Supply Chain Management

Procurement at Betapharm Corp. (A): Case

Analysis Questions

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1. Betapharm centralized the procurement department and delegated almost all
purchases of goods and services to this department. Do you agree with this decision?
What are the pros and cons of such an organizational form? Is this organizational form
better suited for specific types of products or services?
Solution:
At Betapharm, for each purchased product, they formed a sourcing group, a cross-
functional team comprising representatives from procurement, quality, technical, finance
and logistics. This team designed the sourcing strategy of the product starting with
initiating the process, analyzing the market, identifying the supplier base, and spending
analysis of the cost. They then leveraged the sourcing system, manual or ePass to finalize
the suppliers. This team was also responsible for contracting, planning, and savings
analysis and continuous improvement of the process.
This decision makes sense for the standardized products such as the Global Hotel
contracting. However, for more complicated products with high-quality standards such as
procurement of malic acid, this could present certain issues. Since a centralized team will
be more focused on cost-saving, quality could take a back-seat which could result in
cancelling of the license of Betapharm to sell the drug. This can be countered by ensuring
people from quality team are well represented in the sourcing group. In case of companies
which procure multiple raw materials with high quality standards, one will have to form
multiple sourcing teams which could increase the cost of centralizing the product.
Pros of the process:
a) Minimization of total cost of supply sourcing and not just per unit cost of supply.
b) Leveraging future purchases by long term contracts and innovative bids.
c) Integration of purchasing strategies and procurement plans, with management of
company-wide purchasing system
d) Uninterrupted supply of goods and services over a longer period while maintaining
pre-set quality standards.
Cons of the process:
a) The responsiveness and speed of supply is lost, due to predetermined prices and
standards and abrupt changes cannot be subsumed.
b) Is ineffective where a process has unique operational requirements.
c) Quality changes and new product developments are sluggish.
d) No clear ownership of purchase decisions.
This type of procurement is suitable for standardised and homogeneous products with
quantifiable procurement criteria. For products with complex requirement, centralised
procurement can work if there are limited products to procure. In case of a large product
base, the same can be decentralised.
2. Are e-Sourcing tools an asset or a liability to a global organization such as Betapharm?
What are the pros and cons of using technology to help negotiate procurement
contracts?
Solution:
eSourcing tools are both an asset and a liability to a global organization such as
Betapharm. For Global Hotels, eSourcing acts as an asset, but for the procurement of
Malic acid for Exelon, eSourcing can become a liability. Since Betapharm is a
pharmaceutical company, raw materials used in the medicines have to meet specified
regulatory products. In this case, quality becomes more important than price.
Pros of eSourcing:
a) Savings in Procurement cost: Automating the procurement process can be beneficial
for companies that place large number of purchase order during a business cycle. This
can help in reducing the transaction cost, human resources in identifying the supplier,
etc. As per an estimate by the National Association of Purchasing Management in the
U.S., usage of e-procurement can reduce the procurement cost by £67 per order.
b) Reducing time to purchase products: eSourcing can help in reducing the procurement
process as it will reduce the turnaround time at each step by reducing paperwork,
increase transaction speed and identification of suitable supplier based on the
parameters specified. This will reduce the overall turnaround time of contracting and
hence, contract life can be shorter.
c) Transparency and standardisation in the process: eSourcing will bring transparency
and standardisation in the process as the suppliers are selected on specified criteria
and hence, is suitable for the hotel contracting for Betapharm
Cons of eSourcing:
a) Expensive for small supplier base with complex requirement: In cases where the
supplier base is small and has complex requirement, the process can be expensive
than manual process. As in the case, suppliers for malic acid are limited and it needs
to meet high quality standards and hence, eSourcing might not be the best process in
this case as this has impact on healthcare industry and hence, would require trust and
relationship which is tough to quantify. Betapharm would not want to take risk with
the quality for a cheaper price in this case since the product is used in healthcare
industry.
b) Onboarding of suppliers: For niche products, there can be resistance in bringing the
supplier base onboard a new technology platform. Since the suppliers are limited, they
hold a higher bargaining power in this case and hence, migration would not be an easy
process.
c) Micromanagement: Options of customisation can make the process complicated than
needed resulting in longer approval process and evaluation because of micro
management.
3. Should Betapharm use reverse auctions to negotiate global hotel contracts? What
would be the greatest concerns with using reverse auctions to negotiate these
contracts?
Solution:
We believe that Betapharm should use reverse auctions for negotiations of global hotel
contracts. The reason for this is the vast number of hotels available to offer their rooms
to Betapharm (basically leveraging on the large number of suppliers i.e., Hotels). Knowing
about the confirmed customer and the potential of business that Betapharm would bring
to these hotels will make them bid at lower cost. Also, the employees of Betapharm, who
are not aware of the stay options at their destination, opt for hotel according to their
personal choice without any research of hotels and their rents available in vicinity.
Reverse auction would help in developing a standard through which rooms will be booked.
Other than that, it would establish a connect between Betapharm and the hotel. Global
Hotel contracts is a standardised product. Betapharm can leverage the high volume to get
discounts. Since the quality standards can be managed through a standard questionnaire
and can be quantified as was seen in the exhibit. This will ensure that quality parameters
can also be taken care of through reverse auctions. A central contract will reduce the
variability in prices and will make the hotel liable to provide an accommodation at the
contracted price safeguarding it from the seasonal and demand fluctuations.
The greatest concern using reverse auction is that the suppliers are aware that the
purchasing decision would be taken on the basis of lowest price hence even if the supplier
is awarded the contract, it will always be uncertain about its future contracts, hence, no
loyalty would develop. This might lead to poor service during the course of contract and
hence could overall increase the cost for Betapharm.
Another concern is Betapharm spends €70 million on 500,000 hotel room nights (that is
€140 per day) using conventional method while management estimated that using
reverse auction, it would cost them €65 million for 450,000 hotel room nights (that is €144
per day), hence the cost of renting hotel is increasing by €4 a day.
Also, as Betapharm does prequalification process regarding suppliers but still there is a
possibility that highly rated hotels wouldn’t get a chance of being selected in reverse
auction as they might presume that bids are selected on lowest price and knowing their
rates are higher than other low -rated hotels, it would discourage them to even participate
in the auction. Hence, Betapharm might loss premium hotel and their services.

