Supply Positioning and Supplier Preferencing: A Case Study Example

Introduction

Supply positioning is a sourcing activity which procurement practitioners undertake in order to understand the context of a specific purchase. The procurement is measured against two dimensions: (i) the value of the contract relative to the overall spend of the buying organisation and (ii) the level of supply risk involved. The latter dimension considers three elements: market difficulty, complexity of switching suppliers, and the organisational impact of supply failure. Supply positioning looks at the procurement from the buyer’s perspective.

It is essential that the supplier’s position is also considered. The supplier preferencing matrix achieves this purpose. The procurement is measured against (i) its relative value to suppliers (contract value versus overall supplier revenues) and (ii) the attractiveness of the buyer. The value dimension is quantitative and can easily be measured. The attractiveness dimension, on the other hand, is qualitative and encompasses a wide range of subjective factors: stability and predictability of requirements, ease of doing business, opportunity for growth, profile of the buyer, contract duration, quality of relationship, and prompt payment.

In order to demonstrate the usefulness and dynamic nature of these tools, a supply positioning analysis and a supplier preferencing analysis follows based on the procurement of Medical Diagnostic Imaging (MDI) equipment.

Supply Positioning Analysis

MDI equipment has a life-span of ten years and items may therefore be bought infrequently by individual hospitals. The relative value of spend is low. In relation to supply risk, the supply market is highly consolidated with four major suppliers (GE, Siemens, Philips and Toshiba) dominating the industry. Given the complex nature of the product and the need for on-going maintenance and support, it is difficult to switch suppliers. Additionally, supply failure will have a major impact on the hospital’s operations. The supply market risk is high.

Given the low value of spend and the high supply risk factor, MDI equipment can be seen as a bottleneck procurement. The buyer does not have any commercial leverage in this situation and the level of competition is low, therefore there is little chance of achieving low costs. The buyer should therefore concentrate on the core objectives of this quadrant which is to ensure supply: delivery on time and effective operation throughout the equipment life-cycle.

This is the worst quadrant from the buyer’s perspective, with the supplier holding all the power and taking all the value. How can the situation be improved? The buyer may attempt to increase the value of spend by consolidating procurement nationally, or using World Bank as a buying agent, or working with other African countries. However, it is very difficult to agree common requirements across these different players.

Another alternative is to reduce the supply market risk. This may be achieved by increasing supply market competition, reducing the complexity of the product, standardising requirements, and separating the equipment purchase from the maintenance and service contract. There are certainly emerging Chinese suppliers in the industry, but these would need to be vetted thoroughly through robust supplier appraisal processes. There are also moves towards global standards for MDI equipment, but these will take time to develop and will need the buy-in of all stakeholders. Incumbent suppliers may resist, as standardisation is not in their interests. Reducing supply risk will move the procurement into the routine quadrant, where there are many buyers and sellers trading standardised items in a competitive market, each extracting limited value in a transactional way.

Value-based procurement (VBP) is an emerging theme and this presents another opportunity in relation to supply positioning. Rather than just focus on the price of a particular product or service, VBP considers the overall value of the solution it can create, in terms of improved outcomes for patients, reduced total cost of care, and benefits to stakeholders such as healthcare workers. VBP calls for collaborative partnerships with suppliers, with early engagement, joint working, sharing of information, and high levels of trust. The idea is to create added-value solutions together, thus moving the procurement into the strategic quadrant with the core objective of relationship management.

Supplier Preferencing Analysis

The contract value for MDI equipment purchases from a hospital is insignificant in relation to the revenue of the four main players in the supply market. For example, Philip’s Diagnosis and Treatment division has sales of US$3.6 billion per annum, and GE sales are approximately US$3 billion. Even if World Bank is used as a buying agent, this imbalance will not be addressed significantly. Therefore, the relative value to the supplier is low.

In relation to the buyer attractiveness dimension, World Bank has produced a list of positive and negative factors (assuming it is the buying agent).[1] They are shown in Table 1.

Although using World Bank as a buying agent provides an element of attractiveness to suppliers, the negative factors significantly outweigh the positives ones. MDI equipment buyers will be seen as a nuisance customer. This will limit suppliers’ interest in bidding and impact on their pricing and level of support if they do so. This is a significant risk, given limited budgets and the ten-year life of the equipment. The emerging suppliers may value the positive factors more, as they strive to achieve market share, but they will struggle even more to overcome the negative factors, given their relative inexperience.

How can the situation be improved? First of all the negative attractiveness factors need to be addressed. Secondly, VBP provides an opportunity to increase engagement and value for suppliers, thus moving the buyer into the development quadrant, which is a good place to be. In this scenario, buyers and the established suppliers could work together to create solutions rather than just trade products, while the emerging suppliers could be used for more transactional procurements of low-cost equipment. There is a danger, however, of becoming locked-in to the established suppliers and drifting into the exploit quadrant. Robust procurement and performance management processes are required to avoid this situation.

Table 1: Buyer Attractiveness Factors

POSITIVE FACTORS

NEGATIVE FACTORS

Blue chip organisation which provides suppliers with a prestige account for references and promotional activity.
Opportunities for growth, as the Bank’s spend increases through additional financing and increased projects as clients look to replace earlier-generation equipment.
Security of payment, although it can be delayed.
Bank-funded projects provide a high-profile stepping-stone to business from other governments and development banks.
A combination of procurement reform and the launch of industry engagement programmes demonstrate a willingness to change and improve.
Equipment often purchased as part of a larger overall package, providing the opportunity to cross-sell a broader portfolio of medical devices and equipment.
Supply of capital equipment leads to long-term income stream which, over the lifetime of the equipment, exceeds the capital purchase price.
Conditions of contract provide for a reasonable approach to sharing risk.
Transparent complaints-handling system provides increasing confidence in the integrity of procurement processes.

Restrictive specifications.
Slow and inconsistent decision-making during the procurement process adds cost and uncertainty.
Poor visibility of contract/project pipeline hinders business and bid planning.
Changing needs and specifications impacts credibility and confidence in the management of the bid process and the freedom to deliver.
Fragmented customer base leads to inconsistency of requirements and higher costs.
Decisions made on the basis of lowest cost can results in devaluing innovation and effective clinical outcomes.
Lack of consistency and convergence on the required standard and level of support.
Clinical preferences based on user experience and custom and practice.
Lack of transparency of decision-making impacts integrity and confidence in the process.
Specifications are often prescriptive and conformance-based, restricting the opportunity to offer innovation and differentiation.
Limited opportunities to sell value-added services that increase supplier profitability.
Combining equipment supply, installation and support into a single contract provides a long-term legal and commercial risk.
Country security issues create intolerable risk for employees.
Significant supply chain challenges serving remote and/or hostile geographies.
Business opportunities are relatively low and fragmented.
Decisions not made on the basis of whole life costs distort the value offering.
Funding treatment between capital and revenue can over-complicate and distort normal commercial models.
The level of bureaucracy results in a significant cost overhead.
Terms and conditions vary from contract to contract, thus requiring repeated reviews.
Poor investment in contract management increases the resource required to support delivery and increases the chances of protracted contractual delays and disputes.
Low margin business, as equipment procured is earlier generation.

[1] http://pubdocs.worldbank.org/en/258511553620191211/Procurement-Guidance-MDI-Equipment-Buyers.pdf

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