By John Strong
Manufacturers express their opinions
With more than 18 years experience running national group purchasing organizations, I’ve come to believe that there are three basic factors that drive value in a group for its members and contracted suppliers. And I believe these basic factors hold true for $50 billion national GPOs or $50 million purchasing coalitions with members in one particular area of the country. The three basic factors, in order of importance, are:
- Compliance, that is, the willingness of members of the group to use the contracts that the GPO has created, whether at the national or regional level.
- Winning contracting strategies – the use of a sole or perhaps a dual-source contract that allows room for a supplier to gain significant amounts of new volume. Extensive use of multisource contracts that include all major suppliers sets up a scenario whereby there is little room for a supplier to gain business, in exchange for significant discounts.
- Product volume: The fact is, you still need enough volume to interest a supplier in your business.
Other factors may be involved, such as the prestige of a key member or members of a group, or personal relationships that sometimes lead to contracts. But these factors often work in concert when a supplier is evaluating the performance of a regional purchasing group (RPG), or the value of having a contract with a particular group.
There are all sorts of purchasing coalitions and regional GPOs in the market today. They say they offer a number of advantages over a national buying group, including:
- Their smaller size makes it easier to drive compliance.
- They can be closer to their end customer, better understand their needs, and have a face-to-face relationship with them, regardless of their size or location.
- They provide enhanced services, which can be provided at a local level.
- They offer more nimbleness and flexibility in a rapidly changing healthcare market.
But in supply chain management, it’s generally true that the fewer the “touch points” or people or places through which transactions need to pass, the more efficient the process. Adding a regional purchasing coalition to the mix would seem to add another touch point, and add costs to the process. Hence my question: “Do they add value or drive cost in the supply chain?”
Preoccupied with price?
Many suppliers believe that some of these groups have only one thing on their mind: price. In the supplier’s view, getting at the best possible price takes collaboration and cooperation by both the buyer and the seller.
For this article, I conducted some non-scientific research with a dozen senior-level national accounts executives (vice presidents and senior vice presidents) from leading manufacturers of products ranging from basic medical commodity items to capital equipment. I provided a definition of a “regional purchasing group,” and I asked just two questions.
Here’s the definition I provided for a regional purchasing group: “A group of healthcare providers who have come together for the purpose of collectively buying (group purchasing). They may be affiliated with a national GPO or be completely independent. RPGs may perform other services, but for the purposes of the survey, the focus is only on their GPO activities.”
Here are the questions I asked:
Question 1: “Do you believe that RPGs add more cost to doing business for suppliers than the benefits you receive back from dealing with them?”
Question 2: “Do you think that contracting with an RPG increases the likelihood of more sales, than having strictly national GPO contracts?”
In response to Question No. 1, eight of the national accounts executives answered “yes” and four answered “no.” Among the yeses were two executives who indicated that their companies proactively examine and review the ability of RPGs and purchasing coalitions to deliver compliance and volume in return for the lower prices offered. There was no question in their mind that they were incurring added costs, but they were also seeing value from some RPGs through increased contract utilization and sales volume gains. Two others generally believed that they were not covering the increased costs of dealing with RPGs through increased sales.
Question No. 2 yielded a unanimous “yes” from all 12 respondents. These executives definitely see value in dealing with certain RPGs. Several commented that they are selective in terms of whom they deal with, citing a universe of more than 100 RPGs; but each had fewer than 10 RPG contracts. The most important factor used in judging purchasing coalitions and the value of contracting with them? The commitment and compliance of the members. Clearly, without commitment, RPGs are viewed the same way as a national GPO; nor are they given the best possible pricing and terms until they prove they can perform.
Suppliers for decades have analyzed national GPOs and the ability of their members to commit to contracts. Several respondents cited the significant added cost associated with performing the same type of analysis on RPGs. In fact, two mentioned using a standardized review of factors before they will sign a contract with an RPG.
Some RPGs drive value, say suppliers
Perhaps it’s not surprising that suppliers work with some RPGs, but not others. Several of the respondents indicated that some RPGs have delivered what national GPOs sometimes struggle with: compliance. Beyond compliance, they note that the smaller size of the RPGs makes working together easier. Even so, RPGs still need to deliver on their promises, according to the executives. There is clear sentiment that many are not.
That’s not all, however. Some RPGs have limited their contracted suppliers to just one or two. This concentration of volume provides suppliers with an incentive to provide more attractive contract value; they have more to gain than they would if they had to compete with five or six suppliers at the national level (essentially giving RPG members a hunting license).
One executive who responded to the survey made a key point. He indicated that some RPGs are set up to “churn (product) categories for a better acquisition price.” He went on to add that at the same time, these groups have little or no interest in understanding the true impact of the products they are using, or what those products cost in use. It’s a shame, because this is classic value analysis, which could be more easily done at the RPG level than at the national level, and involve key suppliers.
Suppliers are willing to evaluate the costs and benefits of dealing with RPGs because of the potential of eventually increasing their sales. If the trend toward more RPGs continues, perhaps the next question should be, “When are those additional costs suppliers are incurring because of a longer supply chain going to show up on your supply bill?”
John Strong is a former healthcare provider supply chain leader and group purchasing executive who operates his own consulting practice. In addition, he is an adjunct instructor of purchasing and supply chain management at the Sheldon B. Lubar School of Business at the University of Wisconsin—Milwaukee. He can be reached at firstname.lastname@example.org.
What are suppliers saying
Suppliers have issues with at least some of the RPGs that have approached them.
Consider these comments:
- “They (RPGs) send out repetitive RFPs, requesting additional value above the national agreements, requiring increased internal resources to respond. I find that they currently add more cost vs. benefit in general.”
- “[All of these RPGs are saying] the same thing: give me a better price.”
- “The typical RPG…and [its] inability to focus on anything other than price is not a particularly interesting value to us.”
- To re-negotiate what has already been negotiated at the national level is adding redundancy and no real value.”
- “Our SG&A costs have gone up dramatically in response to the current contracting model.”
- “[T]he national agreements are becoming less and less valuable.”