Using ICT to enable government supply chain and procurement processes

How the City of Cape Town used technology to enable its procurement processes Nirvesh Sooful Hetu Consulting

Introduction About me About Hetu Consulting Hetu Consulting is a strategic consultancy helping governments to accelerate the benefits of IT enabled change - through transformation of the public sector and the wider economy. Hetu Consulting brings together people with a track record of success delivering social, economic and public sector transformation. At the heart of Hetu Consulting is a team that has worked at top global organisations and who led some of the country’s most ambitious and successful programmes of e- transformation. Hetu Consulting is 100% Black owned and works in both the public and private sector, but is focussed on the public sector.

Agenda City of Cape Town Context ICT Enabled Procurement context ICT enablement of City of Cape Town procurement processes

Demographics of Cape Town Population: 3.2 million Share of National GDP: 10.5 % Share of Provincial GDP: 75 % Area: 215 900 ha Rateable Properties: 800 000 Employees: 23 579 City of Cape Town annual budget 2007/08: Operating: 13,45 billion ZAR Capital: 4,316 billion ZAR City of Cape Town annual Income 2007/08: From Utility Services: 4,205 billion ZAR From Property Tax: 5,425 billiion ZAR

Local Government – the delivery arm of Government  Electricity  Water and Sanitation  Solid Waster  Roads, Stormwater and transport  Public Housing  Local Economic Development  Social - and primary health services  Emergency Services  Municipal Policing  Urban Planning and Environment  Sport and Recreation  City Administration

Transforming Cape Town Merging autonomous Organisations is complex even though enabling legislation was in place:  “Lack of standardised financial policies and procedures”  “IT systems entrench the „old order‟”  “Back-office systems were deemed to be outdated, functionally inadequate and not properly integrated”  “Difficulty in merging these systems was in fact hindering the merger of the administrations and undermining the objectives which motivated the creation of the Unicity”

Address by Dr Ivy Matsepe- Casaburri, Minister of Cape Town in Context Communications at Nedlac ICT Annual Forum Meeting, 25 January 2005 City of Cape Town has positioned itself to become one of our most technologically advanced cities, through successful IT sector intervention. By implementing its visionary transformation strategy, Cape Town is now a frontrunner in South Africa’s National IT Strategy. The benefits for all have been enormous. E-government services have been developed; the service to its citizens has been improved. All city employees have access to mainstream banking giving low-income employees a measure of economic empowerment. The cherry on top of the cake for this project, is that they have instituted the largest IT training programme in our history, boosting the IT skills of the city by training thousands of employees. IT businesses owned by the formerly dispossessed are also benefiting through this partnership. In order for Cape Town to establish itself as a municipal services leader there had to be a partnership between, business, labour and the community. I am sharing this success story with you because I want to see more of such initiatives. 7

Developmental local government 8

Defining Procurement Procurement refers to the overall process of acquiring a product or service. Depending on the circumstances, it may include some or all of the following: identifying a need, specifying the requirements to fulfill the need, identifying potential suppliers, soliciting bids and proposals, evaluating bids and proposals, awarding contracts or purchase orders, tracking progress and ensuring compliance, taking delivery, inspecting and inventorying the deliverable, and paying the supplier.

Public Sector Procurement Trends The U.S. federal government is the single largest purchasing entity in the world The U.S. General Accounting Office (GAO) reports that the federal government alone is wasting billions of tax dollars owing to underleveraged spend and underperforming procurement and supply management operations Procurement is key to reducing the cost structures of government agencies, improving operating performance and service levels, and satisfying policies and regulations The need to do more with less and increased scrutiny of legislators and watchdog groups will force government agencies to improve their cost management operations Public sector procurement initiatives are primarily driven by requirements to comply with contracting regulations and mandates, such as full and-open competition, minority and small business goals, and the spend-to-appropriation culture of government Most governments have a procurement process that was drafted into law by its legislators, interpreted by judicial branch judges, and carried out by executive branch leaders and their staff members Government procurement culture maintains a strong belief that competition (manifested via the RFx process) limits cronyism and corruption, and leads to higher performance and lower costs More than ever, governments across all industries view procurement as a catalyst not only for supply cost reduction and assurance but also for compliance Sources: RAND Corporation, “High Performance Government”, 2005; NASPO Research Brief, May 2005; Aberdeen Group & GCN, “Supply Management in the Public Sector,” May 2004; Aberdeen Group, “Center-Led Procurement”, Nov. 2005

