Buying Lab Supplies in the Manufacturing Sector
Executive Summary
Are you a lab manager in a QC lab in a manufacturing plant that is responsible for purchasing your lab supplies? Then this blog will be of particular interest to you. Topics covered in this blog include:
1 - Direct vs. Indirect Procurement
2 - Strategies manufacturers use to reduce indirect procurement costs.
3 - The impact of decentralized procurement at the department level.
4 - How using a 3rd party procurement company can help lab managers stay within
their budgets and free up time without increasing head count.
Direct vs. Indirect Procurement
Direct procurement is defined as the purchase of materials that are used in the production of the product being produced. I.e., the raw materials. Indirect procurement is the purchase of goods and service that do not go into the product being produced. Examples include office supplies, janitorial supplies, MRO, safety and lab supplies.
It’s easy to picture that the amount of money spent on raw materials is many times the amount spent on things like pencils, pens, floor wax and the materials necessary to run a lab. It pays to invest in purchasing talent with special expertise in the products and markets where raw materials are obtained, but often investing in even a single procurement specialist that is versed in buying lab supplies just can’t be justified.
How do Manufacturers Deal with Indirect Procurement?
Some commodities have enough spend to warrant a contract. Contracts typically are awarded for five or more years. The concept here is that procurement can do a “one time” action then instruct anyone buying that commodity to purchase for the contract supplier.
The contracting process (typically referred to as a Request for Proposals or RFP) should only be done if there is enough volume to ensure that suppliers will respond with anything significantly better than they offer to customers who purchase without a contract.
RFP’s for indirect spend is being used far less today than in previous years. There are several reasons for this trend:
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1 - Amazon.com and other web sellers often have better prices and shipping terms than an RFP would yield.
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2 - RFP’s freeze out competition and they restrict the end users to a portfolio of products that over the course of 5 – 7 years may not offer the products and services that other sellers provide.
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3 - RFP’s mean that the procurement team is still going to have to devote resources to any contract awarded leaving them short of their goal of spending full resources on direct procurement.
Indirect Procurement at the Department Level
Another popular option is to turn over complete control and responsibility to the department ordering the item. The idea here is to give the department both a credit card, a budget and the authority to buy what they need to get the job done. This achieves the goal of freeing up procurement time. But there are several potential problems with this strategy that keep c-level executives and procurement managers awake at night:
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Is the department getting the best value for the dollars they spend? If the department devotes too much time to finding the best price on an item, then this is hurting productivity. If the department just buys things from the vendors they have always done business with, how will they ever know if they are paying a fair price or if something better may be out there?
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Is this strategy increasing my Procure-to-Pay costs? There is no getting around the fact that the vendor must be paid, and the transaction must be properly entered into the accounting system. The vendor is either paid with a check or with a credit card. Many companies prefer to pay with a check to avoid the “loss of control” that can happen with pCards. This includes fraud, personal buying, buying from vendors with rewards that revert to the buyer rather than the company, getting receipts and the reconciliation process done monthly, maverick spend, etc. Even though many credit card companies offer cash-back options to companies, the more conservative and traditional approach in setting up vendors, establishing credit and paying on a net 30 basis is still a popular option. Each time a new vendor is established, significant resources are required. Departments are seldom sensitive to or even aware of the costs they add to the company through “undisciplined” procurement.
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Problem orders can be extremely costly to the organization. Departments that are asked to do their own procurement in addition to their own tasks often end up in “trouble” if for no other reason than being human. Procrastination is one example. We all tend to wait until we run out of something before we think to order it. Next-day-air shipments multiply and the costs for these shipments are breathtaking. A bigger problem arises from mistake
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- The vendor picked and shipped the wrong item.
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- The person ordering the item ordered the wrong item.
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- The item the end user needs is out of stock (backordered).
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- The item arrived broken or damaged
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- The item is billed at the wrong place and/or with incorrect ancillary charges (e.g. fual surcharges)
When these things happen, the worst case is that the lab can’t do the testing and the company can’t ship product. Situations like this, while rare, can end up costing thousands or even millions of dollars per day in lost revenue. And when this happens, c-level people ARE involved! More commonly it doesn’t result in a shut-down at the plant level rather at the department level where people must turn their full attention to problem solving instead of product testing.
How Procurement Outsourcing Saves Time and Money
How can you handle indirect procurement with the time and attention that is paid by procurement professionals but without either increasing head count, utilizing resources whose main task is direct procurement or by asking skilled laboratory managers to also be skilled procurement professionals?
Lab Manager Skills & Talents |
Procurement Skills & Talents |
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Knows which products best suits their needs. |
Knows how to deal with vendors to get the best possible value |
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Are familiar with requisitioning and processing and are computer savvy |
Are adept at the order placement process. |
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Care most about performing and generating quality lab results |
Are aware of and tasked with reducing the P2P cycle. |
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Generates cost savings through product knowledge rather than process |
Generates cost savings through process rather than product. |
Lab Manager Shortcomings |
Procurement Shortcomings |
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Does not have the time or motivation to deal with problems is orders |
Does not have the time or motivation to deal with problems in orders |
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Are unfamiliar / have little interest in reducing costs that don't directly impact their budget |
Has little knowledge about lab items, chemicals or reagents and must rely on lab managers |
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Not experts in procurement (although most will not admit to this shortcoming) |
The requisition to P.O. process lenghens the time to reciept and may intriduce errors |
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Procurment is not their main mission |
Knows little about the lab supplies market. They aren't scientists/ |
Lab Procurement Services mission is to address this problem:
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Expertise in both Procurement and Scientific Supplies. We have both lab professionals as well as procurement professionals on staff and at your disposal.
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True vendor consolidation. We purchase from any vendor. You are not restricted to the products we sell.
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Proactive sourcing. We are constantly looking for ways to save you money. If we find a potential cost savings, you are notified but nothing changes until you approve.
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Customized ordering system. You see your items and only your items from all your vendors. Click, choose the quantity, enter your P.O. number and click order. Done!
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No contracts, no commitments, and no costs to you. If you can’t save money by ordering through LPS – don’t! We make our money on the product margin on a cost-plus basis. You pay no fees for our services.
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The benefits of group purchasing without the fees and contracts. Each new client adds to our overall purchase volume and brings better pricing to every client.
Conclusion
Are you a lab manager in a manufacturing QC lab? Do you have lots of spare time on your hands to spend buying lab supplies and dealing with items broken in shipment, shipped wrong or on backorder? Do you just like to spend time shopping for better prices for your supplies and chemicals? Then no need to read any further!
However if you are a lab manager who is being pressed by management to meet cost saving objectives, stay within your budget and complete your lab work more quickly, you should contact LPS.
If you have been buying your lab supplies from the big distributors for years and years and you have no sales rep to deal with and you long for the days when someone was looking out for your interest rather than enhancing their profits, you should contact LPS.
If you are a Procurement Professional or a CFO at a manufacturing plant and you are concerned that you are getting the best value for the money spent on supplies and equipment for your lab after the decision making has been handed to the lab, you should contact LPS.
Many other companies have discovered the benefits of utilizing LPS. Once company tracked the savings and found in year one, they saved 34% vs. buying from a major distributor (case study available.)
If you love the lab and want more time to spend doing lab work, you should contact LPS.
