Defining the Buying Channel
What is a buying channel? A buying or purchasing channel is the process buyers use to request, purchase, approve, receive, and pay for goods and services. Buying channels provide an important set of rules and procedures that govern how goods and services are obtained by an organization. Without rules and governance, buyers will find the least path of resistance to fulfilling requests from customers, and in most cases these actions reduce contract compliance and utilization that drives an organization’s ability to negotiate future contracts to get lower or more competitive pricing agreements. It can also adversely effect contract terms and conditions that provide rebates and tiered pricing adjustments that are typically based on purchase volume or market share for a given commodity. Suppliers and manufacturers add these terms and conditions to incentivize buyers to direct purchasing to their goods and services and offer their customers opportunities to get rewarded for their loyalty adherence to a contract and its terms.
Although this sounds like a simple concept and a great way to drive compliance and help standardize on specific items and services; the execution, tracking, and maintenance of these agreements is usually left to already stretched and understaffed supply chain teams and outdated legacy systems that do not have the capability to manage and track the results of spending against a specific contract. This results in a reliance on the supplier to report back rebate results or pricing tier adjustments.
In this article we will explore some techniques to overcome this challenge and look at how the buy side of the equation can use modernized systems and processes to gain valuable insight into their buying habits and flip the advantage so they can benefit from the terms and conditions they agreed to with the supplier.
Buying Channels: Buyer Beware
The buying channel is critical to this process and when it is controlled and monitored on a regular basis the results can quickly change the advantage to the buy side. However, if it is not a controlled process and is not routinely evaluated, it can produce the wrong results and even cost the organization a lot of opportunities for savings and cost reductions. An example will make it simple to understand and highlight how important is and why it impacts the outcome of so many metrics…
A buyer at a hospital system needs to procure several items for an upcoming surgical procedure. The system they use to procure these items does not have a modern user experience and is rarely updated to show the most current price for the items. Without knowing if the items are on contract or updated, the buyer logs in to the system and starts a requisition. When they search for the items, no results show in the system. At this point the buyer is unaware that the sourcing team has negotiated a new contract for the surgical items needed for the procedure, and as a result they search the internet for the items from the previous vendor and find the items on their website. To expedite the ordering process the buyer calls or emails the supplier representative they have worked with in the past and asks to place an order for the items, who acknowledges the request and assists the buyer with the order. The payment can happen in several ways but in this use case the buyer utilizes a purchase card (p-card) to pay for the items directly on the site or through a conversation with the supplier representative. The buyer has fulfilled their customer request and the items arrive on time for the procedure. Sounds like mission accomplished, but if we break this process down there are some steps that could have been avoided if the right system and process was in place to guide the buyer to the right item, at the right price, from the right supplier, in real time.
One of the problems with this example, and more than likely noncompliant transaction, is covered in a recent article I wrote, Acquisition Modernization: Why Operationalizing the Contract Builds and Transforms Healthcare's Supply Chain, that discusses the importance of getting the new contract line-items into the front end purchasing system when a new agreement is signed, especially when a new supplier is selected with new part numbers and prices. And if it is a modernized purchasing system, it should be able to translate an old part number to the new functionally equivalent item, so the buyer does not have to use a traditionally noncompliant buying channel to get the items. Replacements should be easily identified and simple to select in the purchasing system. P-cards serve a purpose and should be used sparingly and for specific commodities and services, but they cannot be the de facto standard in the purchasing process. Acquisition teams work hard to source items and negotiate contracts and that effort must include the last mile of getting the items in front of the teams who buy off the contract. When it breaks down and steps are missed or skipped the buyer is left to ‘figure it out.’ And keep in mind that the buyer’s job is to get the right items on time and in the right quantities to support their customer. The price of those items should not be something they have to validate because that work is done by the acquisition team during the negotiation.
The purchasing system and policy should enforce the most compliant buying channel by not only making it easy to do the right thing every time but also show the most up to date pricing on the items available to the buyer. This concept is vital and is dependent on the system's ability to maintain the correct price and supplier information so the buyer can quickly find the right item, add it to a requisition, and most importantly feel confident that the items will arrive in a timely manner and provide feedback when there is a backorder or other supply chain issue. And as we have seen with some of the recent supply chain challenges, this cannot be overstated. If the system is not reliable, the buyer will lose confidence and shift to a buying channel that gets them what they need regardless of the financial impact to the organization. And those impacts can have a major effect on the organization’s budgets and cost savings goals and objectives.
