What you don't see can hurt you
For many managers of long-term care facilities, paying close attention to procurement and the ordering of supplies is not an area that typically receives a lot of their focus. They are usually far more interested in keeping their facilities clean and healthy for new tenants moving in as well as current tenants staying and renewing their leases.
Because procurement is viewed as a necessary but not vital part of their job, they typically locate various suppliers, including Jan-San distributors, that they are comfortable working with and find reliable and that provide value to both them and their facility. However, taking this position can literally be costly.
There are a lot of hidden costs in procurement, both tangible as well as intangible, and they can really add up. What often happens is that these hidden costs remain just that—hidden—so managers end up spending more on supplies, in one way or another, than they may realize.
The following are hidden costs in procurement that are often overlooked or unnoticed:
Who's buying what?
In most larger facility operations, each department is allowed to order the tools, equipment, or supplies it needs up to a certain dollar amount, with no questions asked. The idea is to make it easier for departments to order what they need when they need it. No purchase requests are necessary, reducing paperwork. However, what very often happens is that these small supply orders are made with convenience and quick delivery in mind, not considering whether the supplier is offering the best price for the product.
Often the supplies needed in one department are already available in another department that may not even be using them. This makes the purchase totally unnecessary.
Working with too many suppliers
Some facility managers purchase packaging materials, cleaning supplies, and other consumables from two, three, or more vendors. Often they do this so they don't put “all their eggs in one basket” — if one vendor does not have the product needed, they have others they can call. However, there is a hidden cost to this. A supplier is unlikely to offer a cost discount if just a case or two of a product is purchased. However, purchasing these supplies from only one supplier results in a type of collective buying power; if you purchase, say, ten cases, a discount is very likely.
No spend analysis
Many facilities, large and small, do not conduct any type of spend analysis. A spend analysis provides the who, what, when, where, why, and how of a facility's expenditures. It answers such questions as how much the facility is spending and with which suppliers and whether the facility is actually getting what it purchased. Sometimes the facility manager is just making purchases without following up to verify that the products were received. According to APQC, a member-based nonprofit that focuses on business operation best practices, companies that have a spend analysis program in place “have leaner procurement functions, greater visibility of procurement activities and expenditures, all of which allow the organization to identify areas for cost reduction.”
No charge visibility
Related to not having a spend analysis in place is deciphering exactly how much a facility is paying for a product.
Let's say Supplier A sells a widget for $10 each. Supplier B sells the same widget for $8 each. Both suppliers can meet delivery requirements, so it looks like Supplier B is the most cost-effective supplier.
But there's a hidden cost: Supplier B's widget is shipped to the United States from Asia and then assembled in the United States; a fuel charge of 18% ($1.44) is added to the cost of each widget and is not included in the listed product cost. Supplier A has a hidden cost, too. Supplier A adds a 7.5 % tax ($0.75) to its widget; Supplier B adds only a 5% tax ($0.40).
Even though Supplier A seems to have the best price for the widget, it's not the best price when all charges are considered.
One of the biggest hidden procurement costs for facilities is the processing of invoices. One big problem is that often invoices must be manually input into an accounts payable system, which can result in data errors. Another problem is that, frequently, purchase orders must be cross-checked against shipping and receiving documents. By the time an invoice gets an “OK to be Paid,” which can take anywhere from 5 to 15 days, it likely has been handled by several people, and this hidden expense typically adds about $12.44 to each invoice, according to APQC.
Eliminating hidden procurement costs
Fortunately, there are ways facility managers can uncover hidden costs. The first step is to analyze what supplies are needed for the facility. For instance, there are online services available – some of which are free – that allow managers to essentially “peel off the roof” of their facilities to see all the different areas of the facility and help determine what products are needed and where. This is also a good way of getting on top of what products are being purchased for which departments and determining the who, what, when, where, why, and how of a facility's expenditures, as mentioned earlier.
The next step is to consolidate and centralize all purchasing activities, from ordering and receiving to stocking and invoicing. The more this can be handled electronically with fewer people involved, the lower the costs to process an invoice.
But fewer people does not mean no people. And important person every long-term care facility should always have in conjunction with using one of these online services is an knowledgeable janitorial distributor when selecting cleaning supplies. Invariably, they can fine-tune the purchase making process, ensuring only the most effective and cost effective products are selected for your facility.
Michael Wilson is vice president of marketing for AFFLINK, a global leader in supply chain optimization with innovative process and procurement solutions to drive efficiencies in today's leading businesses.