Procurement Approach To Sole-Source Vendor In Monopolistic Market
Jan Malasek • October 20, 2021
One of the largest biotechnology companies in the world needed to quickly develop a strategic supply agreement with a sole-source supplier before impending contract expiration. With no existing category manager or in-house expertise, and little time for execution, they were looking for a specialist who could identify opportunities for value, develop the sourcing strategy, and help them implement a long-term supply agreement that would lock in the value. They turned to OnDemand Professional Network member Art Brunton.
CHALLENGE
The sole-source nature of secondary data made it nearly impossible for the client to avoid significant annual price increases. They also had little control over the assurance of supply, quality and service of the data. In addition, all of the industry competitors procured the same data sets, so the competition for the supplier’s performance was extraordinary.
- Proprietary data types – the supplier was sole-source because they owned data technology and supply sources that no other supplier could offer or penetrate. For nearly 30 years, the main barriers to entry for additional suppliers were technology, cost of entry, and access to data sources. There was no potential alternative to the supplier on the horizon either.
- Data set obsolescence and rationalization – the client did not have a grasp on the data sets they were purchasing on a regular basis versus what was actually needed. Therefore, potential obsolescence and rationalization were not clear.
- Fragmentation in spend across the client’s organization – the client had numerous groups within its US organization buying other products and services from the supplier. It also had many other business partners globally buying the same secondary data sets. However, consolidation of spend was not occurring anywhere, and the supplier was leveraging the fragmentation model as a result.
APPROACH
An opportunity analysis, including current business requirements identification, was conducted to provide an accurate business foundation for sourcing strategy development.
- Spend analysis and business requirements development – A cross-functional team was immediately formed to conduct and validate the spend analysis, and determine true business requirements. The focus was not only on cost, as the team spent significant time identifying its quality, supply, and service needs. These were then reflected in the supply agreement as additional clauses that assured compliance by the supplier. The team included members from Global Strategic Sourcing, Procurement Operations, Marketing Operations, Finance, R&D, and Legal.
- Data set rationalization – the team identified data sets that were no longer needed, and removed these from the scope of the project. This simplified the overall data set population for negotiations purposes, and created immediate quick wins cost savings for the client.
- Inclusion of other global business partners – the business partners from Europe, Asia, Canada and Puerto Rico buying the same data sets were included in the negotiations. Even though the supplier did not have a functioning global business model in place, they agreed to honor the US pricing (which was superior to any other region) in exchange for the US contract to be adhered to by the business partners. This resulted in significant savings to the business partners and price control through the duration of the contract.
- Sole-source negotiations strategy – a high-spend category that was effectively sole-sourced with minimal leverage required a comprehensive negotiations strategy. The team engaged three global subject matter experts in both secondary data and the supplier to gain market intelligence and supplier-specific knowledge. This provided valuable information and leverage points for the negotiations plan. Risk mitigation and value-add clauses for the business requirements relating to quality, supply and service were developed with Legal. The negotiations were patiently conducted in a face-to-face environment with multiple iterations which resulted in maximum value for the client over the four year contract duration.
RESULTS
- Strategic sourcing savings and cost avoidance – 11%
- Data set rationalization leading to greater savings
- Opened up US-pricing to the rest of the client’s global partners resulting in higher savings for the global client and reduced risk of price inflation over the life of the contract
- Long-term supply agreement – 4 years
- Significant risk mitigation due to new supply, quality and service clauses included in the contract that protected the client’s data interests
MEET ART BRUNTON
OnDemand Professional Network Member Since 2017
Art has been creating significant financial and non-financial value for clients through procurement, supply chain and operations strategy for 22 years via leadership and interim management roles. He possesses a background across many industries including pharmaceutical and bio-technology, healthcare, medical devices, food and beverage, telecommunications, hospitality, financial services, metals and mining, among others. As a strategy development and supply chain improvement expert, Art is also proficient at bridging the gaps between the Operations and Commercial groups at his clients. Art earned an MBA from Rensselaer Polytechnic University and a BS in Industrial Engineering from West Virginia University.
