Major scope to Leverage Volumes purchased in the SA Public Sector

Walter Johnson.jpgPriority Procurement issues for the new South African Government to address – if they aren’t addressing them already – must be how to organise public sector procurement so that it can deliver the budget balancing procurement savings they so urgently need, and to then measure whether Procurement is delivering the promised, more competitive prices on an ‘audit proof’ on-going basis, Wally Johnson, Chairperson of Purchasing Index UK (and keynote speaker at the Public Sector Supply Chain Summit in August 2009), tells SmartProcurement.

 

The experience of the UK public sector over recent years is relevant, but still work-in-progress, i.e. the UK public sector’s 40,000+ accountable business units are budgeted this year to spend collectively around £180-billion on procurement of goods and services (R 2,340-billion), which will represent more than 50% of the UK public sector overall income for 2009/2010, explains Johnson.

Given the accelerating pace at which the UK Government is outsourcing the public sector’s business processes, these numbers are bound to increase both significantly and very quickly. The UK public sector could be more than 70% ‘Procurement Intensive’ by 2025. Procurement is already the primary source of the UK public sector’s savings opportunities, he says.

“The questions that are now being urgently debated across the UK public sector (they are also attracting Parliamentary interest), are how to organise Procurement on this scale with particular emphasis on the generally presumed Procurement advantages of Volume Leverage – the theory that the bigger your contractual commitments are for the various categories of goods, services and outsourced business processes you are purchasing, the lower the prices you will achieve ad infinitum.

“Little has been done anywhere over the last few decades to validate the Volume Leveraging theory, however the UK public sector is undoubtedly now committed to moving in the direction of corporatising its current annual Procurements of £180-billion worth of expenditure on goods and services. The impact of these developments on the UK public sector’s current Procurement structures and strategies as well as its supplier infrastructures is already significant and could be all but impossible to reverse even if the corporatising Procurement strategy doesn’t work, i.e. if it doesn’t deliver the lower prices the UK Government so badly needs. The UK public sector is now becoming very anxious indeed to keep SMEs (Small to Medium Enterprises) and local and regional suppliers in business.

“Pan public sector multi-year South African national frameworks for common consumables, which could offer the easiest opportunities for corporatising South Africa’s Procurement structures and strategies, would undoubtedly affect the current public sector supply chain and its procurement people to the commercial disadvantage of local and regional suppliers. The questions that will arise as the initial multi-year frameworks come to an end will include whether the unsuccessful tenderers of, say, four years previously, will still have the logistical and commercial capabilities to meet the contractual requirements for the next pan public sector Procurement exercise for the goods and/or services previously purchased at the business unit level.

“Whilst early, open and informed public debate – preferably Procurement led – on the advantages and the downsides of corporatising South African public sector Procurement nation-wide are essential, there probably isn’t enough quantitative information on the operating costs and pricing achievements of public sector Procurement in the public domain to make effective quantitative analyses of its current or prospective future Procurement performance.

“The UK Government, in a recent Treasury paper, has identified nearly 50 Procurement Intermediaries operating in the UK public sector, the costs of which are almost impossible to ascertain because many of them are funded by undisclosed supplier commissions. Some of them are also being paid out of the public purse. The Commission, which suppliers direct to Intermediaries, appear to range from something less than 1% of spend coverage to charges in excess of 3%. Taken together with the, admittedly, reducing costs of fast diminishing business unit Purchasing operations, the savings sharing based charges of the Outsourced Purchasing Service Providers and the growing, but unrevealed, costs of the UK public and private sector and Audit bodies which are also now moving quickly into the UK’s savings measuring game, the cost of UK Purchasing operations is also unknown but it must be very large indeed. Whether the same situation will arise in South Africa merits urgent discussion.

“Although, to be the best of my knowledge,” says Johnson, “South African public sector Procurement isn’t yet corporatised, the search for purchasing savings will, when it starts, have similar effects to those I have described over the existing, presumably largely regional and sub-regional Purchasing operations.”

What can Purchasing People do now?

South Africa purchasing professionals would undoubtedly benefit significantly if they were to start taking a much more quantitative interest in both the costs of Procurement and the prices they negotiate on behalf of South African public sector clients.

Purchasing Index UK, of which Johnson is the Chairperson, can provide compelling evidence that the Purchasing Leverage ad infinitum proposition, is nonsense, i.e. the volume thresholds for the lower prices purchasing organisations are having to deliver are really quite modest. Purchasing at the apex of corporate business entities doesn’t deliver the lowest possible prices. The real solution lies in better resourced procurement at the regional and sector specific levels.

Wally Johnson is the Keynote Speaker at this year's Public Sector Supply Chain Summit. He will discuss contemporary procurement trends in the UK Civil Service and Local Government.

If you have questions for Wally Johnson, he can be contacted on (+44) 20 7463 2022 or at wally@pibenchmark.com


 

 

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