The power of procurement

Procurement was once an art that has evolved into a science over the last 20 years! Back in the 1980s negotiation for services and products was often a question of experience and feel. Personal relationships played a large part in how deals were done. Needless to say, at the time, created a very uneven playing field in terms of quality of outcome.

In clinical medicine, a new philosophy was making itself felt. This was encapsulated in the words evidence based. Of course, medicine had been evidence based in terms of science for many decades. The term has now expanded to include, by definition aspects of health economics.

Nowhere was this more keenly felt than in the pharmaceutical industry. Health economic modelling became as important as good clinical trial results in order to market medicines. And the marketing of pharmaceutical products started to shift from being brand led to being argument led.

Proving that goods provide value to customers

Marketers in the healthcare products industry asked themselves how they could prove that goods provided value to their customers. This began a process of hard self-examination of everything that comprised the creation of the finished product. From raw materials, processes, to packaging and distribution. This was not only an internal exercise. The industry turned the same spotlight on external suppliers. They also had to prove that they were providing value as part of the finished product.

A new class of corporate warriors sprang up! This warrior was known as the procurement manager. Their role was to ensure compliance with evidence-based proof of quality assurance regimes in all the industries associated with healthcare. The role of the marketer changed from just having to answer to their bosses on sales of their products. Now they also had to answer to  parallel regulatory departments about how those products were marketed. They also had to prove to another parallel department that their budget spend was evidence-based.

Suddenly, after about 1996, the word procurement was all over health care. It spread like wildfire from the various industries, like the pharmaceutical and devices industries, into the public sector.

What is procurement? 

According to the business dictionary it is:

“The act of obtaining or buying goods and services. The process includes preparation and processing of a demand as well as the end receipt and approval of payment.”

The processes listed in this definition involve:

  1. Purchase planning
  2. Standards determination
  3. Specifications development
  4. Supplier research and selection
  5. Value analysis
  6. Financing
  7. Price negotiation
  8. Making the purchase
  9. Supply contract administration
  10. Inventory control and stores
  11. Disposals and other related functions

The dictionary also states:

“The process of procurement is often part of a company’s strategy. Because the ability to purchase certain materials will determine if operations will continue.”

I could probably write a book on each of these aspects of purchasing! The key point that turned the old purchasing clerk into the procurement manager is Number 5: value analysis.

How do you prove value?

This is not a philosophical question to a procurement professional. But it does require careful thought and application because for every purchasing decision, there is an appropriate algorithm.

The algorithm input is based on the purchasing decision. And the algorithm output is the product you might feasibly expect get if you make that decision.

So, say you have to choose between buying A, B and C. Each of which does the same job as a reagent, and each of which has a different price. Apart from that there could be differences in shelf life, formulation characteristics, bulk-buy discounts and storage issues. Each of those relevant parameters needs to be accommodated and expressed in the algorithm. In the final analysis you are able to compare like with like.

This does not mean to say that there will not be other differences between A, B and C that are not accommodated by the algorithm. But it means that these other differences, such as free delivery, emergency delivery service and guarantees can be de-bundled. The aspects of A, B and C can now be compared as commodities. They can then be allocated an added value quotient. If product A doesn’t exceed product B in the original algorithm, it may exceed when its added value quotient is included.

Algorithms and rate cards

The same thing applies with services. However, with services the concept of rate cards comes into play. Across any industry there are standard industry rates for certain services. These are based on skill level and experience of the person providing the service. For instance, there is a standard rate for certain types of locum nurses and another rate for embryologists. However, in most industries there are bulk buy discounts on rate cards. You would not expect to pay the standard daily rate on a 12-month contract.

A skilled procurement manager will be adept at:

  • Creating and manipulating appropriate algorithms in order to compare value across similar goods purchases
  • Masking use of, and sometimes constructing, appropriate rate cards for benchmarking purchasing of human services
  • Negotiating prices for both goods and human services

Procurement solutions for complex services and products – the Request for Proposal (RFP)

When the requirement is a combination goods and services over a period of time, an experienced procurement manager would apply project management to the purchasing decision. For example, is when you need to investment in expensive equipment to meet the needs of the business.

In this case you could simply apply your tailored algorithm. This can include aspects of rate card negotiation for where human services such as servicing and maintenance are required. You could also make provision for added value by asking the potential vendors for their best offer. Theoretically, you could come to a decision with no need for anything other than interaction with the vendors.

But could you guarantee value for money by taking this route?

A better idea might be the to send out an RFP to a selection of vendors so you can leverage their collective knowledge and experience to come up with the best solution.

What kind of instructions might the RFP contain?

Apart from an outline of the requirements of the clinic, the RFP might contain:

Algorithm questionnaire

A fixed questionnaire for the purposes of the cost algorithm that is being applied, essentially a spreadsheet where numbers are entered by the vendors. This might be equipment/component costs with, perhaps scaled to the number of units of such or time period.

Rate card questionnaire

Relating to any rate cards that might be applied for the purposes of ascertaining labour costs over the period of use of the equipment.

Fitness to provide questionnaire

Increasingly businesses require vendors to be certified in various aspects of the service and products they provide. For instance, trade memberships, licences and insurances. Increasingly aspects like sustainability, commitment to environmental and social concerns are also playing a part in this aspect of RFPs

Confidentiality and contractual aspects

Acknowledgement from both parties that they are entering a into a two-way process where information important to both parties will be exchanged.

The vendors are asked to complete the questionnaires and then provide their proposals to meet the needs of the business. This allows the vendors to come up with solutions that may not have been considered when the RFP was issued. It also gives vendors the opportunity to add value according to the added-value quotient mentioned above.

An RFP process might include 7 vendors, of whom 5 might submit written responses to the RFP. There are often valid reasons why a vendor might decline to take part. Then 3 vendors are invited to meet the procurement manager and other team members to discuss their proposals in more detail. Following this process, a winner can be selected.

The advantages of this approach are multi-fold

  • Leverage the collective experience, skills and knowledge of the vendors
  • Build working relationships in advance of delivery
  • Ensure that vendor proposals focus above and beyond core value
  • Provide many facets on which to negotiate (three questionnaires plus the added value proposal)
  • Provides empirical evidence that the chosen proposal is of high value.

BUT the downside of an RFP approach is that it needs planning and it takes time to evaluate the proposals. Not only that but the process of evaluation requires more eyes than just the procurement manager. And it is usually the procurement manager that manages the evaluation process. For these reasons the RFP approach is best utilised only for more complex, larger-spend purchasing projects.

Evidence-based purchasing is what procurement is all about and it is here to stay. It will be a hallmark of healthcare provision and future generations will wonder how we ever got along without it!

Neil Madden, Editor

The Fertility Hub