
briefly popular “reverse auction” process failed to catch on.
What will the procurement process look like in the
future?
Long term, I believe that the too cozy relationship with very large incumbent
suppliers will come to an end. Customers may still trust but they will verify. Lab
supply complexity will only increase, and so will the need for cost-effective
expertise to assist buyers in making informed decisions, and to ensure that
contracted suppliers are abiding by the terms of the contract or agreement.
I formed LPS for this task. LPS helps its clients to make informed, cost-saving
buying decisions every day. Contact us for more information on how we can
assist you.
