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Have You Considered Procurement Outsourcing?

Executive Summary

  • Cost savings with measurement of services levels and defined baseline costs.
  • Increasing company productivity by reassigning key personnel from procurement o impact activities.
  • Factual research and results referenced in the following article.
  • An offer from LPS to review feasibility at no initial cost – we take the investigative risk for you!

Is there a better way?

In Kate Vitasek's book Vested Outsourcing (Vitasek, 2010) she states: " No other question encapsulates the drive for continuous improvement permeating today's business environment. It is what drives people like Albert Einstein and Thomas Edison to challenge the status quo to create not just better products but also better solutions. It is what drives businesspeople to solve complex problems to meet customer needs."

"To be successful, companies have to change the lens through which they look at problems." We often hear the terms "Lean" and "Six Sigma" used. Lean is a process improvement method that stresses eliminating all activities that do not add value to a process. According to Vitasek, "Unfortunately, most organizations have applied this thinking rather narrowly, such as a manufacturing plant or warehouse. My plan was to convey Lean concepts across the entire supply chain and to make improvements in the end-to-end solution regardless of who was performing the activity. In short, my plan would pay the outsource provider to meet service levels while making the overall operations of what is being outsourced as efficient as possible."

Henry Ford once observed, "Coming together is the beginning. Keeping together is progress. Working together is success." Vitasek's golden rule is: "A company outsourcing should not win at the expense of its service provider and vice versa. The economics of the collaborative business model should be so powerful that it drives efforts to solve for an optimized, complete solution. This combines four influential business concepts of the twenty-first century: outsourcing, collaboration, innovation and measurement."

Outsourcing – What does this really mean?

The capitalist and economist Adam Smith wrote in the Wealth of Nations in 1776 that "the greatest improvement in the productive powers of labor, and the greater part of skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labor." (Smith, 1776). Vitasek comments: "The division of labor is the foundation of Smith's theories of growth and prosperity. The general concept that Smith advanced was that when workers focused on a limited number of tasks or processes, they improved their skill and production. When skilled workers divided the task of production, output was far greater than when one individual tried to perform all tasks." This observation is just as true today on the factory floor or in the laboratory.

"At its core, outsourcing can be viewed as a form of this division of labor. When tasks are given to companies that have the best skills to perform them, productivity is higher and economic resources are better utilized. The decision to outsource is fundamentally one of company structure or the setting of boundaries of what production or services the company will produce and make available to its customers." As Tom Peters says, "Do what you do best and outsource the rest." (Corbett, 2004)

As the scope of activities has expanded – especially to include offshore labor – many have come to identify outsourcing with jobs shipped overseas and rising unemployment. Even though the terms outsourcing and offshoring are at times used interchangeably, there are very important and real differences. Outsourcing involves contracting with an outside supplier, which may or may not involve moving the work offshore.

Just how popular is outsourcing? One estimate by the International Association of Outsourcing Professionals (IAOP) says the global outsourcing industry is huge, an estimated $6 trillion, based on input from its membership with more than 150,000 professionals working to manage and support outsource contracts. (Professionals, 2009)

The real costs of traditional procurement and sourcing processes in the laboratory

(Excerpts from the publication "Strategic Procurement" by Tom Russell, Lab Manager Magazine, May 2009.)

In research, the need for specific supplies often becomes apparent only as experiments evolve. Researchers and their assistants search paper catalogs and web sites, fill out purchase orders, acquire signatures for approval and wait. For the researcher who makes ad hoc purchases on urgently needed reagents, supplies and assays, the only choice often is to complete paperwork, pay extra for rush shipment and hope for on-time delivery.

For most lab managers and research procurement staff, the process rarely ends there. There are phone calls made and e-mails sent to the procurement department and suppliers to confirm contract pricing and determine when orders will arrive and if they will be on time, and calls back to researchers to confirm possible substitutions. On receipt of product, additional backtracking may be needed to determine why the wrong supply was received, followed by more research to determine if another lab has the needed supply— such as an important compound or reagent—in stock. Waste is rampant.

Enabling technologies alone have not provided the complete answer. Some labs have equipped researchers with internal purchasing tools that are supported by structure-based electronic catalogs and/or p-card purchasing capabilities, only to find that efficiencies gained in one area create increased costs and process delays in another.

Not surprisingly, most lab managers find it difficult to manage their labs' manual systems, which can be cumbersome and don't address the fast paced nature of the lab environment. Perhaps most important, these manual systems do not provide for real-time monitoring of where money is being spent and even what is being purchased.

"Considering the broad accessibility of e-procurement systems and the very strong advancements in functionality made over the past five or six years, I continue to be surprised by the percentage of enterprises that utilize a fully or partially manual requisition-to-order process," says Andrew Bartolini, vice president of Global Supply Management Research at Aberdeen Group. "These enterprises are leaving money on the table by continuing their off-line strategies."

