Why Purchasing Compliance Can Be A Challenge and How Procurement Companies Can Be A Part of the Solution
There is nothing more frustrating to a procurement department or an operations team than having contracted programs that are dramatically underutilized. This situation can quickly escalate, putting headquarters at odds with field locations and impeding strong financial performance. Why do field operators struggle with purchasing compliance? Here are a few reasons why field locations might not be utilizing procurement programs—and how procurement companies can help address these shortcomings.
Contracted Program is Not Competitive vs. the Market
Operational performance is measured on both revenue and cost. With food cost being one of the two highest costs a food service operation must manage, operators pay a lot of attention to ingredient prices. When an operator can purchase a like product for less than the corporate contracted item, they usually will. Procurement departments contracting directly with suppliers do their best to ensure program competitiveness; however, assessing competitiveness and performing a comprehensive pricing analysis can be challenging. Data is often hard to come by and prices can vary significantly from market to market. Procurement companies can frequently help in this area due to the volume of customers they work with and the number of benchmarks available to them to validate the program proposed by suppliers.
Contracted Program Weights Rebates More Than Price
Sometimes the overall value of a program is good but the discount allocation is not balanced. Field locations often make purchases based on the invoice price, not to the total value of the program. If the majority of the program value is rebate-driven, then you may have perfectly rational yet sub-optimal purchase activity. To encourage purchasing compliance, the operator must be incented correctly. There are two ways to accomplish this:
- The net into-unit price needs to reflect the majority of the program value or
- The operator must receive the benefit of the total value of the program.
In both cases, the operator will be able to purchase the best item for both the field operation and the corporate procurement team. Helping to identify the right balance between rebate and price is where procurement companies excel. A procurement company’s reporting and analytics can help determine if there is a gap that needs to be corrected.
The Field Lacks Program Visibility
Sometimes program adoption fails not because of value but due to poor implementation. Have suppliers and distributors properly implemented the program? Are prices and rebates correctly entered? If the answer is “no” to either of those questions, have the issues been caught through some type of auditing process? Managing proper implementation of supplier and distributor programs is essential to driving the right purchasing behavior. If the pricing is not correct, purchasing compliance will suffer. Some companies are able to dedicate in-house resources to managing the implementation and auditing of prices ; however, if you can’t, this is another area where a procurement group may be able to help. Many have auditing technology platforms that are capable of regularly reviewing prices and are then able to recover any monies due to overcharges.
Sometimes a program is properly implemented but may simply not be extendable. What can be a great program with one distributor, another simply may not recognize. The distributor or supplier may also have certain restrictions about who may access the program. Sometimes these restrictions can be so onerous that only a very small subset of locations may qualify. Many times these restrictions are a function of scale and negotiating power. Partnering with a procurement group can often times minimize these types of gaps in program coverage and disparities in value. In addition, direct conversations with suppliers and distributors about volume thresholds can result in accommodations, especially when system-wide volume is on a positive trajectory. In general, suppliers and distributors will be more willing to work with you on your needs if you can guarantee they will sell more or their products.
Limited Stocking at Distributors
No matter how great a program your procurement team has contracted, the field must be able to find the products. If there are limited distribution outlets carrying the contracted products, operator purchasing compliance will also be limited. Try to have your distributors bring the products into stock. If that is not possible because your locations do not use enough of the product to meet stocking minimums, you might try to work with a procurement company that has relationships with your distributors and can help you with stocking. Usually GPO contracts cover all their members, which means that it’s more likely that a contracted program is already available and in stock or can be stocked. This will help when implementing a new program as well. It’s more likely that the supplier’s products will be brought into stock so that all customer locations can take advantage.
For more information on how to maximize participation in your contracted programs, Contact a Foodbuy representative.