Procurement committment pays off for the Department of Health

One of my New Year resolutions ( I consider September to be the real New Year, as we’ve explained before) is to write more about parts of the UK public sector that we don’t feature so regularly. The main area is Health, where we haven’t done much for while – we’ve focused recently on central government events, and the self-destructive tendencies of councils who believe outsourcing is going to be their saviour.

So let’s start with a positive story today. Logistics firm DHL operate the NHS Supply Chain operation,under contract from the Department of Health (DH). Supply Chain provides a huge range of consumables, equipment and stock items to hospitals and other health organisations – everything from prosthetics to paper, from capital equipment to antiseptic wipes.

Now at the lower value end of things, NHS Supply Chain has reasonable buying power. Although they may not have firm commitment from their customers, Supply Chain knows to a high degree of accuracy how many syringes will be ordered in any given week, and can go to market with that volume pretty well guaranteed – which means the suppliers should offer a competitive price.

But when it comes to expensive capital equipment, it is more difficult. The ordering pattern is unpredictable and occasional. So DHL couldn’t take the self-financed risk of going out and spending millions of pounds up-front on buying equipment, even though it will almost certainly be needed. Instead, they would place “framework” contracts, that their customers may use when required, but there was no guarantee of volume to the suppliers. So, as we know, suppliers were unlikely to offer the best value deals under these frameworks. (Remember the first rule of Procurement Club – “commitment drives value”).

Smarter hospitals would then see that, with their real commitment to offer the market, they could buy better than the Supply Chain deals, which further weakened Supply Chain’s power in the market, and the whole picture tended to get rather fragmented.

But now in a simple but innovative move, the DH and Supply Chain have cut through this.  As part of a “Capital Fund” initiative, DH have provided cash for Supply Chain to actually go and buy some of this expensive equipment up-front, before they have the firm orders from hospitals.  (Private sector readers may see this as obvious, but believe me, this is pretty radical in public sector terms from an accounting point of view).  Supply Chain can then get good deals, as they are committing, and can offer the equipment at favourable prices to hospitals.

And the other beauty of it is that it’s self-sustaining. DH put in the money once and once only. When Supply Chain get the revenue from the sale of this equipment to a hospital, they can re-invest this in buying more, which is then available when required.

The results look promising – better value for money, and less need for hospitals to run their own procurement processes. So it certainly looks like a good example of how a bit of creativity and investment (and it’s not even a P&L cost really for the DH, merely a cash-flow issue) can pay off.

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