Strategic Sourcing is often associated with driving down cost, efficiency improvement and increased service levels. There are some situations where Strategic Sourcing is needed to help rebuild supplier relationships while enhancing trust all the while securing additional resources for core capabilities. Such is an example of work that OnDemand Professional Network member Chris Vu did for post-bankruptcy period at a hospital serving a major metropolitan area. SITUATION OVERVIEW A hospital in New York had emerged from bankruptcy and needed to stay afloat since it was the largest hospital and biggest employer in its Brooklyn neighborhood. The Materials Management/Purchasing Department was able to manage day-to-day activities to support patient care. However, indirect and ancillary areas were secondary in priority and the suppliers were extremely unhappy losing money as a part of the bankruptcy protection process . Chris was brought in to negotiate new contracts with suppliers to obtain improved terms and ensure uninterrupted service. APPROACH An incumbent approach was taken to help prevent disruptions in service and allow stakeholders to focus on their day-to-day responsibilities. In addition, it was difficult finding new suppliers willing to work with a financially distressed organization. As a part of the approach, Chris not only had to negotiate improved terms, but rebuild trust and rapport with suppliers . Expectations were reset with suppliers encouraging them to view the hospital as a new organization and to look forward and not backwards. The hospital’s group purchasing organization was leveraged as a baseline for pricing and terms . In addition, Chris met with current and potential new suppliers, where available, to support operational improvements for the future. CRITICAL SUCCESS FACTORS Leveraging the current supplier base Rebuilding trust with incumbent suppliers Developing custom pricing outside of the hospital’s GPO Identifying innovative opportunities for the longer term RESULTS Pricing and terms were negotiated to provide annual recurring savings of 11% across 36+ suppliers . 2 to 3-year terms were secured with suppliers to ensure continuous service, and in most instances, pricing better than the hospital’s GPO. Stakeholders were also pleased since they were able to maintain their current supplier relationships and didn’t have to trial or switch to new products/services . Furthermore, a pipeline of potential opportunities was left for the hospital to explore in the future. For example, the hospital could invest in new disposal containers for used needles that optimized storage capacity. Or the hospital could review several rent vs. buy scenarios from wheelchairs to floor mats to mops. Meet CHRIS VU - OnDemand Professional Network Member Since 2020
Structured approach, cross-functional leadership and rigorous analytics are key to procurement success. I asked a member of our OnDemand Professional Network Priya Kumar to share her approach. Here is her example. SITUATION OVERVIEW Biotechnology company wanted to establish a procurement function for their $120 MM global external operations. Priya was brought in as a Procurement leader to work with the organization to develop a strategic procurement function to drive savings and improve efficiency. APPROACH She worked closely with engineering teams, product development, manufacturing operations and global planning to understand current processes and business priorities. Additionally, she conducted a supplier activity and spend assessment to analyze the current landscape. A thorough analysis of current challenges and gaps in processes revealed the following: Supplier relationships with significant spend were highly transactional Risk and relationship oversight was complex and arduous Frequent planning and forecasting changes led to additional costs, cancellation fees and high risk exposure Supplier contracts were often one-sided, with limited benefits for the client EXECUTION & BENEFITS Priya successfully crafted a robust category strategy to effectively manage and optimize the $120 million expenditure with suppliers . This strategy encompassed thorough market analysis, supplier evaluations, and strategic sourcing initiatives aimed at maximizing value and minimizing risks. Her next step was to streamline processes across the organization, while building a truly strategic procurement function. She built the foundation for strategic sourcing, supplier relationship management and contract lifecycle management. This fostered harmonization in supplier engagement, elevating the value extracted from deepened supplier relationships. By aligning procurement activities with organizational goals and industry best practices, she also fortified the supply chain operations to withstand dynamic market conditions and unforeseen challenges. In partnership with other stakeholder groups, she implemented robust visibility mechanisms within procurement , leveraging advanced analytics and reporting tools to enhance spend transparency and facilitate informed decision-making. This heightened visibility empowered stakeholders to proactively address potential bottlenecks, mitigate risks, and optimize resource allocation. Priya’s greatest achievement was the immediate identification of several contract re-negotiation opportunities that served as quick wins to show procurement value early. Priya developed the negotiation strategy and conducted negotiations with many key suppliers, ensuring alignment with the category strategy and business objectives. In an ever-changing landscape, Priya showed excellent insight and maturity in making agile decisions that would mitigate loss and risk throughout the lifecycle of the contract. She achieved >$15MM of cost savings for Year 1 & 2 through execution of the newly developed category strategy. By leveraging strengthened supplier relationships and employing rigorous negotiation tactics, she secured favorable contract terms and pricing arrangements, driving tangible bottom-line results while maintaining quality standards and service levels. Meet PRIYA KUMAR - OnDemand Professional Network Member Since 2018
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