Government Procurement Drivers Source: Aberdeen Group & GCN, “Supply Management in the Public Sector”, May 2004

Procurement Reform: Asia Pacific / ANZ “E-procurement has been identified as an instrument in public sector reform. It enables government to monitor the efficiency and effectiveness of procurement and provides more transparency and accountability.” “In many government organizations, the tools necessary to complete the procurement transactions (e.g., search, requisition and payment) often reside in different departments or agencies. Related policies and procedures may also reside outside the procurement organization. Therefore, the full integration of the complete end-to-end process and the deployment of usable policies and procedures to support this process remain a key challenge.” http://www.agimo.gov.au/publications/2005/may/e-procurement_research_reports/Case_Studies_on_E- procurement_Implementations.pdf#search=%22Case%20Studies%20on%20E- procurement%20Implementations%22

Procurement Reform: European Commission Brussels, 25 April 2006 eGovernment: Commission calls for ambitious objectives in the EU for 2010 Hundreds of billions of euros could be saved for European taxpayers every year as a result of administrative modernisation in the 25 EU Member States, outlined today in the European Commission’s eGovernment Action Plan. Information and communication technology is the key to modernising government services: making them more efficient and more responsive. 100% take-up of electronic invoicing and electronic public procurement is predicted to save 300billion euros every year. All Member States already signed up to an ambitious agenda to achieve these goals in Manchester last year The new eGovernment action plan adopted today by the European Commission addresses five priority areas for 2010 and underlines the commitment of the European Commission to delivering tangible benefits to all Europeans, in cooperation with the Member States: Implementing e-Procurement: Government procurement represents 15% of GDP or about €1.500 billion a year. The Member States have committed to achieving 100% availability and at least 50% take-up of procurement online by 2010, with an estimated annual saving of €40billion. The action plan will lay out a road map for achieving these goals as well as the practical steps required for such large-scale cross-border procurement pilots and full electronic handling of company documents (the “Electronic Company Dossier”).

Procurement Reform: Developing Countries ”…procurement is often one of the top three types of spending (besides salaries and debt payments) [in government]. Public procurement spending is estimated to account for 15% of the world’s GDP. The influence of good procurement on the effectiveness of public spending is mirrored by its impact on development of the private sector. A government‟s most direct impact on the private sector is through its procurement behaviour. The government is often the largest investor in and purchaser of services, especially in poorer nations. The way it manages its commercial relations with the business community has a profound influence on whether acceptable business practices will evolve or not, and on the dynamism of the private sector. Procurement systems can promote competitiveness and improve the local market‟s ability to survive in international markets by awarding contracts on an economic basis, just as they can promote inefficiency and corruption by awarding contracts on the basis of personal relations or private negotiations. In this manner, a country‟s procurement system has a significant impact on national investment rates, as well as long-term growth rates. Strengthening procurement can potentially generate enormous savings, especially in developing countries. Improving the performance of a national procurement system even slightly could, in many cases generate enough savings to more than pay for the cost of the reform programme itself and leave a significant amount of money left over to increase e.g. social spending. Strengthening procurement efficiency and increasing transparency might equally increase the confidence and trust of the civil society in its government, in particular in government‟s credibility honesty and commitment to development.”

EIU 2005 Global Survey • “What role do software tools […] play in ensuring the overall success of your purchasing strategies and initiatives?” Automate and Accelerate Processes Vital Role Very Important  E-procurement is widely appreciated Electronic Procurement 19 31  Supplier connectivity equally important Supplier 16 34 Connectivity RFx and 9 17 Auctions Optimize and Reduce Cost Spend  Spend analysis at top of agenda Analysis 26 31  Collaboration valued higher than auctions Supplier 17 34 Collaboration Category 12 32 Management Improve Strategy and Compliance Performance 26 36  High demand for performance management Management  Contract management is seen as key Contract Management 17 31 Source: Economist Intelligence Unit, April 2005

General Procurement Trends Moving From Tactical To Strategic Purchasing Tactical Strategic Purchasing Purchasing Generate savings Generate value Manage compliance Manage contribution Extend processes Expedite processes Analyze supply Analyze spend strategy history Continuous One-off initiatives improvement TRADITIONAL VALUE ADDING ACTIVITIES ACTIVITIES

