purchasing strategies in healthcare and fashion industry - a relative study

PURCHASING STRATEGY IN HEALTHCARE AND FASHION

INDUSTRY - A RELATIVE STUDY

ABSTRACTA relative study on the purchasing strategies of varied industrial sectors are discussed in brief and comparisons made along with how one sector can benefit or learn from the other.

SACHIN MATHEWS

Table of Contents

Sl No. Title Page No

Executive Summary 2

1. Introduction 3

1.1 Importance of a Right Purchasing Strategy 3

2.1 Purchasing in Healthcare 4

2.1 ABC Analysis in Healthcare Purchasing 6

2.2 Collaborative Purchasing 7

3. Purchasing in Fashion Industry 8

3.1 Fast Fashion Concept- ZARA Case 9

3.2 ZARA Core Purchasing Strategy 10

4. Comparative Study of Purchasing Practices 12

5. Conclusion 13

6. References 14

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PURCHASING STRATEGY IN HEALTHCARE AND FASHION INDUSTRY - A RELATIVE STUDY

Executive Summary

Objective - The paper has two objectives. One is to explore the purchasing strategies in the

healthcare and fashion industry and then to compare the two, how they differ and what can

one learn from the other.

For the literature review we first look into what purchasing is and how an effective

purchasing mechanism can have a positive impact on business performance. The paper then

focus on two sectors - the services and retail sectors. For the services sector we look into

health care industry where we first understand the challenges in this industry pertaining to

purchasing strategies and how they differ from other industrial context. The application of

"ABC-Analysis" a valuable method that can be effectively used in healthcare purchasing in

identifying the crucial activities as well as critical products and services that can help health

care firms in providing an agile supply chain. We also discuss a concept called "collaborative

purchasing" that is highly being used as an effective purchasing strategy in health care

industry, more commonly known as GPO (Group Purchasing Organizations) and the benefits

it provides.

In the retail sector we explore the concept of "fast fashion" that is increasing being adopted

by the fashion industry especially by the Spanish clothing and accessories retailer ZARA.

Here we study ZARA's core purchasing strategy where the emphasis is more at "pull"

mechanism that enables reduced cycle times and reaching their product quickly to the market.

We then compare the two purchasing strategies involved in the two distinct sectors, how they

differ, what aspects are common and how one can learn from the other to achieve greater

sustainability.

For the research we have used articles, journals, conference reports and white papers from

industry sources as well websites, leading journals and magazines in material and inventory

management, supply chain management, purchasing and procurement in healthcare as well as

in fashion retail industry. From the study we find that purchasing strategies have a great

impact on the business performance of firms. If firms continually explore and incorporate

latest technologies and methodologies in their purchasing practices alone, studies have shown

that they could improve their sales revenue by 4 percent and net profit by 30 percent.

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Introduction

Imagine a world where things you need the most, in the most opportune moment are not

available. For example you are sick and you rush to the only nearby medical store, only to

find out that they have run out of paracetamol or you ordered a Christmas tree and it is not

available till Easter !! This happens as a result of poor planning or inefficient purchasing

strategy, where the demand exceeds the supply. On the contrary, if the medical store keeps

excess stock it could lead to loss of sales as medicines have a short shelf life or expiry dates

as well as it could lead to higher inventory cost, resulting in lower profits. This is where

"purchasing" plays a important and distinctive role in ensuring that the right things are

available at the right time, the right place and at the right price. In many organizations

purchasing may be a hidden function but in reality, the operational and business strategy

revolve around its purchasing strategy and vice versa.

1.1 Importance of a Right Purchasing Strategy

All business require supplies, which may be physical such as raw materials or components or

could be service based, such as information, distribution or technological, in order to operate

effectively. As shown in figure1, an effective purchasing strategy can help business to control

costs, maintain lower inventory levels, improve the quality of services as well mitigate risks

involved in supply chains. (Matthew 1996) research highlights the importance of effective

purchasing strategy, claiming that firms can increase their sales by 4 percent and improve

their net profit by 30 percent. This was based on analysis of information from more than 3000

companies. Key findings of his research are that an effective purchasing must include the

total cost of acquisition and not just price. It also shows that having good relationships with

suppliers can reduce rise in prices below market norms. In addition the quality of supplier's

service, the product, as well as delivery and response times improves as well.

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Figure1: Components of Effective Purchasing Strategy, Source - (Opito 2010)

2. Purchasing in Healthcare

The environment surrounding health care is quite different from a typical manufacturing or

retail environment where purchasing is primarily driven by production/sales forecast and cost

considerations. Being predominantly a service industry and compared to other typical

industrial contexts, it is highly complex. It involves different kinds of supplies and a myriad

of distribution channels along with participation of various stakeholders (Royer 2002).

