South West Employers Obtaining Value for Money & EU Procedures Trainer: Date:
Dec 25, 2015
Activity 1 - Icebreaker
Is a middle child
(1 point)
Likes to eat Japanese food
(1 point)
Is wearing pink
(1 point)
Plays a team sport
(1 point)
Speaks another language
(1 point)
Wears glasses
(1 point)
Is over 6’ tall
(1 point)
Has less than four letters in his/her
first name
(1 point)
Has a last name that starts with a W
(1 point)
Has green eyes
(1 point)
Owns a Vauxhall car
(2 points)
Likes classical music
(2 points)
Preferred Maths to English in school
(2 points)
Knows someone famous
(2 points)
Has red hair
(2 points)
Has more than 2 children
(3 points)
Has made a parachute jump
(3 points)
Has visited more than 10 countries
(3 points)
Has more than 7 letters in his/her
first name.
(3 points)
Has a birthday in the same month as me
(3 points)
One unusual fact I have found out about someone here is? ____________________________ (5 points)
How many points do you have? _______
Activity 2 - Groundrules
Groundrules help to create a positive and safe learning environment. Discuss and agree a list of between 3 and 5 rules that all participants are comfortable with
Objectives
At the end of the session, participants will have knowledge and an understanding of:
Procurement techniques that will assist in the achievement of obtaining value for money
Defining value for money (VFM) & ‘best value’
Having an awareness of the procurement cycle
Applying a category management approach
Tools and techniques that will assist with obtaining best value
Hints and tips
Definitions
Value for Money
A concept associated with the economy, effectiveness and efficiency of a service, product or process, i.e. a comparison of the input costs against the value of the outputs and a qualitative and quantitative judgement over the manner in which the resources involved have been utilised and managed.
Best Value
Best Value provides the statutory basis upon which authorities plan, review and manage their performance in order to deliver continuous improvement in all services and to meet the needs and expectations of service users while having all regard to value for money
Under LGA 1999 s.3, FRAs have a best value duty towards the inhabitants of the local area they serve
Realising benefits – the 3 E’s Economy
Efficiency
Effectiveness
Reducing the costs of the operation. Doing the same things, but cheaper
Getting higher outputs from the same staff and the same resources. Doing the same things, but better
Providing the right services and solutions. Doing different and better things
Procurement cycle
Planning
Enquiry
Implement
Define & review need
Define & review need
Develop specification
Develop specification
Determine procurement strategy
Determine procurement strategy
InviteInvite
Pre-qualify suppliers
Pre-qualify suppliers
Issue RFQ or ITT
Issue RFQ or ITT
Evaluate tenders
Evaluate tenders
Negotiate?Negotiate?
Contract awardContract award
Manage implementation and transition
Manage implementation and transition
Manage contract performance
Manage contract performance
Exit & termination
Exit & termination
Application of pricing/profit analysis
Application to obtaining best value: Understand supplier’s pricing
and value equation Monitor & assess the
competitiveness of supplier pricing Supports better supplier appraisal,
tender evaluation and sourcing
decisions Supports negotiations and price
reduction activities
1. Supplier pricing / profit analysis
2. Supplier category analysis
3. Whole-life costing
What is profit?
Costs
Profit
Price
The supplier’s profit is the difference between the pricea product is sold for and the cost of producing & selling it.
Materials +
Overheads
Labour +
Mark-up (%) Margin (%)
price
quantity
p2
p1
Volume has limited effect on price
Inelasticity of Demand Elasticity of Demand
price
quantity
p2
p1
Volume has major effect on price
Pricing theory: (In)elasticity of demand
Supplier’s perspective
The strategy used for providing prices by suppliers depends on what they want to achieve:
Increased volume
Improved profitability (ROI)
Competitive parity
Pricing models in practice
1. Premium Pricing
2. Market Pricing
3. Skimming
4. Cost-based Pricing
5. Marginal Pricing
6. Penetration Pricing
7. Loss leaders
Pricing Model: Example in use:
Activity 3 – Markup and margin
Split into small groups
Read through each of the scenarios, calculate the contract value and explain how the requirements should be procured
Feedback your answers to the wider group and discuss your findings
Application of pricing/profit analysis
1. Supplier pricing / profit analysis
2. Supplier category analysis
3. Whole-life costing
Application to obtaining best value: Assists with segmenting the
supply base in order to manage risk Helps decide where to allocate
effort and resources Enables procurement to be
managed in ‘categories’ Supports a better understanding
of relationships Supports procurement and price
reduction activities.