Today's strategic e-procurement technologies address the realities of lab work and fundamentally redefine how laboratories obtain the goods and services they need.

Fundamentals of strategic research procurement

A strategic approach to research procurement—one that returns hard cost savings on investment as well as empowers and assists researchers—rests on two primary tenets: leveraging the value of supplier relationships and empowering researchers to make the best possible sourcing decisions.

Leveraging strategic supplier relationships for sourcing requires aggregation of buying power—suppliers offer more favorable pricing, terms and conditions in exchange for greater market share. With researchers selecting goods and services from a variety of different suppliers, catalogs, etc., even the purchase of identical items is rarely done as a collaborative effort.

Without the data needed to keep volume discounts top of mind or the ability to aggregate spending across the lab, the opportunity to leverage the lab's buying power is lost.

With strategic procurement, labs can direct their spend to key suppliers and, at the same time, gain real-time insight into spend data. Spend is categorized consistently across purchases and supported by powerful analytical reporting to enable clear, fact-based identification of opportunities to put more attractive contracts or agreements in place. This real-time visibility into enterprise-wide spending enables professional buyers to negotiate better terms and conditions with suppliers, based not on the purchasing power of a single lab, but of the entire organization.

The contracts that result often result in savings of up to 20 percent on items that are commonly purchased; for example, by directing purchases of solvents toward a preferred supplier in exchange for preferential pricing, invoicing and delivery terms.

Gregg Brandyberry, vice president of procurement for GlaxoSmithKline's (GSK) Global Systems and Operations, is widely known in the procurement profession as a pioneer and influential advocate for strategic procurement. Under Brandyberry's leadership, GSK won an ROI Baseline Award in 2005 from Baseline magazine for achieving the highest ROI ever verified in the competition—a 100 percent return every four business days.

Leveraging supplier relationships and achieving the associated benefits requires disciplined day-to-day compliance with strategic sourcing agreements. Some organizations have attempted to achieve compliance by placing lab management and procurement staff in rigid, bureaucratic roles, as overseers to catch and correct noncompliant behavior. Those efforts have generally achieved limited success, often with a severe impact on speed. In contrast, when procurement is seen as strategic rather than merely tactical, researchers are empowered to make the best possible sourcing decisions, coupling complete and accurate information with their knowledge of scientific requirements.

In particular, the best strategic sourcing decision may be to not make a purchase at all. Researchers with an urgent need for a particular material often purchase it without knowing that it is already in stock on-site. In most research labs, at least two-thirds of all on-hand chemical reagent inventory is distributed across several labs, with little or no visibility for researchers looking for chemicals. Because the fastest sourcing alternative is generally the container already on hand, and because each chemical container potentially carries handling and disposal costs that exceed its purchase price, this lack of visibility represents a major lost opportunity for cost and time savings.

A strategic, empowering procurement approach instead gives researchers a complete view of available in-house inventories and purchase options—including electronic alerts that notify researchers when an item they want to purchase is already available in-house. Inventory information is accurate and reliable. Purchase options are presented with rich, descriptive information, accurate contract pricing, and clear identification and promotion of preferred suppliers. Information is standardized for streamlined flow through purchasing systems. Applicable health and safety risks are clearly identified prior to purchase confirmation and automatically trigger required approvals in the e-procurement workflow

Adoption – Focus on the researcher first

Achieving the promised benefits from e-procurement processes and technologies requires pervasive end-user adoption. Effective organizations achieve high adoption rates by focusing on the researcher's experience.

Where traditional procurement processes hindered researchers and lab managers with time-consuming paperwork, strategic e-procurement solutions present the same online shopping experience consumers have come to expect on popular e-commerce sites. Utilizing an online shopping platform that enables researchers to quickly find the items they need in hosted electronic catalogs or "punch out" to suppliers' web sites, these solutions automate the entire procurement process.

Researchers log in, browse for needed items, add them to a virtual shopping cart and click "send." A purchase order is created, automatically routed electronically for the proper approvals, and delivered to the supplier, at which point invoicing and payment are likewise handled electronically.

While Brandyberry was quick to prove e-procurement's value and impact on the bottom line, he is equally proud of how procurement reform is modernizing the research function.

The promise (and threat) of emerging technologies

Given the advancements and innovations now shaping how pharmaceutical labs purchase the materials they need, one would think that procurement reform would be a top-of-mind issue in the research community, but Brandyberry cautions that procurement, when done right, is simply accepted as a matter of course.

"For years, labs have operated with little thought given to how they procure crucial materials. It's only when researchers have the opportunity to utilize new technologies for themselves that the laborious nature of existing systems becomes so evident. Technology is like that. We thought fax machines were highly efficient until the Internet came along. E-procurement is no different."

For a no charge consultation, contact Lab Procurement Services, LLC. LPS is a Knoxville, TN based company specializing in Laboratory Procurement outsourcing and consulting.

 

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