4. What are the benefits and risks of using reverse auctions to select and negotiate with
new, Asian suppliers for Malic Acid?
Solution:
The benefits of using reverse auctions (RA) to select new supplier is quite apparent. First,
as per Exhibit 5, this process has helped Betapharm to find out the lowest cost supplier.
Second, using the same exhibit, we can infer that Tao Pharmaceuticals currently supplies
at €145 per kg which is second lowest in comparison to the bids received. Using this
information, Betapharm can renegotiate prices with Tao after completion of contract.
Third, the anonymous nature of RA prevents any collusion within suppliers. Fourth, this
process can help Betapharm expand its supplier base. Finally, the acceptance of
‘innovative bids’ can help Betapharm select multiple suppliers based on the quantity it
wishes to order, in such a way that it reduces the ‘total cost of owning’.
There are certain risks associated with using RA for selecting new supplier for Malic Acid.
First, Malic Acid is a key ingredient of the drug. It needs high quality and technical
standards which the Asian suppliers may not be able to provide. Second, even if
Betapharm has worked with them before, there is a possibility that those firms may not
be able to execute such a large-scale project. There may be uncertainty in lead times,
technical capabilities and quality control standards. It also depends on their willingness to
invest. Third, even if they are willing to invest, the technical know-how and technology
transfer may take significant time depending on the knowledge and skill-level of Asian
suppliers. Fourth, Tao may come to know about the auctions and can then choose to not
continue with Betapharm at all or renegotiate higher prices for future supplies. Fifth, the
regulatory approvals could take 2 years and there is uncertainty whether they will get it
or not. Sixth, there is a huge variance in the sealed bids among the 5 suppliers, for
instance, Chun Wu offered a price of €59 whereas all other suppliers were in the range of
€175-286. Hence Betapharm may not accurately predict the ‘total cost of owning’ as they
are not much aware of the support that would be needed by suppliers from them. Finally,
since the large-scale sourcing from Asian suppliers was not done in the past, there would
be limited data available for decision-support tools, analytic tools and electronic
auction/sourcing tools. Hence it may not be that efficient as it was with western suppliers.