INSTITUTIONAL & GOVERNMENT MARKETS
Our discussion has concentrated largely on the buying behavior of profit-seeking companies. Much of what we have said also applies to the buying practices of institutional and government organizations. However, we want to highlight certain special features of these markets.
The institutional market consists of schools, hospitals, nursing homes, prisons, and other institutions that must provide goods and services to people in their care. Many of these organizations are characterized by low budgets and captive clienteles. For example hospitals have to decide what quantity of food to buy for patients. The buying objective here is not profit, because the food is provided as part of the total service package; nor is cost minimization the sole objective, because poor food will cause patients to complain and hurt the hospitalâ€™s reputation. The hospital purchasing agent has to search for Institutional food vendors whose quality meets or exceeds a certain minimum standard and whose prices are low. In fact, many food vendors set up a separate division to sell to institutional buyers because of these buyersâ€™ special needs and characteristics.
Heinz produces, packages, and prices its ketchup differently to meet the requirement of hospitals, colleges, and prisons. Aramark Corp, has a competitive advantage when it comes to providing food for the nationâ€™s prisons, a direct result of refining its purchasing practices and its supply chain management.
Where Aramark once merely selected products from lists provided by potential suppliers, it now collaborates with suppliers to develop products that Aramark customize to meet the needs of individual segments. In the corrections segment, quality has historically been sacrificed to meet food costs operators outside that market would find impossible to work with. When you go after business in the corrections field, you are making bids that are measured in hundredths of a cent says president of Aramarkâ€™s Food & Support Services. Any edge gained on the purchasing side is extremely valuable.
Aramark took a series of protein products and sourced them with unique partners at price points it never could have imagined before. It was able to drive costs down by working with partners who understood the chemistry of proteins and knew how to do things to lower the price but which could still create a product very acceptable to Aramarkâ€™s customers.
Aramark replicated this process with 163 different items formulated exclusively for corrections. Rather than reduce food costs by increments of a penny or so a meal, which was the previous norm for this market. Aramark succeeded in taking 5 to 9 cents off a meal while maintaining or even improving quality.
In most countries government organizations are a major buyer of goods and services. Government organizations typically require suppliers to submit bids, and normally they award the contract to the lowest bidder. In some case, the government unit will make allowance for the supplierâ€™s superior quality or reputation for completing contracts on time.
Government will also buy on negotiated contract basis, primarily in the case of complex projects involving major R&D costs and risks and in cases where there is little competition. Government organizations tend to favor domestic supplier. A major complaint of multinationals operating in Europe was that each country showed favoritism towards its nationals in spite of superior offers available from foreign firms. The European Union is removing this basis.
Because their spending decisions are subject to public review, government organizations require considerable paperwork from suppliers, who often complain about excessive paperwork, bureaucracy, regulations, decision making delays, and frequent shifts in procurement personnel.
In India supplying to institutions is not that cumbersome as compared to supplying to government. For supplying to government the suppliers have to register first fulfilling several norms with organizations like Indian Railways, DGS&D, Ministry of Defense, ISRO, Department of Atomic Energy and several others. From registration to supply it may involve a few tens or hundreds of paper in addition to Red Tape. That is why only large suppliers venture to make a bid to supply to government as the medium and small enterprises cannot afford the costs of clerical work.