576

CHICAGO

An American Hospital Association Company

Health Forum, Inc.

At least one full-time procurement person works with members to identify their needs
and to negotiate contracts.
Members usually meet formally to establish or update policies and operating procedures, establish specifications, evaluate products, share information, and assess the GPOs
function.
GPOs frequently function as agents for the members, acting on members behalf when
negotiating contracts.
A membership fee is required.

Some institutions are combining their buying power by forming purchasing cooperatives, or
GPOs, to save costs. These units are also known as cooperatives, buying groups, and purchasing support groups. Generally, the term cooperative is used to describe nonprofit organizations,
whereas the term group purchasing describes the relationship among for-profit organizations
that pool their purchasing power. Regardless of which term is used, about 90 percent of all
health care organizations belong to one or more of these groups. Compared with other health
care departments, purchases by food service departments account for less than 10 percent of
purchases made by the largest national and regional GPO.
The concept of group purchasing is based on the premise that several organizations have
more purchasing power when negotiating collectively than any one entity alone. Purchasing
groups can be organized on a local, state, regional, or national level. The requirements for
membership and services provided vary. In most instances, members of a GPO pay a membership fee that is often based on bed count, dollar value of operating budget, or some other scale
based on the volume of purchases. These fees provide capital for operating the central office
and employing procurement personnel and legal services attendant to negotiating contracts.
Some GPOs require members to purchase a specified volume of products, whereas others
expect members to use their contractual agreements to their fullest potential.
Most GPOs have several characteristics in common, including the following:

Group Purchasing Organizations

The purchasing method used by the buyer varies depending on the organizations size, philosophy and policies, purchasing volume, and financial stability, and the distributors location and
current environmental trends. The most common methods of purchasing used by health care
food service facilities include group purchasing, consortium purchasing, prime vendor, onestop purchasing, just-in-time purchasing, and formal (competitive) and informal (off-the-street)
purchasing.

Purchasing Methods

On delivery, acceptance, and storage, items can be dispensed as needed to production areas.

Meat, poultry, and fish delivered once a week or less frequently, depending on whether
the products are chilled or frozen
Fresh produce delivered once or twice a week, depending on the storage space available
and the quantities needed
Canned goods and staples delivered weekly, semimonthly, monthly, or quarterly,
depending on the storage space available, quantities needed, and price quotes for specific volumes
Milk, milk products, bread, and baked goods delivered daily or every other day
Butter, eggs, and cheese delivered weekly or as needed
Frozen foods delivered weekly or semimonthly, depending on the storage space available, usage rate, and price quotes for the quantities needed

Food Service Manual for Health Care Institutions

Foreword by Carlton Green

Ruby P. Puckett

for Health Care Institutions

Third Edition

Food Service
Manual
Carrots
Bananas, #4

Smith
11.40
12.00

Brown
13.85
13.40

One-stop purchasing or single sourcing is defined as the strategy of selecting and using a single supply source. This purchasing method is used by large and small health care facilities
(including long-term care facilities). The method is based on a cooperative relationship between
the food service department and the vendor.
One vendor (a full-line distributor) provides the buyer with most of the food and supplies
needed. The efficiency of food purchasing is improved by eliminating the time-consuming
processes of placing bids and getting quotations. A substantial reduction in warehousing costs
is possible if deliveries are made frequently. Lower net costs of products can result because the

One-Stop Purchasing or Single Sourcing

Select a group composed of members from organizations sharing similar characteristics.

Interview current members and the GPOs employees to assess potential savings in
excess of required fees.
Answer the following questions:
What are membership requirements? Is a guarantee to purchase a specified quantity
(percentage) or dollar volume through the GPO required?
How does the GPO operate?
What value-added services are provided to members?
Is a prime vendor contract used? If so, what product lines are available?
What is the GPO doing to obtain data on current market prices, new products, and
trends?
Discuss findings with food service management staff and members of the quality product evaluation team.
Consult with the financial officer when evaluating the cost-benefit ratio of membership.
Present a proposal for joining a GPO to the administration.