Procurement in the City of Cape Town In terms of Section 217 of the Constitution of the Republic of SA, the City of Cape Town is required to implement a procurement system that is fair, equitable, transparent, cost effective and economical. It is further required by Section 14 of the Municipal Supply Chain Management Regulations to keep a list of accredited prospective providers of goods and services that must be used for the procurement requirements of the municipality though quotations and formal bids. Fundamental to the city’s supply chain management strategy is the fact that procurement is a Strategic Function within Local Government – through which it is able to influence economic development, give action to its developmental objectives and exhibit good governance. In the private sector the supply chain is predominantly a transactional overhead – best suited to transactional outsourcing and where only those procurement items which provide a competitive advantage is retain in-house. Been an evolution Two platforms underpin the strategy SAP and Internet

SAP-R3 & ISU Foot Print - Billing to sundry - Financial Accounting debtors SD Sales & SAP Fact FI Sheet Financial Distribution Accounting MM  420 end-to-end Business CO - Management - Procurement & SCADA* Materials Mgmt. Processes Controlling Accounting Inventory PP R/3 and AM  Cost: Production Fixed Assets IS-U/CCS R354mil (2000-2002) Management Planning Mgmt EDI QM  Single Instance – 8 terabyte db PS - Plant Maintenance Quality Project - Asset Management PM  7 500 Users WF System Management Plant Field Workflow  580 SAP Sites City Wide Maintenance Service Support HR IS IS-RE - Project Work Industry Human Solutions Accounting  3,2 mil ISU contracts Clearance* Resources IS-U / SM GIS FERC CAD - Human Resources & Service Mgmt  1,2 mil consolidated invoices per AM/FM IS-U/ - Real Estate Management Payroll month CCS  2 mil equipment items. Solution for - Industry Utilities - Customer Care & Revenue Management

The ERP and Process Based Organisation Design (Business Processes – eg. “Procure to Pay”) Render PO Requisition Receipt to Match PO Purchase Authorize Authorize Authorize to Goods Payment Expedite Receipt Receipt Source Invoice Invoice Create Create Goods Order Order Make Each Dept has its own Procurement and Accounts Payable responsibilities. Render PO Requisition Receipt to Match PO Purchase Authorize Authorize Authorize to Goods Payment Expedite Receipt Receipt Source Invoice Invoice Create Create Goods Order Order Make Accounts Accounts added and payingcentrally – but each Line Dept. performs own approve. Procurement nowservices provided provided but Shared Servicefeels the need to buying. HighPayable buying asservices of vendors centralised stillcontrol and efficiency. volume Payable a Shared Service by Line Dept for Organization. Performed by Line Dept Performed by Supply Chain Specialists

Key System Statistics The SAP transactional environment :  23 000 payroll members.  1 200 000 invoices every month  22 592 Purchase Order Line Items per month  2309 Cost and 1550 Profit Centres  25 Business Areas  7 500 named system users (12 500 user licenses)  554 SAP sites in the City  19 977 254 online transactions per month  + 50 overnight batch jobs  Prod 24x7, 99.85% availability for 2006 (includes planned down time)  Average online response = 0,7 sec / transaction (1.5 sec design)  Database = 8TB, growing at 60-80GB per month  130 calls per day logged with our SAP Support Desk

MM : Procurement and Inventory Management • Standardised and structured Procurement process implemented. • Single master record of all vendors created (21 000 vendors reduced to 8 000) Implemented • Compliance with procurement policy (SMME‟s) 30 December 2002 • Consolidated inventory management through standard material codes across 100 stores. • Real time postings and reconciliation of store ledger to main ledger. MM : Creating Financial Value through: • On-line authorisation of expenditure with full audit trail. • Improved financial control through visibility of financial commitments and the lowest level of detail relating to all expenditure. • Stock holdings optimization through maximising stock turns, visibility across all stores and facility rationalisation. • Procuring against contracts and use of Electronic Bulletin Board for quotations. MM : Opportunities • Better use of Supply Chain Management functionality and E-procurement.

