In many organizations, private and public, there is enough attention to the cost of purchasing but usually it lacks the real interest it deserves. On one hand the strategic importance of long-term partnerships, secondly the efficient procurement of goods and services. There is insufficient awareness of the fact that a small saving on purchasing could mean a large increase in Return on Investment. Such results can be observed by using the Du Pont Scheme.
As the Scheme shows, by savings 2% on the purchase, the ROI increased by 14.5%.
But one needs to realize that the buying process, involves more than just a good price. Savings on procurement will only succeed if it is an integral part of the strategy of the organization.
Once you have put Purchasing on the agenda of the board, you will face the difficult process of selections, negotiate and ultimately tender. For public organizations it also involves the strict and rigid rules in Europe which do not allow a buyer to really negotiate with parties, although this point of contact is most of the time the best chance to get a better price and conditions. The problems the purchaser faces when he follows the European rules are summed below.
The scope of the directives is not clear so there remains room for interpretation. What guidelines are in place at which situations? Which financial threshold is where applicable? By the multiplicity of amounts, types and units a buyer has room for interpretation.
Regulations are perceived as complex. Due to this the buyer will find loopholes and shortcuts.
Rules try to squeeze a highly differentiated system within a straitjacket. Tailor solutions is stifled. In many cases there is a negotiated ban.
Contracting organizations have a variety of publishing and tracking data in order for Europe to allow the control on the process. These data often have little value to the contracting authority. The effects of this are that purchasers in public organizations, but also the suppliers, become “creative” with the tendering process:
* Orders are cut into pieces to remain below the threshold
* Coherent products are purchased separately and later combined
* Still sticking to regular suppliers, thereby ignoring EU rules
* Colleges send to a phased acquisition
* Implementation of rules differ for each organization so there is no clarity for suppliers.
* SMe’s at a disadvantage. Assignments are often large, making procurement effort for smaller business too big.
In business, there is a separate purchase management training, but for the public sector with its specific requirements, there is often insufficient support. Often, the buyer position has little attention and has no real strategic function in the organization. There is also excessive expertise in order, as the engineer who develops the specifications in detail does not take into account that the buyer has not the ability to evaluate the engineer work. One is to rely on the engineer.
Decentralized procurement, especially in smaller towns, makes negotiating position has not improved. Smaller organizations often can not afford to establish a professional purchasing department, in which the required quality is available to optimize such purchase functionality.
The culture of organizations also plays a role. “Being the boss at home, that is the way we do business, fear of the unknown.” These factors are an additional obstacle to a good purchasing function.
The Selection Process:
The selection process seems clear with described criteria for which various tools are available to launch a tender. There are a number of pitfalls of which buyers should be beware off. Sir Telgen, professor at the University of Twente, evaluated the purchasing function in closer detail.[dutch link: ]
Quantity of suppliers:
The Economic Tender Quantity calculates the optimum number of bids and the expected price. More suppliers increases the likelihood of a lower price. More vendors means more costs of negotiation and evaluation of offers. In his presentation, he points to the importance of using the DuPont plan to show the importance and impact of purchase. By specifying the share of the purchase plan in DuPont, one obtains a better understanding of where the savings potential can be found.
A major problem in procurement is to purchase at a volatile market. People choose the lowest price, or a long-term interim solution with many escapes in the contract. By applying a probability distribution function, a strategic threshold price can be determined.
Increasing the purchasing function through cooperation offers the advantage of buying in volume, but organizations should invest more in order to maintain the joint purchasing function. There is also the question of how they will divide the purchase benefit. Goes to: Everyone equal, proportional to the volume or a compromise value. In determining the distribution it might be possible that a small batch has a large advantage as well absolute as relative. Large parties will then be reluctant to let smaller parties participate.
Vendor selection is about the award criteria, method of linking criteria, weighting of criteria, score each criterion and who is the real winner.
How an organization supports its tender? Within private organizations that often happens on a historical basis, personal relationships and experiences of other organizations with relevant suppliers. Private organizations are completely free, it is a purely internal process where no public publicity is given.
For public organizations, the European procurement rules comes into play. With strict conditions for an open tender to organize, with sealed bids, evaluation and a little to no space to negotiate.
There are three basic methods for connecting criteria:
* Compsatory. A poor score on a point may be offset by another scoring point. (Weighted factor score, value for money)
* Non-compsatory. No compensation option. It includes the knockout criterion. (Maximim. lexicographically)
* Semi-compsatory. A middle way between these (lowest acceptable bid, Canadian method]
The problem with the various methods and criteria is that the choice of method also changes the winner!
Even when assigning weights to criteria it’s the same problem. The importance of a criterion is determined by weight x score. The importance and errors in this step are also numerous. The EU directives provide little guidance on this point. It is a subjective method where the arbitrariness of the leading buyer will decide. A buyer can let a supplier win by choosing the correct score method which selects its preferred supplier.
Setting up a proper and transparent procurement function is not only important for the organization financially, but also for the reliability of the process. There should be more attention to benefit from this sport within public organizations. Moreover, it is a condition that the European rules give way for this.
- Win More Business – Public Sector Procurement (slideshare.net)
- In Recession and Recovery, Putting Supplier Relationships First (Part 1) (spendmatters.com)
- A Case for eProcurement in Government Purchasing — Denying Politicians Their Take! (spendmatters.com)