A few days ago, the Pittsburgh Post-Gazette ran an article that indicated that new Medicare competitive bidding procedures soon to go into effect may favor large suppliers vs. small suppliers. While the article described the new procedures, it didn’t really discuss the current procedures so that one can understand what is wrong today.
But the effort seems geared toward the timeless cost reduction principle of supply base consolidation as the article states “a list of 20,000 nationwide suppliers would be culled by several thousand.”
The changes are being protested by small business advocates who feel that quality will decline and small businesses will go out of business.
On a separate but related front, Jason over at Spend Matters yesterday posted a blog entry noting that the University of Texas divides its $271 million in annual spend among 1.5 million suppliers. He remarked that “Methinks everything really is bigger in Texas — including the cost of procurement!”
But I have this question: is government procurement efficiency bad for the economy?
Doing business with fewer suppliers means that small suppliers, who do not have the capacity to handle large volumes, will not be able to compete and survive. And aren’t small businesses critical to a successful economy? After all, “small businesses create two out of every three new jobs and account for nearly half of America’s overall employment,” according to the White House’s Web site.
Now, in the private sector, I feel strongly that being inefficient for the sake of philanthropy is wrong in the sense that it may conflict with an organization’s mission to maximize profits. But in government, I’m actually undecided, believe it or not.
OK. Government has a duty to reduce costs to benefit tax payers. So instead of awarding business on a single-transaction bid, it will look at consolidating its spend into longer contracts.
But will this truly reduce costs? I think that there will be some increases in cost and some decreases in cost, actually. And I don’t know what the net effect will be.
What do I mean?
Well, when bidding on single transactions, small suppliers may beat the prices of large suppliers. That’s how they get so much government business to begin with.
But if those single transactions were now packaged with other transactions, those same small suppliers may not have the capacity to fill the order. The large suppliers’ package unit price will likely be less than their individual transaction unit price, but it is not known whether the total package price will be less than the sum of all small suppliers’ individual transaction prices. And, if it isn’t, whether the premium will offset the savings of dealing with fewer suppliers. Plus, with fewer small suppliers to compete against, big suppliers may feel less pressure to keep prices low.
But it goes beyond that.
If small businesses are no longer able to compete for a large amount of government work, theoretically jobs will be lost. What happens when jobs are lost? Who picks up the tab? That’s right, the government!
You watch. If the economy does slip into recession, you will probably see the government extend the term of unemployment benefits. You will probably see tax cuts in the form of advance checks sent to tax payers. All of this will increase the national deficit. And increase government costs.
So keeping small businesses in business through inefficient government procurement may actually benefit the economy.
Look, I don’t have a definitive answer on this. But I do know enough about the situation to say that there are economic benefits to the inefficiencies that help small businesses get government contracts.
Would I ever teach government purchasers to remain inefficient? Well…no.
This could be a topic that many of you will have strong opinions on one way or the other. I’d love to hear them. The hundreds of other daily readers of this blog probably would, too. So feel free to post a comment!
To Your Career,
Charles Dominick, SPSM
President and Chief Procurement Officer
Next Level Purchasing, Inc.
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