Depending on the kind of functionality (Burns 2002) broadly classifies the stakeholders into

three categories as shown in the figure1.

Figure2 - Stakeholders in a Health Care Supply Chain, Source - (Burns 2002)

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The "producers" are the ones that manufacture the health care products such as medical

equipment, pharmaceuticals and other medical supplies. The GPO's (Group Purchasing

Organizations), wholesalers and distributors form part of "purchasers" who help in bringing

these products to the market. The "providers" are the last mile of the health care supply chain

with primary focus on serving the patients. As shown in figure2, they include IDNs

(Integrated Delivery Networks), hospitals, physicians and pharmacies. The complexity is not

just in the kind of stakeholders involved but also in terms of the physical goods and services.

(Kumar 2008) lists out some of the key aspects of healthcare chains that make it unique as

well as challenging. The innumerable variety of drugs, medical equipments, the ever evolving

technologies, changing health care aids, patient transportation vehicles are a few of the

aspects he mentions. Some of these supplies are critical, as lives depend on it. Hence there is

always a need to keep a certain level of "safety stock". Also many of the drugs and medical

resources have a short "shelf life" which can lead to increased wastage. In such a scenario

purchasing needs to be short term (i.e. 3-6 months) except for supplies like medical

equipment or patient transportation vehicles. These myriad of supplies pose huge challenges

for purchasing professionals or demand planners in framing the right kind of strategy that will

help reduce costs, provide product quality and safety as well as ensure that the regulatory

compliance is met. A recent survey conducted on respondents from a heath care supply

chains in the U.S, shows that meeting regulatory compliance is one most challenging aspects

in a health care supply chain (UPS 2011).

Figure 2 - U.S HealthCare Supply Chain Challenges, Source - (UPS 2011)

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In addition the purchasing strategy will also depend upon the physicians’ education,

preference and experience. As pointed out by (Chen 2013) there may not be a direct link

between those making buying decisions (healthcare managers) and those making use of the

supplies (physicians). An effective purchasing strategy in health care must consider all these

factors. Some of the contemporary strategies include first performing ABC analysis to

identify key products or process that take up maximum costs or resources. Group or

Collaborative purchasing is another approach that can to a great extent tackle some of

challenges faced by the health care supply chains which are discussed further in detail.

2.1 ABC Analysis in Health Care Purchasing

The main objective of a health care facility be it hospitals, pharmacies or nursing homes is to

ensure there is adequate stock or uninterrupted supply of key items (Kunders 2000). As seen

earlier, product life cycles of medical supplies are short as well quite complex in terms of

product mix. (Burch 1994) in his book reveals how this approach is appropriate in a scenario

where product life cycles are shorter. (Barker 1993) in his research identifies how this

approach could help purchasing managers in better structuring their purchasing strategies,

make-or-buy and sourcing decisions. As the name suggests the focus shifts from managing

costs to managing activities. In this approach the products or supplies are classified into three

categories A,B,C in decreasing order of their criticality. The A items constitute of the smaller

amounts in terms of quantity but consume the largest amount of resources. These require

tighter control, closer watch, rigid estimates and lower safety stocks. B items that are those in

between that require reasonably strict monitoring and control, moderate safety stocks and that

can be managed by middle management. The C items are the ones that consume lesser

amount resources but are larger in terms of quantity.

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Figure3 - Example of ABC Analysis Cumulative Curve of Pharmacy Store, Source - (Devnani 2010)

Figure3 is an example ABC analysis carried on pharmaceutical store in PGIMER,

Chandigarh, India. This enabled the management to identify the critical items that need in

order to identify items that needed stringent control by the healthcare management especially

in developing country like India where resources are limited and must be utilized properly.

This also enables health care firms to better analyse the activities that do not add value such

as procurement of certain medical supplies or ones that do not need a specific kind of storage.

Reducing non-value add activities can further help in the reduction of suppliers, improved

design, reducing unnecessary spending while ensuring the required service delivery is met

(Dowless 1997).

