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STRATEGIC PROCUREMENT
Presenter: |
ESTELLE SETAN
Introduction
1. In the recent past government procurement has been in the public spotlight for all the wrong reasons.
2. The latest Auditor-General report suggested that unauthorised, irregular and fruitless and wasteful expenditure amounted to more than R30 billion across national and provincial government.
3. In 2013, Min Pravin Gordhan announced the establishment of the Office of the Chief Procurement Officer in the National Treasury.
Purpose of the O-CPO
The purpose of the O-CPO is: 1. To modernise the state procurement system to be fair, equitable, transparent, competitive and cost-effective.
2. To enable the efficient, economic, effective and transparent utilisation of financial and other resources, including state assets, for improved service delivery.
3. To promote, support and enforce the transparent and effective management of state procurement and the sound stewardship of government assets and resources.
Structure of the O-CPO
Chief Procurement Officer Divisional Support SCM Client Support SCM Policy, Norms & Standards SCM Governance, Monitoring & Compliance SCM Information, Comm. & Technology Strategic Procurement Transversal Contracting
One of the six functions in O-CPO whose primary task is to research, develop and implement strategic sourcing practices so that cost savings and socio-economic objectives are achieved.
Current State – Public Procurement
• Multiple policy objectives • Poor supply chain performance (AG results) • Highly prescriptive and complex • Not achieving value for money • High cost of procurement • Misaligned organisational structures • Limited SCM capability • High rates of movement and staff vacancies • Pervasive corruption • Operational challenge NOT SCM
Strategic Sourcing in the OCPO
1. These challenges and the recognition of the limitations that current procurement presents, resulted in a need for a differentiated approach to procurement.
2. Pursuant to the establishment of the Office of the CPO, the National Treasury introduced various interventions such as the concept of Framework.
Strategic Sourcing as a tool to support the SCM
What is Strategic Sourcing?
1. It is the
systematic
process that directs supply chain managers to plan, manage, and develop the supply base in line with the government organisation’s strategic objectives.
2. It is, furthermore, a
process
of understanding categories of goods and services, their
intended use
and their
supply markets
based on rigorous
analysis
, in order to identify the
leverage points
and develop the appropriate sourcing strategy which
reduces the total cost
to government and / or increase the benefits / value of the service / commodity to government.
Strategic Procurement Process
Outcome:
- Establishment of the Strategic Relationship(s) - Environment set-up and change management - Continuous monitoring and improvement of the strategic relationship
Implementation & Roll-out NEEDS Outcome:
A decision regarding the continuation of the Strategic Procurement initiative for the identified category(ies)
Outcome:
A selection of the most appropriate strategy option for the strategic supplier relationship approach identified.
What information is required for a concise overview of your commodity / category?
1.
Spend Area Overview 2. Marketplace Influence 3. Government Situation Overview
1. Spend Area Overview
1.
Spend Area Overview 2. Marketplace Influence 3. Government Situation Overview
1. What is the spend area?
• What are the categories and sub-catogories? • What products/services do suppliers provide and how?
• Is there overlap with other spend areas
2. How much do we spend?
• What is the breakdown by sub-category?
• What percentage of total enterprise spend does this constitute?
3. What is the total market spend?
• What is the size of the industry nationally and/or globally?
4. Who are the main suppliers in the market?
• How developed are their markets?
• What are the pros and cons of each?
1. Spend Area Overview (cont.)
1.
Spend Area Overview 2. Marketplace Influence 3. Government Situation Overview
5. Who are OUR main suppliers?
• Which suppliers constitute the largest amount of spend and why?
• What defines a preferred supplier and why?
• What is our strategy?
• Is there opportunity for rationalization?
• Are we sole-sourced?
• Does the supply base in this category put government at risk?
• When do the current contracts expire?
Who Needs it?
Leadership and CxO’s
• Need up to date reports to drive
strategic
direction.
• Need to see the data in broader, aggregated groups
Managers, accountants, etc
• Need to drill down into the spend data set to explore specific areas of interest.
• Need greater detail to drive
commodity category
decisions
Sourcing power users
• Need to locate, drive and monitor the next set of savings initiatives.
• Need greater detail to drive
specific commodity
decisions
2. Marketplace Influence
1.
Spend Area Overview 2. Marketplace Influence 3. Government Situation Overview
1. Changing Technologies:
• What are the trends in the marketplace? • How does this affect the products and services that will be available to the government institution(s)?
2. Marketplace Environment:
• Is this a growing market? Is the market consolidating?
• What trends should we be aware of and are they affecting our preferred suppliers?
3. Government Business Objectives:
• What are the institution's objectives?
• What is in place to achieve these objectives?