The Modern Buying Channel
Another area to focus on is the purchasing platform used to find contract line-items, create requisitions, and process purchase orders. In many areas of government, the systems used to complete these simple tasks are not only outdated but also lack the user experience we are all accustomed to when we buy products online using business to consumer platforms. These platforms are simple to use, require very little training, and have features and functions that make it easy to find the right item and purchase it with minimal friction.
In another recent article, Supply Chain Efficiency and Modernization Starts with Great User Experience, I discuss how a great user experience that has been designed using best practices and procedures can drive contract compliance and utilization in the purchasing process. When the system is easy to learn, simple to navigate, has the proper contract line-item information that is enriched with images and item attributes, and contains clean standardized data and up to date pricing, buyers will use it regularly which promotes efficient and compliant purchases. The bottom line is that you cannot say you have modernized your supply chain when the supply chain system is over 20 years old. Most large government contractors understand this and have updated their ecommerce platforms to maximize sales and general usage. However, they too struggle at times to keep prices up to date with the agreements they have with their customers. I believe this further re-enforces the point to rely on the contract and line-item pricing to ensure the purchase is per the agreement and not what the supplier publishes on their site. ‘Trust but verify’ is a concept that has never been more applicable than it is now due to the all-time high list of supply chain challenges.
GPC Buying Channels
The Government Purchase Card (GPC) program has strict rules and regulations that govern how and when a GPC is authorized for use to make a purchase. And in most cases, they are used effectively by government buyers, however; when they are used for transactions that should start on a purchase order and end with an electronic invoice and automated payment process, the risk for off contract spend increases. It is also important to note that GPC spend is analyzed and audited closely to ensure their use is within the guidelines of the regulation, however; even though the item may have been purchased off a valid government contract does not always indicate the purchase is compliant to the right contract. Large government organizations negotiate contract pricing using several different data points. One of those data points is how much volume the agency can commit to spending with the supplier for a given commodity or service during the life of the agreement. And it is those volumes that help drive the pricing of the line-items on the contract. There are other factors that contribute to the pricing discussions, but volume commitments are typically part of the negotiation process and can directly affect the pricing.
When a purchase is made using a non-preferred contract, the impact is to the volume the parties agreed to and can adversely affect the pricing on the contract when it is time to renegotiate it. These enterprise level contracts should be the preferred contract and continuously measured to ensure the terms and conditions are being met not only by the supplier but also by the agency. They often include tier pricing conditions that incentivize the buying organization to reach predetermined volume thresholds to realize more cost savings with lower tiered pricing on all or just specific contract line-items. And with the amount of spend a large government agency can put against a contract, these savings can be significant. Putting the most preferred contracts in front of the buyers can help get to these savings opportunities faster and more efficiently.
Buying Channel Compliance
Compliance to a contract must be enforced and managed using a controlled buying channel that is simple to navigate, offers the ability to interact with the preferred contracted content, and provides the confidence that it will deliver on the promise made by the supply chain team and system administrators. Buyers inherently want to do the right thing, but their customer is the priority and when they need to buy something to meet the customers’ needs, and specifically in healthcare where their decision can mean life or death, it must be reliable and instill confidence in the buyer. When it does not meet those objectives, buyers will look to other channels to accomplish their mission and those decisions can negatively affect opportunities for savings, cost reductions, and impact future contract negotiations. Engage the buyer community and discuss how they can help reduce the friction in the buying process and ask for their feedback on how it can improve. Buyers should always be part of the process to modernize supply chain because they are the ones who must implement the policy that keeps supplies in stock and ready for use. Analyzing spend to determine which buying channel was used is critical to understanding what buyers are doing and how you can redirect their actions to a more controlled channel. Ask tough questions and be prepared to redirect buyers when the spend goes in the wrong direction, it is never too late to educate, coach, and train a buyer to do the right thing.
About the Author
Ted Dagnal is the Vice President of Government Strategy at Prodigo Solutions responsible for all public sector initiatives and programs. Ted has been shaping supply chain best practices in the commercial healthcare industry for more than 20 years, working with some of the largest health and research systems in the country. He is passionate about bringing industry lessons learned, as well as more than 20 years of leadership service as a former US Army officer, to actively help government clients transform and secure their supply chains and data in a federal environment.
Ted is leading the effort to rationalize the Supply Chain Master Catalog for the Department of Veterans Affairs to improve their data quality, enrich item attribute information, and improve contract utilization. He also led the FedRAMP authorization and ATO approval process for Prodigo’s Marketplace platform at VA.
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