How Buying Channels Can Enhance Contract Compliance and Utilization
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Ted Dagnal, Strategic Account Director
This article guide by government healthcare supply chain expert, Ted Dagnal, explores the complexities of buying channels, the potential pitfalls when not handled correctly and the value of modernizing these systems for optimal outcomes.
Table of Contents
1. Defining the buying channel
A buying channel, or purchasing channel, is the process a buyer at a hospital uses to request, purchase, approve, receive and pay for goods and services. The buyer’s job is to use these channels to get the right items on time and in the right quantities to support their customer.
Buying channels provide rules and procedures that govern how a health system obtains goods and services. Without them, buyers will find the path of least resistance to fulfilling requests from customers, which can reduce the contract compliance and utilization that drive an organization’s ability to negotiate lower pricing in future contracts.
It can also adversely affect contract terms and conditions that provide rebates and tiered pricing adjustments. Healthcare 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 contract loyalty.
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and maintenance of these agreements are usually left to overworked, understaffed hospital supply chain teams and outdated legacy systems that lack the capability to manage and track the results of spending against a specific contract.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.
2. Buying channels: Buyer beware
When the buying is controlled and monitored on a regular basis in this process, the results can quickly change the advantage to the buy side. However, if it is not controlled or routinely evaluated, it can produce the wrong results and even cost the health system opportunities for savings.
Let’s look at a hypothetical example:
A buyer 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 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 needed items, thus they search the internet for the items from the previous vendor and find them on their website. To expedite the ordering process, the buyer contacts the supplier representative they have worked with in the past and asks to place an order.
The buyer in this case utilizes a purchase card (p-card) to pay for the items directly on the site. The buyer has fulfilled their customer request and the items arrive on time for the procedure. Sounds like mission accomplished, but several steps could have been avoided if the right system and process were in place to guide the buyer to the right item, at the right price, from the right supplier.
One problems with this more-than-likely non-compliant transaction relates to 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 non-compliant buying channel to get the items. Replacements should be easily identified and simple to select in the purchasing system.
Additionally, p-cards should be used sparingly for specific commodities and services; 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 getting the items in front of the teams who buy off of the contract. When steps are missed or skipped, the buyer is left to “figure it out.” The price of those items should not be something they have to validate – that work was already done by the acquisition team.
The purchasing system should enforce the most compliant buying channel not only by making it easy to do the right thing every time but also by showing the most up-to-date pricing on the items available. This vital concept 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, feel confident that the items will arrive in a timely manner, and provide feedback when there is a backorder or other supply chain issue.
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 financial impact.
3. 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 from online consumer platforms.
A great user experience that has been designed using best practices and procedures can drive contract compliance and utilization in the purchasing process. Buyers will regularly use a system that promotes efficient and compliant purchases, 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.
The bottom line is that you cannot have a modernized 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. This further reinforces the point to rely on the contract and line-item pricing to ensure the purchase is per the agreement. “Trust but verify” is a concept that has never been more applicable than it is now.
4. 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. 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.
Also, GPC spend is analyzed and audited closely to ensure their use is within the regulation’s guidelines; however the item purchased off a valid government contract does not always indicate the purchase is compliant to the right contract.
One data point that large government organizations use when negotiating pricing 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. It is those volumes that help drive the pricing of the line items on the contract. Other factors contribute to the pricing discussions, but volume commitments are typically part of the negotiation process.
Making a purchase using a non-preferred contract impacts the volume the parties agreed to and can adversely affect pricing when it is time to renegotiate the contract. 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.
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.
5. Buying channel compliance
Contract compliance must be enforced and managed using a controlled, simple-to-navigate buying channel that 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 customers are their priority and when they need to buy something to meet customers’ needs (particularly when their decision can mean life or death to a patient), it must be reliable and instill confidence.
GHX recommends engaging the buyer community to 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.
Visit ghx.com/government-solutions to learn how GHX offers federal agencies the power of the leading healthcare supply chain solutions to deliver better care at a lower cost.