2.2 Collaborative Purchasing in Health Care

Collaborative purchasing also known as "cooperative" (Rozemeijer 2000) or "consortium"

(Macie 1996) purchasing is a form of purchasing where different buyers procure supplies

from the same vendor (Saha 2011). The consortium of buyers (predominantly hospitals in

healthcare sector) who share common interest, pool or share purchasing volumes of supplies,

which could also include information and resources (Schotanus 2011). This an effective

strategy especially in the healthcare sector because of the huge volume of medical supplies

that are needed and purchased by hospitals at a regular basis. In the process of aggregating

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volume of specific commodities the consortium can leverage the collective bargaining power

with the vendor and get a better price, due to the economies of scale they achieve together

rather than by doing it by themselves. The purchasing power of the consortium because of the

sheer strength in numbers can negotiate better with respect to prices, discounts and other

cooperative benefits. The benefits are not just in terms of price but provide various other

advantages. It reduces the time of contract development process that usually involves supplier

research, preparing a bid, invoicing and making a purchasing order. The buyers also can

strive to attain better quality of the supplies from the vendor. In addition, the hospitals can get

access to information, technical expertise and knowledge from fellow members which they

can use to form their own best practices. However it is important to get the right strategic fit

in terms of having the same interests and requirements which need to be defined prior to

collaborative purchasing process. The competencies of members and their purchasing

patterns are other factors that need to align while forming the consortium (Bakker 2008).

(Nollet 2005) emphasises that this alignment needs to be within the consortium as well as

between the consortium and the vendor. More importantly it needs to be aligned in meeting

the final objective which is meeting the customer expectations.

Figure4 - Alignment Framework In Collaborative Purchasing, Source - (Gobbi 2015)

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3. Purchasing in the Fashion Industry

The fashion industry comprises of establishments that deal with clothing and clothing

accessories which is a typical example of "made-to-stock" products. The industry is

characterized by short product life cycles, volatile customer demands, tremendous variety of

products and long supply process (Sen 2008). In such an environment timing or "time to

market" is an all important factor which is highly dependent on the forecasting capabilities of

a company. The industry needs to constantly ensure that their product satisfies the customer

needs that are ever changing with seasons. The performance in this sector is best judged by

the capability of the firm to produce the right amount at the right time. A situation of

overproducing where items remaining on the self for a long time is highly undesirable and at

the same time falling short in the opportune moment leads to loss in sales revenue. In order to

forecast better it imperative to have supply chain visibility (Schoenthaler 2003) to get real

time information on purchase trends, inventory stock levels, time of delivery of shipments.

This is where technologies such as RFID, Barcode and integrated systems such as ERP and

EDI, comes in handy. A typical apparel supply chain is shown in figure5, where proper

monitoring and tracking of supplies is carried out at various points in the chain are illustrated.

The forecasting depends hugely also on the consumer perceptions and purchasing patterns. A

survey carried out by (TIA 2008) classifies consumer requirements into three tiers based on

the decreasing order of priorities. First tier constituted of factors such as fit, easy care and

durability, second came in as price/value, bleachability and fabric blend and only third tier

constituted of brand name, hand wash, cold wash and dry flat. To encompass all these

requirements and considering shorter span of product life along with cut-throat competition,

to stay with trends and stay above the curve, it is indispensable for fashion retailers to not

only have a fabulous marketing strategy but an effective supply chain with the right

purchasing strategy.

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Figure5 - Apparel Supply Chain Configuration, Source - (fibre2fashion 2009)

3.1 Fast Fashion Concept - The ZARA Case

As global trade in apparel continues to grow and the lightning speed at which trends are

changing, companies need to quickly restock their shelves with latest trends to stay afloat in

this highly competitive sector. To counter this fashion retailers have improvised and adopted

a concept called “Fast Fashion" where latest high cost luxury trends and designs move from

catwalk quickly into the market at lowest possible cost (Annamma 2012). It thrives on rapid

prototyping of small batches of large variety clothes coupled with an efficient and fast

transportation and distribution systems. (Cachon 2010) elucidates the two key components

that is a must for "fast fashion" which are "quick-respond" techniques and "trendy" products

design techniques. ZARA a leading Spanish clothing and accessories retailer are considered

as pioneers in fast fashion. Though many firms claim to be quick to respond to the changing

demands of markets and customers, few actually have the requisite agility in their supply

chain and ZARA is one such company. ZARA’s agile supply chain was one of the key

factors for the tremendous growth it achieved in the last decade as shown in figure6, with its

major expansion initially coming from Spain and in Europe. (Zhelyazkov 2010) describes

how ZARA used the agile supply chain which includes an agile purchasing mechanism and

positioned itself third in fast fashion retailing. Unlike other fashion chains where it takes

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anywhere between 6-9 months ( far east clothing) , 4 months in case for an international

brand, ZARA takes only about a week (Zhang 2008).