Savings in excess of 20 percent is the primary reason food service directors use group purchasing. Other benefits include product standardization, increased quality, decreased administrative cost for processing multiple purchase orders, and less time spent in purchasing products
and supplies. Members also cite improved knowledge of new and existing products and enhanced
networking as a result of participation in GPO meetings. Membership commitment and support
of the GPOs philosophy are essential for success of the group.
Some barriers that influence the effectiveness and cost savings of participating in a GPO
include difficulty in obtaining consensus on product specifications; loss of control over supplier
selection, product variety, quality, and contract awards; and unwillingness of representatives of
competing health care organizations to work as team members. Group members who join multiple GPOs decrease the negotiating power of the group because the volume of purchasing is
diminished. The groups purchasing power is increased only when volume is significantly more
than it would be for each food service department.
When selecting a GPO, the buyer and food service director should adhere to certain guidelines, such as the following:

577

Purchasing

What is available on the market?

Who can supply the product(s) or service(s)?
Who can supply it (them) most (or more) economically within the required time period?
Who are the distributors that service this area?

The survey stage is devoted to identifying the need for new products, investigating new
suppliers, or reevaluating current suppliers. Questions in this regard include the following:

Survey: Explore all possible sources of supply.

Inquiry: Compare and evaluate prospective vendors to identify qualifications, such as
size, capacity, or both; financial strengths; technological services; geographical locations;
labor relations; and advantages and disadvantages.
Negotiation and selection: Enter into effective and clear dialogue with candidates to
secure the best price, quality, and delivery commitment.
Experience: Monitor vendor service and product quality to ensure that what is promised is delivered, delivery is provided in emergency situations, prices do not suddenly
change, the number of rejects is kept to a minimum, and the sanitary condition of the
warehouse and the hygiene of personnel are appropriate.

Supplier selection involves a four-stage process, which is best remembered by the mnemonic SINE:

Selection

Achievement of these objectives is essential to the overall success of the procurement process.

Many GPOs are currently establishing prime vendor programs requiring committedvolume contracts. Members are required to purchase a minimum of 80 percent of their products from prime vendors with whom the GPO has contracts. In some instances, members are
prohibited from joining other GPOs with prime vendor arrangements.
Competitive bidding is the primary procedure used for determining pricing, terms, and
contract conditions between the GPO and the supplier.
Value-added services such as product quality testing, value analysis, computer systems
and software, employee development seminars, recipe ideas, and menu planning may be provided to GPO members.

582

50-lb.
bag
40-lb.
bag

DL

Supplier and Quotations per Unit

Date: 2/10/88 Approved by:

Negotiate a fair price.

Receive consistent quality and quantity as specified.
Receive order on time.
Develop relationships with vendor based on trust.
Avoid internal conflicts over vendor relations.
Build relationship with local vendors to develop goodwill within the community.

23

21

Monday

Quotation Sheet
Day:

Description and Specifications

Fresh produce

Amount
on Hand Quantity Unit

Type of product:

Exhibit 17.5. A Quotation Sheet

Food Service Manual for Health Care Institutions

578

The benefits of a prime vendor agreement are increased competition and lower prices;
reduced cost of inventory, space, and order processing; and availability of value-added services.
One value-added service that many health care food services use is computer systems provided
by the prime vendor that allow the food service operation to place orders, obtain current price
information and availability of products and supplies and product information (including
nutrient analysis), and implement menu-planning and merchandising ideas. Some prime vendors provide a variety of software programs to their customers.
Disadvantages include potential gradual price increases, a decrease in competition, and a
limited number of vendors with whom the operation conducts business. A reduction in service
level can occur, especially in areas where only a limited number of vendors are available to conduct business. For the concept to be effective, continued enhancement of the vendorbuyer relationship is essential. The buyer must treat the DSRs and individuals delivering the product as
partners rather than adversaries. Prime vendor contracts are also used in group purchasing.

The buyer completes an ABC analysis of purchases to determine which items make up
the majority of purchases (see Chapter 18).
The food service department solicits bid proposals from several distributors for an estimated committed volume (annual or monthly usage); product specification; and designated
delivery, services, and inventory.
The food service director (or other buyer) reviews the bid and determines the lowest bidder that meets all criteria.
The buyer negotiates and awards a contract.
The food service department (through the director or other channel) provides feedback
to the vendor on quality of service, delivery, and products. The food service representative can
require the vendor to open the books and provide information on the structure of its cost
and pricing data if this privilege is a condition of the contract. It is imperative that the purchasing agent continue to track prices and market conditions.
The buyer develops secondary sources for products and supplies.