• Is this category a “strategic commodity”?
2. Marketplace Influence (cont.)
1.
Spend Area Overview 2. Marketplace Influence 3. Government Situation Overview
4. Geographic locations:
• Government institution geographic locations vs suppliers geographic locations.
5. Financial considerations
• How financially viable are our suppliers? What are their operating margins and is there risk of supply?
• What are the pitfalls we should avoid?
• What should be considered when qualifying suppliers?
6. Major Trends
• What are the overarching trends in technology, supply base consolidation, globalization, etc.
Tools for Market Analysis - PEST
Political • Government type • Government stability • Freedom of press, rule of Law, Bureaucracy, Corruption • Regulation/ De-regulation Trends • Social / Employment Legislation • Likely Political change Economic • Business Cycle Stage • Growth, Inflation & Interest Rates • Unemployment, Labour supply, Labour costs • Disposable income/ distribution • Globalization • Likely economic change • Population growth / Age profile • Health, Education, Social mobility • Employment patterns, attitude to work • Press, public opinion, attitudes and Taboos, Lifestyle choices • Likely socio-cultural change Socio-Cultural • Impact of emerging technologies • Impact of internet, and reduced communication costs • R&D Activity • Impact of technology transfer • Likely technology change Technological
Tools for Market Analysis – Porter’s Five Forces
threat of
new entrants
bargaining power of
suppliers competitive rivalry
bargaining power of
buyers
threat of
substitute products
3. Government Situation Overview
1.
Spend Area Overview 2. Marketplace Influence 3. Government Situation Overview
1. How many total suppliers in my spend area?
• Are there any notable trends in the size of the active supply base?
2. What is our compliance performance?
• Are all “business units” and regions using the agreements?
• How many contracts expire in the current year?
• What percentage of spend/budget is concentrated with the preferred suppliers?
3. What are the payment situation?
• Do we pay our suppliers on time?
• What are the concerns regarding payment?
3. Government Situation Overview
1.
Spend Area Overview 2. Marketplace Influence 3. Government Situation Overview
4. What are the main performance metrics we use to measure supplier performance?
• How are these metrics captured and used to drive improved performance?
5. What are the supply chain issues – delivery, quality, cost, responsiveness?
• Have there been issues with delivery timelines which violated contract SLA’s?
• Is there any dissatisfaction related to customer support, required quality adherence, inflated cost or price adjustments?
Government Impact Analysis
GOVERNMENT IMPACT ANALYSIS • Does the total purchase cost for the sourcing group represent a major part of the organization's total external expenditures?
• Do end-users perceive that the sourcing group provides significant value?
• Does the sourcing group differentiate the end product in an important way?
Area of Impact
• Expense base impact • Customer value impact • Product differentiation impact • Does the sourcing group provide access to leading technology critical to the value your end-user perceives?
• Leading technology impact • Would a sourcing group failure or shortage affect your end-users satisfaction / service delivery?
• Failure impact
No Yes Low High Overall Business Impact of the Sourcing Group Overall Impact
Total Cost of Ownership (TCO)
Internal model Supplier model Supplier Cost Elements Our Cost Elements
Collaboration
CORE TEAM
RESOURCE REQUIREMENTS
EXTENDED TEAM Project Leader Financial Resource (Budget) Category/ Commodity Manager End-user / client departments Legal representative Industry Stakeholders Technical coordinator Data Analylist/ Research Info Services CROSS FUNCTIONAL TEAM Change Management/ HR Industry Experts
Consolidate information
Consolidate the information gathered during the data collection and analysis process
Category 3 Category 2 Category 1 Key Drivers
• Government objectives and goals • Specific departmental drivers • Supply base challenge • Product complexity • Strategic directions
Supplier Analysis
• TCO elements where applicable • Cost drivers • Supplier cost breakdown • Supplier cost drivers • Supplier contract detail • Supplier performance
Commodity Characteristics
• Functional Specification • Design Specification • Quality Specification • Consumption • Product segmentation/grouping
Spend Analysis
• Spend by supplier • Spend by department • Spend by product/part • Historical spend data • Spend forecast
Supply Market Analysis
• Key players • Competitor activity • Market trends • Market capabilities • Product trends • Market segmentation and classification • Market economics • Government objectives for market growth
Supply Positioning Matrix – Peter Kraljic
