by Stephen B. Gordon, lead coordinator of the Continuity of Supply Initiative (CoSI)
For the past two and a half years, times have not been good for state and local governments or the millions of the people they are -- or, once were -- responsible for serving. Since early 2020, more than a million people in the U.S. have died from the COVID-19 virus because, among other things, healthcare providers in the private, nonprofit, and sectors did not possess the vaccinations, the personal protective equipment (PPE), or the medicine early enough in the pandemic to respond to the needs of their patients or to protect their front-line and support staffs.
The unanticipated sudden arrival, the severity, and the rapid worldwide spread of the COVID-19 pandemic, combined with resultant breakages in vulnerable supply chains, made the challenges facing states, localities, and other U.S. healthcare providers especially daunting. The longstanding, well-known desires of state and local governments and other consumers to pay prices that were as low as possible and the ways in which producers and providers of goods and services had aggressively cut costs in their supply chains to respond to the demand signal from consumers for low prices had set the stage for supply chain failures.
The institutions and public entities that had been substantial buyers of personal protective equipment prior to the pandemic were largely able to continue fulfilling their requirements. That was not true, however, for the hospitals, clinics, health departments, and the fire, rescue, and law enforcement departments that, alone, did not have the leverage in the marketplace to assure they would continue to get the PPE they needed.
Prior to the outburst of COVID-19, most of these smaller buyers of PPE had used so-called cooperative procurement agreements, which had worked well for them in normal times. However, when demand for PPE spiked steeply and suddenly, the suppliers who held these cooperative agreements told their lower-leverage customers that they could not fulfill their requirements – and, as far as I know, faced no consequences. The jilted customers were forced into what they soon would call the “Wild West”, where in competition with one another they chased after previously unknown and unqualified brokers, who offered PPE of uncertain quality at outrageous prices.
Many of them demanded upfront payment and sometimes the supplies that states and localities ordered and paid for in advance never arrived; on other occasions, the goods arrived but were seized by federal authorities. Except in those instances where inspections revealed that the products received were clearly unacceptable, the seizures left a very bad taste in the mouths of the frustrated state and local officials who had placed the orders.
Among the many other triggers that could lead to unacceptable contractual results for state and local governments and their stakeholders, is a lack of competition in industries that supply critical goods and services. Consider, for example, the baby formula shortage and the associated price increases for this product that hit the headlines in 2021. When one of two factories operated by one of the four U.S. manufacturers that control 90% of this market had to be shut down due to both supply chain issues and FDA’s detection of a dangerous contaminant in that factory’s output, many families had to make-do or do without until the federal government resolved the shortage for the time being by invoking the Defense Production Act and launching Operation Flyover. Despite the temporary success in resolving the problem, the underlying vulnerability in the baby formula market remains.
So, what can state and local governments, in particular, do to assure that they never again will find themselves without PPE or any other goods and services that they simply cannot do without? First, they must acknowledge that while the pandemic was a furiously extreme event, it’s overwhelmingly likely that there will be other events in the future that will likely – without proper preparedness -- lead to supply shortages, price increases, and other unacceptable consequences for their stakeholders. Second, they must recognize that while the future triggers for such unacceptable consequences may include global pandemics, they also may include more mundane circumstances in which, for example, a small number of suppliers control their market.
State and local governments can, if they choose, enter into supply agreements that will assure continuity of supply at affordable prices when suppliers’ primary supply chains break. That will require them to move away from convenient but potentially unreliable, typically low-price-focused sourcing options to reliable competitively sourced agreements in which state and local governments collaborate with one another and with manufacturers and distributors to plan, develop, and assure success and, in so doing, achieve best value as opposed to only economy and efficiency.
A significant portion of the value derived through such agreements will be the seamless transitions to backup supply chains for which increases in cost, if there are any, will be based on formulas pre-provided in the agreements. Each proposer’s price will be scored in relation to the value offered in its technical proposal; not “objectively” on-a-price to price basis.
It’s clear that there are no easy answers to assuring continuity of supplies, when there’s no certainty whatsoever about what goods and services, specifically, will be under pressure. But unless steps are taken in advance of a crisis, future disruptions are inevitable.
The contents of this guest column reflect those of the authors and not necessarily those of Barrett and Greene, Inc.