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Dr Rovel Shackleford procurement market strategies july 2011
Dr Rovel Shackleford procurement market strategies july 2011
Dr Rovel Shackleford procurement market strategies july 2011
Dr Rovel Shackleford procurement market strategies july 2011
Dr Rovel Shackleford procurement market strategies july 2011
Dr Rovel Shackleford procurement market strategies july 2011
Dr Rovel Shackleford procurement market strategies july 2011
Dr Rovel Shackleford procurement market strategies july 2011
Dr Rovel Shackleford procurement market strategies july 2011
Dr Rovel Shackleford procurement market strategies july 2011
Dr Rovel Shackleford procurement market strategies july 2011
Dr Rovel Shackleford procurement market strategies july 2011
Dr Rovel Shackleford procurement market strategies july 2011
Dr Rovel Shackleford procurement market strategies july 2011
Dr Rovel Shackleford procurement market strategies july 2011
Dr Rovel Shackleford procurement market strategies july 2011
Dr Rovel Shackleford procurement market strategies july 2011
Dr Rovel Shackleford procurement market strategies july 2011
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Dr Rovel Shackleford procurement market strategies july 2011

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Strategic Procurement/Purchasing guide by Dr Rovel Shackleford

Strategic Procurement/Purchasing guide by Dr Rovel Shackleford

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  • 1. Strategic ProcurementGuideMarket StrategiesObjectives of the Strategic Procurement Guide(Dept. to complete)Dr Rovel Shackleford Final Draft
  • 2. Who should use this Strategic Procurement Guide?(Dept. to complete)How is this Strategic Procurement Guide to be used?(Dept. to complete)Final Draft 2
  • 3. ContentsMarket strategies – what are they? pageThe procurement team page A team approach Knowledge, experience and skills in managing the processOrganisational issues impacting on the pageselection of a market strategy Identification of a requirement What is important to the customer? Policies Strategies for low value and low risk needs Other issuesWhat supply sources are available? page The supply base Degree of competition The use of preferred or pre-qualified suppliersPotential strategies page A “one-step” or “two-step” process Invitation documents Request for information Registration of interest/Expression of interest Request for tender Selective request for tender Request for proposal Request for quotation Direct negotiation Verbal quotes How can we add additional value?Review of the procurement activity pageSummary pageWhere can I get more help? pageFinal Draft 3
  • 4. Market strategies – what are they?The primary task of buyers is the evaluation and selection of suppliers. Whilstthe identification of needs, selection of suppliers, the development andmanagement of a contract, and the on-going evaluation and measurement of thesupplier’s performance are all important activities, the most difficult is theidentification of an appropriate market strategy.A market strategy is defined as: how an organisation approaches suppliers to ensure that it can have its need for goods and services met in the most cost efficient and effective manner.How the buyer approaches the market can impact upon the success or otherwiseof the procurement activity. Much will depend upon what is being bought, howsuppliers view the organisations business, what risks are involved, what potentialsuppliers exist, how experienced the buyer is and what policies guide the buyer. So how can a buyer approach the market?A number of tried and well-tested strategies are available. These include:  Request for Information,  Request for Quotation,  Registration of Interest,  Request for Proposal,  Request for Tender,  Selective Request for Tender,  Direct Negotiation, or  Verbal Quotes.Selection of an inappropriate strategy can have unfavorable consequences so itis critical that this part of the procurement task is well thought through and astrategy appropriate to the good or service sought, risk, and needs of theorganisation is selected. If the buyer is not sure if a market strategy is appropriate, it is recommended that advice be sought from more experienced procurement professionals within the organisation, the appropriate Accredited Purchasing Unit (COA) or Dept..In selecting an appropriate market strategy, a number of factors will influence thechoice.Final Draft 4
  • 5. These factors are illustrated as follows: The procurement team Organisational issues Selection of an appropriate market strategy Potential strategies Sources of supplyIts is these factors this guide will discuss. Other steps in the procurement process are covered in more detail in other Dept. Strategic Procurement Guides including - Acquisition Planning, Managing the Tender Process, Evaluation of Tenders, Contract Development, Contract Management, Performance Measurement for Procurement, Procurement Profiling, and Supplier Development.The procurement teamThe buyer is responsible to the organization for the purchasing activity, whichincludes selecting an appropriate market strategy. However the buyer may notbe able to undertake this task alone and ideally should seek input from a widerange of people and sources including representatives from the appropriateCOA, Dept., Crown Law and other specialists.A team approachCritical to the successful management of any complex activity, is the selection ofthe right team. The buyer has responsibility, if necessary, to ensure that anappropriate, usually cross-functional team is identified. Key considerations couldinclude:  What does the team need to do – is it responsible for the development of:  the specification,  a business case,  an acquisition plan,  the tender evaluation plan, and  the tender documents?Final Draft 5
