7.4: Buying Strategies

Procurement strategies define how a good or service will be procured. In the public sector, this includes the decision to proceed competitively or non-competitively while supporting government needs, regional benefits, or other national objectives.

Cost-Plus Buying

Cost-plus buying is a purchasing procedure commonly used in many industries, including large food chains. An arrangement is made with a supplier to purchase all of a certain kind of food at a specific percentage markup over the supplier’s cost. The advantage of this method is that the markup is smaller than it would otherwise be. In addition to the cost savings realized for a lower markup, the purchasing agent saves time contacting other suppliers to get price quotations. The disadvantage of this system is that it is usually impossible for a purchasing agent to verify the supplier’s cost unless the supplier agrees to unannounced inspections of the firm’s books.

Another variation of cost-plus buying is the use of a prime vendor. The advantages and disadvantages of prime vendor purchasing are the same as cost-plus; however, some organizations need to be cautious in their use of these methods because of the purchasing regulations they are required to follow. This is particularly true of school systems since they are public institutions supported by taxpayers and must use competitive bidding.

Cooperative Buying

Public procurement officers need to understand the benefits of group or cooperative purchasing. Cooperative buying involves similar operations joining together to purchase products. It is commonly referred to as group purchasing. The organization of these units may be based on several considerations: membership in a regional hospital, educational association or council, the proximity of other institutions wishing to participate, a common religious affiliation or some other allegiance, or membership in a national purchasing program.

The obvious benefit of group purchasing is that it enables a relatively small facility to reap the same cost benefits it would enjoy if it were receiving mass purchasing discounts. In order to realize volume discounts, however, the group must agree to minimize the number of varying items ordered. This tends to limit flexibility in planning. Often, facilities that belong to a group purchasing program also go to a local secondary supplier.

Institutions can increase their cost savings and tighten their control over group purchasing procedures by designating a representative — preferably someone with purchasing experience — to monitor the group’s policies and standards. Collectively, members of the group can develop purchasing specifications to be used, in turn, by their purchasing agent in obtaining bids or quotations from vendors. The formulation of these specifications would be an obvious fringe benefit to the small operation with no specifications of its own to define the quality of the product it requires. The membership representative might also participate in product review activities and tests that encourage more objective and thorough purchasing decisions but are inconvenient and impractical for a single facility to conduct on its own.

Joint Procurement

Attributions

“7.4 Buying Strategies” is adapted from Introduction to Food Production and Service, copyright © by Beth Egan, licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

The multiple choice questions in the Checkpoint boxes were created using the output from the Arizona State University Question Generator tool and are shared under the Creative Commons – CC0 1.0 Universal License.