The 3rd in an eight part series titled “The View from the Other Side”

 

The pareto principle  (the 80/20 rule) - nearly always applies to your spending.  You spend 80% of your money on 20% of the items you buy. As crazy as it sounds, it’s true!

 

What’s also mysterious is that so few people know:

 

     -   What items they spend the most money on.

     -  The number of items they routinely purchase (not including one-time purchases.)

     -  The items they should put on a hot list vs. the ones they should not.

 

In most labs who spend less than $200,000 per year on lab supplies, item lists that hardly ever exceed 250 items purchased repeatedly.  A more typical amount for smaller labs is 100.

 

The Hot List Basics

 

A hot list item is one SKU.  An SKU is one item in one unit of measure.  A single item that is sold by the EA, PK & CS added to a hot list in all three units of measure would occupy three available slots.

 

This is important because the distributor wants to restrict the number of slots available.  Why? Because these are going to have the slimmest profit margins and any item that is priced individually bypasses the GGM rule.  Not good for them. Good for you.

 

Another enticement distributors offer on hot list items is annual price caps.  The typical number mentioned is 3.5%.

 

Selecting Items for Your Hot List

 

Here are some suggestions:

 

  • If you don’t have a complete listing of what you buy, how often you bought it and what you spend on it (most people don’t,) then INSIST that your supplier provide it to you.  They have the data. They really don’t want you to have it so you might have to twist their arms.

  • If you tell the distributor that you want P/N X on the hot list but you don’t specify the UOM, they will add it in EVERY available UOM.  It takes up more slots that way.

  • If you’ve been buying items from the vendor under an existing agreement and that item is routinely being priced by the GGM rule, add this to the hot list to prevent that from happening.

  • You should be in control of what goes on the hot list!  Do not rely on the vendor to choose these items for you.

  • Do not put even expensive one-time-buy items on your hot list unless you have a lot of spare slots available.

 

Price Caps Revealed

 

A hot list item that is capped at 3.5% sounds like that if there was no price increase on this item, that the price would be the same next year.  The cap ONLY applies if the price goes up more than 3.5% per year. But this is not how your distributor interprets this - not by a long shot!

 

The distributor has the right, year-after-year, to increase the price of this item by 3.5% regardless of what the manufacturer charges them.  It’s how they profitize the agreement. (More on this in Post #7.)

 

So what can you do about this?  About the ONLY thing you can do is to resolve this in the language of the agreement before you sign it.  If you are signing onto a group agreement like Bio/Biocom, you have only one option: Ask the item be taken off the hot list if the normal discount yields a lower price on the item.

 


 

What we will discuss in this series:

  1. 1.) Contract Terminology 101 - what are the components and what do they mean to you?
  2. 2.) Contact vs. Agreement - What’s the difference?  Do you have the right to shop elsewhere?  What about a “generic” or group contract?
  3. 3.) The Hot List and Price Caps - The pros and cons.
  4. 4.) Guaranteed Cost Savings - Hard vs. soft cost savings.  Metrics. Penalty clauses.
  5. 5.) Cost Plus Pricing - Depends a lot on how you define “cost.”
  6. 6.) Rebates and Prebates - Sound too good to be true?  Most likely it is.
  7. 7.) Profitization - How it’s done and how you can protect against it.
  8. 8.) LPS On Your Side - The LPS approach.  How it addresses these issues and is a better fit for many lab