The prime vendor method involves a formal agreement between the food service department
(buyer) and one vendor (supplier) whereby the buyer contracts with the vendor to supply a
specified percentage of a given category (or categories) of product. The percentage ranges from
60 to 80 percent, with 80 percent being more common today. The prime vendor contract, also
referred to as a systems contract, includes an agreement to purchase certain items for a specified time period and frequently specifies a minimum quantity of any or all items to be ordered
during the contract period.
The steps involved in establishing a prime vendor relationship are outlined below. The bidding system is similar to contract purchasing, which is discussed later in this section.

Prime Vendor Agreements

supplier knows relatively far in advance that certain food services will be needing specific products; thus, the vendor can buy from wholesalers in larger quantities.
Certain disadvantages can arise from relying on one vendor exclusively. For one thing,
backup suppliers might be difficult to find should the single-source vendor fail to deliver the supplies ordered. For another, the quality of available foods might be inferior or inconsistent. For
larger food service departments, the number of distributors able to supply one-stop services may
be limited; nonetheless, the supplier pool for this service provision is definitely growing. The
effectiveness of one-stop purchasing is directly related to the efficiency and credibility of the supplier. Most food service departments generally have found this method to work satisfactorily.

Food Service Manual for Health Care Institutions

Two other general methods of buying are contract purchasing and noncontract purchasing.
Contract purchasing (sometimes called formal buying) involves a binding agreement between
vendor and purchaser. With this process, food service directors develop written specifications
for each product and an estimate of the quantity needed for the designated bid period. A written notice of requirements, or a bid request (Exhibit 17.4), is made available to vendors, who
are invited to submit price bids based on the quality and quantity needed. The bid request
includes instructions about the method of bidding, delivery schedule required, and frequency
of payment; when the date bids are due; the basis for awarding contracts; and any other information needed by buyer and seller. This process may be formal, with notices of intent to bid
published under legal notices in the local newspaper. Alternatively, it may be informal, with
copies of the bid distributed widely through the mail or by other means.

Contract and Noncontract Purchasing

With centralized purchasing, the most common method of purchasing used in health care institutions, a separate department in the institution specializes in purchasing the materials and
supplies needed by the institutions various services and departments. In this system, the food
service director (like all other department heads) requisitions supplies from the purchasing
department. Only representatives from the purchasing department deal directly with outside
vendors and suppliers. Vendors have direct contact with end users of the supplies only if new
products or services are being brought into the purchasing system. In many institutions that use
centralized purchasing, the purchasing department also handles receiving and storage rather
than the individual departments that use the supplies.

Centralized Purchasing

Just-in-time (JIT) purchasing is a production planning strategy adopted by many manufacturing firms. The process involves purchasing products and supplies in the exact quantity required
for a production run or limited time period and only as they are needed (just in time).
Distributors deliver small quantities of supplies more frequently, and deliveries are timed more
precisely based on production demand. Thus, JIT purchasing has an effect on both purchasing
and inventory. Three goals are achieved with the JIT purchasing process: Inventory is decreased
significantly, as are related costs; space management is simplified; and problems must be
resolved immediately as they occur. Unlike the manufacturing industry, each day food service
operations produce a large number of perishable products in smaller quantities. The effectiveness of JIT purchasing warrants investigation because of potential cost reductions.
The ability to implement this method depends on several factors. These include complete
support and cooperation of suppliers, the commitment of all employees (including top administrators), accurate production demand forecasts, and changes in most aspects of the operation
from menu planning through final service.
Locating food service distributors willing to provide frequent deliveries may be a challenge to some buyers, given that most distributors are requesting that customers accept fewer
deliveries so as to decrease costs. Like the prime vendor concept, JIT purchasing requires
building partnerships with distributors, and the adoption of the JIT-purchasing philosophy
could require a change in attitude regarding quantity of supplies to maintain in inventory. JITpurchasing practices emphasize ordering small quantities rather than storing large quantities
just in case additional product is needed.

Just-in-Time Purchasing

579

Purchasing