Financial benefit realisation: Inventory Optimisation How is this benefit realised? • Inventory holdings to be kept to a minimum, while ensuring adequate availability. • Stock visibility across all stores is the primary driver of this benefit. • Stores Consolidation will be a function of Organisational Restructuring. • Reducing the cost of holding inventory by, e.g. disposal of redundant stock and improving stock turns; and • Optimising the Stores infrastructure based on optimal stock holding. Inventory Benefit: Calculation: Discounted Value of Stock Holdings - month on month comparison. • The year on year value of stock holdings was compared. Stock Value discounted to March 2003 R 170,000,000.00 • Value of stock compared to March 2003 R 150,000,000.00 • Monthly Stock value discounted by CPIX back to baseline R 130,000,000.00 date. • Interest saving calculated and allocated to R 110,000,000.00 R 90,000,000.00 Financial Benefits (R millions) R 70,000,000.00 R 50,000,000.00 • Inventory Optimisation Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun • Stock Value reduction = R 55mil July 2003 to June 2004 July 2004 to June 2005 • Recurring Interest saving = R 6.6mil pa (@ prime = 12%)

Financial benefit realisation: Procurement: Price Standardisation, Inventory Optimisation • Procurement will be done in a consolidated and standardised fashion with the maximum use of tenders and in accordance with City’s procurement policy. • Inventory holdings to be kept to a minimum, while ensuring adequate availability. • Eliminating price discrepancies between administrations and vendors on the same commodity – goods & services; • Reducing the cost of holding inventory by, e.g. disposal of redundant stock and improving stock turns; and • Optimising the Stores infrastructure based on optimal stock holding. Financial Benefits (R millions) Calculation: • Price Standardisation • Minimum prices across all commodities were compared to the • Low Road = R 60mil pa (@ 5pm) prices paid over the period that SAP has been live for Store • High Road = R 96mil pa (@ 8pm) purchases only; • Inventory Optimisation • The top 20 stores were assessed for their stock value and turn. • Stock Value reduction = R 55mil • Total stock holding = R 141mil (ideal = R 86mil); • Recurring Interest saving = R • Ave ST = 2.4 (best case = 4); 6.6mil pa (@ prime = 12%) • Total materials = 52 000 (34 000 active); and • 3500 materials contribute to 97% of all stock movement in stores.

No Txns per Day E-Fuel 8 000 7 000 Average Daily Value R744,201 6 000 Average Daily No. of Txns 1140 5 000 4 000 “Another interesting area has been the 3 000 automation of fuel payments through e-fuel 2 000 system and interface into SAP. Through this 1 000 we pay approximately R750 000 per day for 0 fuel to the respective suppliers without any human intervention...... 3 500 000 Inv Value per Day Sum of No Txns 3 000 000 2 500 000 ......What makes things even 2 000 000 better is that the price is checked against contract pricing and 1 500 000 payment is optimised to ensure 1 000 000 that we only pay on due date. In 500 000 the past we had the fuel supply 0 cut to the city due to late payment, now nobody worries about it.” Sum of Inv Value Andre Stelzner, ESC Manager, City of CT

In conclusion – it is a process of evolution Moving From Tactical To Strategic Purchasing Tactical Strategic Purchasing Purchasing Generate savings Generate value Manage compliance Manage contribution Extend processes Expedite processes Analyze supply Analyze spend strategy history Continuous One-off initiatives improvement TRADITIONAL VALUE ADDING ACTIVITIES ACTIVITIES

Hetu Consulting is your full service supply chain and procurement partner Hetu Consulting’s experience spans across both strategic and operational aspects of supply chain and procurement optimisation. Our experience includes but is not limited to: The development of an overarching strategy that optimises procurement processes and drives value from procurement and supply chain management activities The development of procurement policies in line with national and other applicable legislation. This includes the integration of local economic development (LED) imperatives. The review and overhaul of existing policies to deal with issues like fronting. Also to make the policies compliant with BBBEE legislation and new codes. The implementation of new procurement and supply chain systems and processes. The ongoing improvement of procurement and supply chain processes on existing systems eg. SAP The creation and ongoing management of internet based tender management systems which include advertising and publishing of tenders, publishing results, providing tender support, etc. The development of a fair, transparent and defendable tender scoring model that can be used for tender development and scoring.

Thank You Questions/ Discussion Nirvesh Sooful nirvesh@hetuconsulting.com Download this presentation and other information from: 29 www.knowledgecommune.com/blog

Using ICT to enable government supply chain and procurement processes

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