It just makes sense: Why would a major distributor with a great local representative that you give most of your business NOT provide you with competitive prices? Doing business this way is takes almost no effort on your part and you certainly don't have to take time out of revenue producing tasks to deal with supply problems. This strategy allows procurement to focus on the job of placing orders without having to worry about what they are ordering or how much it costs.
This strategy is founded in the idea that it is just takes too much time and expertise to pay close attention to the cost of items when there is little reason to believe that by doing so, the savings derived would outweigh the cost. And it is true that there are more Lab Managers who embrace this idea and feel justified knowing that many (if not most) other labs of comparable size do the same.
As labs grow to a certain size and the stakes increase along with having a board and a procurement staff, you seldom find this strategy in use. Why?
- The financial stakes are much higher to make the risk acceptable.
- The volume of purchases has increased to the point where the lab has leverage with vendors who now "beat the door down" for the business.
- There are enough resources to justify hiring procurement people who have been trained in contracting and negotiation.
Paradoxically, when a lab is small, the need to reduce expenses and increase margins should be far greater than a large lab with significant cash flows and deep corporate pockets.
Consider for a minute this issue from the distributors point of view.
- Like any other business, they must grow but they are in a market that is smaller today than last year. This means they need to make higher profits. The only customers that are still "variables" in the equation are the small, non-contract accounts. And they are very skilled at finding ways to increase their profit margins year-over-year, especially on customers who never seriously push back.
- Experienced sales reps are a vanishing breed. With sales calls averaging $275 per call, they are now focused on the larger labs only. Most small to mid-size labs now must deal with a telesales rep or the web. Representatives play a key role in representing both the company and their customers. This firewall is now gone.
- There are two large distributors in the U.S. Retail prices are manipulated to give clients the illusion of a good price. But if you take the time to look outside the two large distributors, you find that you have been getting a big discount off an inflated price!
Question: Do you have the time, talent and energy on your staff to do things differently?