2. LEVERAGE ITEM HIGH RELATIVE SPEND – EASY TO SECURE SUPPLY Procurement Focus:
Leverage Items, e.g. medical supplies
Time horizon:
Varied, typically 12 to 24 months
Key performance Criteria:
Cost/price and materials flow management
Typical Sources:
Multiple suppliers, mainly local
Items purchased:
Mix of commodities and specified materials
Supply:
Abundant
Decision authority:
Mainly decentralised
1. ROUTINE ITEM LOW RELATIVE SPEND – EASY TO SECURE SUPPLY Procurement Focus:
Non-critical /routine Items, e.g. office supplies, catering
Key performance Criteria:
Functional efficiency
Typical Sources:
Established local suppliers
Time horizon:
Limited; normally 12 months or less
Items purchased:
Commodities, some specified materials
Supply:
Abundant
Decision authority:
Decentralised
4. STRATEGIC ITEM HIGH RELATIVE SPEND – DIFFICULT TO SECURE SUPPLY Procurement Focus:
Strategic Items, e.g. infrastructure, social grant payments
Time horizon:
Up to 10 yrs; governed by long term strategic impact
Key performance Criteria:
Long-term availability
Items purchased:
Scarce and/or high value materials
Typical Sources:
Established suppliers
Supply:
Natural scarcity
Decision authority:
Centralised
3. BOTTLENECK ITEM LOW RELATIVE SPEND – DIFFICULT TO SECURE SUPPLY Procurement Focus:
Bottle-neck Items, e.g. electricity
Key performance Criteria:
Cost Management and reliable short term sourcing
Typical Sources:
Predominantly new suppliers with new technology
Time horizon:
Variable, depending on availability vs short-term flexibility trade-offs
Items purchased:
Mainly specified materials
Supply:
Production based scarcity
Decision authority:
Decentralised but centrally coordinated Criteria: supply, monopoly or oligopoly conditions, pace of Technological advance, entry barriers, logistics costs and complexity, and so on.
Source: Peter Kraljic (1983): Purchasing must become Supply Management; Harvard Business Review Sep-Oct 1983
Procurement Strategy Options
Strategy options within each approach are identified. Below are examples of the types of options available within each approach.
Exploit Buying Power
Consolidate number of suppliers Pool volume across units Redistribute volume among suppliers Combine volume from different commodity categories
Volume Concentration Product Specification Improvement Create an Advantage
Conduct product value analysis and engineering Substitute materials Pursue system buying alternatives Optimise life cycle costs Compare “total” costs Model “should-costs” Renegotiate prices Unbundle pricing Expand geographic supply base Develop new suppliers Identify supply/demand imbalances
Best Price Evaluation Strategic Procurement Joint Process Improvement
Reengineer joint processes Share productivity gains Integrate logistics Support supplier operations improvement
Supplier Base expansion Relationship Restructuring
Establish/develop key suppliers Employ strategic alliances/partnering Examine strategic make versus buy Develop integrated supply chain
Pyramid of Procurement Solutions
Strategy Implementation
Overall Strategy Selection Feasibility Filter Exploit Power Create advantage Best Fit Sourcing Approaches Best Fit Sourcing Options
• •
Volume Concentration techniques …..
…..
• •
Supplier base expansion techniques …..
…..
Joint process
• •
improvement techniques …..
…..
Technique
•
……
•
……..
•
……… “Best Fit” Techniques
•
…….
•
…….
•
…….
Action Required SWOT
• • •
…… …….
………
Centralisation vs Decentralisation
Value for money
Savings Opportunities
• Think outside your comfort zone to come up with cost savings ideas • Uncover opportunities within each category and sub-category • Streamline processes to eliminate admin burden • Endless list of opportunities 7%
27%
Value Add Traditional Result 3% 3%
6%
5% Supplier Management 5% Aggregation of need across units 4% Proper Demand Management Eliminate low value Middle-men Consolidate Volume Tough “Negotiations” Typical Result
Strategic Sourcing in the OCPO
KEY PRIORITIES 2014/15:
A. Framework for Strategic Procurement in Government B. Based on a high-level analysis of government’s spend on Goods & Services and key priorities in the NDP, the O-CPO identified the following projects for 2014/15: 1.
2.
3.
4.
Health Sector - Medical Equipment (Health Technology) – Budget speech 2014 Travel & Accommodation (Domestic Air Transport; Hotel Accommodation; Car Rental ) Communication – Cell phone related expenditure Computer Hardware (PC’s, Laptops, Tablets) C. Public Works Team) – Leases and government accommodation (PTI/SARS working
What can you do to assist the OCPO?
1.
2.
3.
4.
5.
Support the OCPO in it’s Key Priorities for 2014/15 Collaborate on the Strategic Sourcing Projects in identifying the most appropriate sourcing strategies relevant to the end-user and in line with market dynamics.
Think outside the box! Identify savings opportunities and share!
Identify new projects – Relevant to your environment – Relevant to the whole country