Figure6- ZARA Stores Growth & International Expansion, Source - (Palladino 2010)

3.2 Zara Core Purchasing Strategy

ZARA is typically a vertically integrated retailer (Palladino 2010) where it predominantly

(about 60%) uses an "in-house" design and production system relying on its own capabilities

in manufacturing their product. In such a scenario it becomes difficult to oversee such a large

chain and purchase the right amount of fabric, produce the right quantities and reach its

products quickly to the market. For this the firm uses a combination of "Push" systems like

MRP (Materials Resource planning) where they produce goods depending on estimated level

either using extreme learning machine (ELM) or Grey Model (GM) for forecasting (Tsan-

Ming Choi 2012), as well as "Pull" systems like JIT (Just-in-time) where actual demand is

used to move inventory quickly into the market.

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Figure6 - Pull and Push Strategy, Source - (Palladino 2010)

For JIT, approximately only one half of the fabric purchased is kept undyed enabling "in-

season" or "mid-season" updating (Palladino 2010). It uses the ABC analysis discussed

earlier to identify the riskiest products which are then produced in small batches or under

contact suppliers who are located close by. This "in-house” production also leads to rapid

product turnover thereby creating an atmosphere scarcity and opportunity in ZARA stores.

Customers know that new arrivals come in a span of two week (also known as " two magic

weeks") and may not be available thereafter. In addition it has a unique response system

consisting of human resources, information technology and the use of robots in highly

automated factories that enables it to reduce the cycle time. The push strategy which highly

influenced by the speed of accurate forecasting coupled with their pull strategy that is

enabled by the ZARA's backward vertical integration helps in its inventory optimization

process while meeting the customer requirement in a short span of time.

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Figure7 - Cycle Time Compression Through Quick Response, Source - (Palladino 2010)

As shown in figure7, the design and procurement start between 3 to 6 months before the

selling season where about 65 percent fabric needed is captured. However only about 15 - 20

percent of the production begins during this stage, the remaining happens based on sales

trends, where sizes and type of items (smaller tweaks for example, V-neck instead of round

neck) are delivered to stores on a "need basis" in a span of not more than 10 days. As seen in

figure7, 40-50 percent, happens "in-season" compared to the traditional industry where there

is only about 20 percent. Most fashion retailers emphasize more on demand forecasting (or

the push system), whereas ZARA's core strategy is to move in line with their customers (or

the pull system) which is their key differentiator and competitive advantage.

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Figure7 -ZARA vs Traditional Industry Product Commitment & Markdown, Source - (Palladino 2010)

4. Comparing the Purchasing Strategy between Fast Fashion and Healthcare

As seen in both sectors, the purchasing mechanism needs to be abreast with changing needs

of consumer. Be it the services sector or retail environment, the ability to respond quickly is a

competitive necessity and essential to be sustainable. Health care sector where there is myriad

of products and services, short shelf lives, critical nature of supplies and complex nature of

regulatory environment, the purchasing strategy often used is collaborative where a Group

Purchasing Organizations cater to multiple requirements of health care providers. These

GPO works closely with the vendors to develop replenishment models that fit the

requirements of the consortium. A alignment of the strategic needs, which includes volume,

time, price and quality of the products is first agreed upon which enables a cost effective

utilization of the medical supplies. In comparison, the fashion industry, though can also

benefit with strategic partnerships with suppliers, a collaborative purchasing practice is not

sensible considering the competitive environment and secrecy needed in design and

production. Firms have to evolve their own purchasing mechanisms by having effective and

advanced short term forecasting methods to produce the right quantity but more importantly

need to have the right pull mechanism in order deliver products quickly to the market and

stay abreast with the changing trends. These strategies used in retail have not been

completely adopted by health care. (Rossetti 2013) suggests that healthcare could benefit

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from using the best practices in retail industry and investing in purchasing and inventory

management mechanisms.

5. Conclusion

In a world which is constantly evolving, with rapid changes in technologies, consumer

buying patterns and with newer products hitting the stores more frequently than before, firms

need to quickly adjust and adapt and must be able to anticipate and predict the needs in order

to match supply with demand and stay sustainable. As seen in this paper, organization across

the heath care supply chain as well as fashion retail chains are taking measures to reduce

costs and increase their operational efficiency by smarter procurement practices. Healthcare

though is lagging behind in terms of effective resource planning compared to retail and need

to identify the right purchasing strategies and foster a system wide adoption of latest

innovations to achieve better results and customer satisfaction. As we seen in this study an

effective purchasing strategy plays a crucial role and could well spell out the difference

between success and failure of a business.

6. References

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