Traditional approaches to achieving value in procurement underscore cost savings. Contemporary procurement on the other hand, takes a holistic view that transcends cost savings, delving into other forms of value addition that are realized by organizations through procurement functions.
This report highlights the different forms of value that can be realized through procurement. It is aimed at ensuring that procurement professionals appreciate the concept of value for money; so as to design & implement the structures, systems & processes that would promote the delivery of value to their respective organizations through procurement.
One of the key factors in achieving value for money is coming up with a comprehensive procurement strategy. A good strategy should incorporate key services or goods for various units/programs/departments, an assessment of how these goods are purchased, performance of key suppliers & the scope to improve value for money & quality of service. A good procurement strategy should also cover the whole process of obtaining the goods, services & works from third parties. This strategy should link the procurement goals & the achievement of the overall organization objectives.
Procurement has direct control over huge amounts of money in an organization & therefore there needs to be continuous development of procurement staff to further enhance competence development. This ensures that through this, they are able to identify areas that can be maximized on & those that can be improved to further ensure that they realize value for money for the organization in terms of procurement.
Value can be realized in terms of viewing an asset to be purchased in a whole life perspective which incorporates initial cost, maintenance of that asset, warranties & guarantees, support services, obsolescence & the cost of disposing that asset when the time comes. A good example of these would be the buying of vehicles for an organization: some brands of vehicles are expensive to buy, maintain but overall, have a high resalable value even after long periods of use, compared to vehicles that are cheap to buy & maintain but end up in a scrap yard after a couple of years because no one wishes to purchase them. An organization should always look at opportunities to gain some money off disposals that can be utilized for other activities.
It is crucial for users in an organization to include procurement when they are defining their needs. This allows procurement to advice on areas that savings can be achieved & avoids unnecessary purchases that become expensive especially when specifications are not well defined. Incase it’s a project based procurement, early procurement involvement makes sure that the users are able to anticipate potential problems & proactively deal with them, still at the planning level. This saves on times & cost. In terms of aggregating procurements, the procurement department can pool together needs from the various departments/users, standardize on the specifications & at the same time save on costs in terms of volume discounts from suppliers.
The foundation of any value that an organization can gain in a contractual arrangement will be based in the structured contracts. The ability to remove possibility of variability in the duration of the contract is vital in achieving on time delivery and on budget & thus realizing value for your money. It is important that in the planning process of a project, everything is taken into consideration since midstream re-evaluation of needs & specifications will translate to more costs that those initially planned for. All stakeholders including procurement need to be involved in the planning process & look into ways to deal with supplier delays, fluctuations in products costs & how these are incorporated into a contract. A good example of this is a company that enters into a contract with a contractor to build a road, but the contract is time based & not performance based. The contractor can delay the project, bill at the specified periods be it quarterly & at the end the organization ends up paying the full amount, long before the road is even done. The key here was even if litigated, the contractor was within his rights to be paid without completing the project based on the contract that was signed.
Procurement risks can be managed by avoiding unnecessary purchasing. There needs to be clear justification of need for goods and services. It is also good to note that price does not necessarily represent value for money, it is always advisable to purchase through competitive bidding. Assessment needs to be done to ensure that goods are not purchased in uneconomic quantities, & right quality is maintained. It is good to note how to allocate the various risks across the supply chain to the party best placed to manage that risk. Some of the risks that an organization takes when purchasing a particular product are: will the product perform adequately, will the supplier deliver in time, what happens when the supplier fails to deliver & also the reliability of the product in question. All these risks need to be looked at in case they occur & how they will be handled.
Procurement audits also need to be done once in a while. These audits help to identify weaknesses and areas of non-compliance in the procurement system, ensure implementation of intervention measures & ensure the application of fair, competitive & transparent procurement activities. It is also advisable to audit the procurement policies to check if they are realigned to achieving the organization’s strategic objectives. Procurement audits should look into random procurements to check if the right procedures were used in the planning & specifications identification, whether the bids sent out were standard, conform to the public procurement Act, conditions & specifications were clear, the choice of the procurement method, how the bids were opened & were committee meetings maintained, how were the late bids treated. How was the evaluation of these bids done? Was there consistency in application of the evaluation criteria? Was the evaluation report prepared & duly signed? After award, it needs to be established if simultaneous notification to successful & unsuccessful bidders were sent out, the contract issued was based on documents, award decision, and notification of award. All this cries for proper maintenance of procurement records that are transparent & show the entire procurement process.
In a nutshell, it is good to note the key drivers for value for money for the organization. These are focusing on whole life costs of a product, integrated planning & design, deriving proper specifications, continuous improvement of skills & expertise, best value evaluation of bids & proper contractual terms.