Category management approaches
Expenditure is ‘grouped’ into categories
Provides aggregation around key markets with their specific characteristics
Examples: IT, construction, professional services, equipment
Allows specialist knowledge and expertise to develop
Allows focused market strategies to drive value for money
Two classic approaches:
Pareto (ABC) analysis
Kraljic (supply positioning)
Pareto Analysis or ABC Analysis
Inve
nto
ry i
nve
stm
ent
Inventory range10% 100%25%
90%
100%
75%
A CB
%age of items
%age value of annual usage
Inventory management
Class A items About 20% About 80% Close control
Class B items About 30% About 15% Regular review
Class C items
About 50% About 5% Infrequent review
Non-critical
Empower the end user to undertake the purchase themselves
Focus on reducing the cost of processing
Automate processes: Purchasing Cards, e-Procurement, Online catalogue
Call-off arrangements, umbrella contracts
Single supplier/one stop shopping?
Medium/long term contracts
Create service contracts and use SLAs
Minimal formality No goods-in checking, deliver direct to user, consolidated billing,
supplier generated management reporting, no stocking, prompt service
Leverage
Short/medium term relationships
Standardise inputs/switch suppliers
Use purchasing leverage
Supplier/source research
Price intelligence / forecasting
Collaborative procurement with other FRS regions
Consortia buy? Empower procurement
Keep switching costs between suppliers low
Make sure you have a sound contractual base
Bottleneck
Medium/long term relationships
Know suppliers business
Seek alternatives/substitutes
Build contingency plans
Search for other frameworks
Encourage/support new suppliers?
Hold stock
Compensation agreements?
Strategic
Long term relationship
Partnerships/alliances
Willingness to share risks and benefits
Cost transparency and lean relationships
Total cost of ownership focus
Cross functional teams/communication
Plan for the worst! (amicable or adversarial)
Framework Agreements Act as ‘call-off’ arrangement for 1, 3 or more suppliers
No commitment to specific volume – ideal where demand not really known
If pre-existing, considerable time/efficiency advantages – no full tender – however can be time-consuming to set up
Maximum length: 4 years
Examples: stationery, spares, consultancy
Examples of framework suppliers are Buying Solutions and Pro5
Risk that suppliers can consider the mini competitionas a ‘double tender’
Activity 4 – Relationship strategy
Split into small groups and use the information provided to:
1. identify the type of relationship with each of the 5 suppliers
2. determine whether it should be changed
3. highlight the specific factors that need to be considered in order to obtain value for money
Application of pricing/profit analysis
1. Supplier pricing / profit analysis
2. Supplier category analysis
3. Whole-life costingApplication to obtaining best value:
Helps focus on the total cost
of acquisition Considers the whole life cost in
terms of buy, own, use & dispose Helps focus on cost elements
that add cost but not value
Whole life costing (WLC)
Price
Defects
Inventory
Repair
Training
Consumables
Delivery
Support
Delay
Inspection
Handling costs
Maintenance
Disposal
Research
“A method of project economic evaluation in which all costs arising, and
benefits accrued, from installing, owning, operating, maintaining and ultimately
disposing of a project are considered to be potentially important to that
decision”
(ISO 15686)
Whole life costing elements
Whole Life Cost
Price
Delivery
Specification
Tendering
Quality
Install
Commissioning
Visits
Opportunity cost
Depreciation
Taxes
Fuel/Energy
Consumables
Spares
Break Fix
Maintenance
Operators
Training
Upgrades
Removal
Transport
Decommissioning
Waste disposal
Capital Gains Tax
Buy Own Use Dispose
Activity 5 – Whole Life Costing
Split into small groups and use the information provided to:
1. Calculate the whole-life cost of each of the printer options over a three-year life period
2. Recommend which represents value for money (and why)
3. Discuss what other factors need to be taken into account
Achieving Value for Money
1. Make determined efforts to find, investigate and assess new sources of supply
2. Carry out continuous benchmarking exercises
3. Ensure the use of the competitive tendering processes
4. Understand suppliers pricing models and endeavour to obtain open book accounting to enhance cost analysis
5. Focus on obtaining the right balance between quality and whole life costing
Objectives
At the end of the session, participants will have knowledge and an understanding of:
Procurement techniques that will assist in the achievement of obtaining value for money
Defining value for money (VFM) & ‘best value’
Having an awareness of the procurement cycle
Applying a category management approach
Tools and techniques that will assist with obtaining best value
Hints and tips