Building purchasing power: a look at how volume purchasing works in Arizona

Food and Nutrition, Fall-Winter, 1989 by Dick Montoya

Building Purchasing Power

It is an economic fact that volume purchasing means lower prices. For years large school districts have been able to negotiate favorable contracts with food processing companies to turn their hard-to-use bulk supplies of USDA surplus commodities into portion-sized foods more easily used in school lunches.

Small and rural schools, on the other hand, have had a difficult time finding processors who will handle their relatively small quantities of bonus commodities. They also pay more for the products and have higher transportation costs.

Turning such products as flour and dairy products into foods like pizza and burritos is often not economically feasible. Rather than processing the bonus federal foods into finished products, small and rural schools are likely to purchase such school lunch favorites as pizza and burritos directly from food wholesalers or supermarkets.

Giving schools

buying power

As assistant director of the Arizona Department of Education's commodity unit, Janet Lander wanted to give small and rural schools not only the purchasing clout the larger schools had long enjoyed, but also the variety of products possible through food processing programs.

Building on an idea advanced by James Mixon, a consultant hired by USDA to look at ways to improve the overall federal commodity distribution system, Lander came up with what's called the Master Supplier Program.

The Program was designed to take advantage of the savings derived from volume purchases by consolidating at the state level the surplus commodities local agencies receive from USDA. With thousands of pounds of surplus commodities to work with, the state can negotiate contracts for finished products at volume discounts and also save on transportation and storage costs by shipping commodities directly from USDA warehouses to the processing companies.

In a nutshell, Lander's Master Supplier Program calls for: selecting one processor for each group of finished products; stocking the finished product in a central warehouse where agencies can place orders and expect prompt delivery, often on a weekly basis; setting up a selection panel to evaluate products proposed for purchase; and contracting with a management company to market the program, and handle stocks, distribution and billing.

As a result of the program, local agencies can order the finished product at the same net price, whether they be large or small, located in the city or far out in the Arizona desert.

Finished products for the Master Supplier Program are determined by representatives of the local agencies. Price alone is not the determining factor. In selecting a product for the program, the state conducts a "blind cutting" where students, a state representative, and representatives from school food services from several schools and other recipient agencies--about 12 people in all--meet to sample the quality of the bidding processors' products.

The results of that "blind cut" are then submitted to a five-member advisory council that looks at the evaluations, product prices, and the processor's performance record if the company has worked with the state before. The council then makes a selection.

Recipient agencies

have a choice

Schools and other recipient agencies do not have to buy the Master Supplier Program products. "If they choose not to purchase our product," Lander explains, "they can go out and buy it commercially. What they can't do is take their commodities to another processor to produce a like product. Once they commit their surplus commodities to the Master Supplier Program, we include that amount in our bid proposal to processors."

In the program's first 4 months, Arizona negotiated contracts for and regularly stocked 38 processed products. They expect to add seven more before the next school year.

All recipient agencies in Arizona--including schools, hospitals, prisons, health care operators, summer food programs and camps, and nutrition programs for the elderly--can order the products rights off the shelves of the central warehouse in Phoenix at the net price (cost of the item less the value of federal surplus commodities plus the fixed fee) and all pay the same delivery charge.

"The state's workload," Lander says, "has not increased one bit. In fact, it has decreased because most of our processing activities have shifted over to the Master Supplier Program."

Not all processing has shifted over to Master Supplier Program, however. For example, the state continues to handle meat and poultry processing and processing of entitlement or allocated commodities USDA purchases specifically for certain programs. "We want to start out slow," Lander says.

Marketing and

delivery contracted

In September 1988, 20th Century Food Products, headquartered in San Clemente, California, was awarded a contract to handle distribution and marketing for the Master Supplier Program.

"We decided to contract out the distribution and marketing activities," Lander says, "because we didn't want to get involved in quality control complaints, warehouse inventory and control, ensuring accountability, invoicing, working with manufacturers and marketing." For its services, 20th Century adds a small fee to each case of product delivered.