  • 6.  Who do I need on the team – customers, legal, finance, engineering, representative from the COA or Dept. (if appropriate), and others who may be involved in the development of the requirement, the evaluation of tender responses, or the management of the contract?  What experience do they need/do they have – if the necessary level of experience is not available, who can provide assistance?  Does the team, or any of its members need training?  What resources are required to research and identify an appropriate market strategy?  When should the team meet?  Do responsibilities need to be defined? Who identifies market strategies in your organization? Is it the buyer, or is someone appointed?Knowledge, experience and skills in managing theprocessIt is becoming evident that organisations need to identify and secure staff withspecific knowledge, experience and skills in managing complex processes. Theknowledge, experience and skills required include:  Interpersonal experience and skills – communications and negotiation experience and skills, project management skills, and  subject specific knowledge, experience and skills – relevant industry knowledge, experience and skills; high-level procurement experience and skills; financial skill; human resources skills; and legal knowledge.Organisations need to:  recognise that the required knowledge, experience and skills may not be available,  determine the knowledge, experience and skills ‘at hand’ and those needed, and  obtain the necessary levels of knowledge, experience and skills. Does your organisation have the necessary level of knowledge, experience and skills to manage complex processes? If the buyer does not have the necessary level of knowledge, experience and skill required, advice and support should be sought, initially from senior management within his or her organisation, then from the appropriate COA or Dept..Final Draft 6
  • 7. Organisational issues impacting on theselection of a market strategyIdentification of a requirementBefore any market strategy can be identified, buyers or the team must ensurethat the customer has accurately identified a requirement. This identified need isthe starting point in all purchasing activities. Specifically, the buyer must definethe true nature of the requirement ensuring that all internal and externalinteractions are managed properly in the process.The buyer must ensure that sufficient time is allocated to this activity. To dootherwise may compromise the purchasing activity, deliver to the customer aproduct or service which:  does not meet the identified need,  may force the choice of an inappropriate strategy,  may ultimately add significant cost to the organisation, and  may ultimately alter the marketplace to the disadvantage of the buyer.The nature of the goods and services being bought will impact upon theidentification of an appropriate strategy. For example:  is the good or service of high value,  is it a high volume purchase,  is it sensitive/risky,  what is the length of the contract,  is the requirement viewed as being strategic or tactical,  does the organisation have appropriate experience, for example, is it the first time the good or service has been brought?What is important to the customer?It is also important that the buyer identify the relative importance of price, qualityand service to the customer and the organisation.PoliciesWhen choosing an appropriate strategy, the buyers should be guided by theappropriate organisational, COA and State Supply Board (SSB) policies. If thebuyer is unsure, advice should be sought from other more experiencedprocurement staff. Further information regarding procurement’s guiding principles and their application is contained in the Government of South Australia Procurement Reform Strategy document - Purchasing Strategically: theFinal Draft 7
  • 8. policy framework for reform dated May 1998 and the State Supply Board document – Policies Issue No. 1 dated May 1998.Procurement strategies for low value and low risk needsBuyers must also be cognisant of selecting an appropriate strategy to supportlow value, low risk needs. Significant costs can be incurred when inappropriatestrategies are used to source low cost, low risk goods and services. Appropriatestrategies could include:  Use of preferred or pre-qualified suppliers,  Use of credit cards, and  Use of an existing contract.Such strategies can relieve procurement staff from small purchases and isusually applicable to the purchase of consumables under guidelines establishedby the organisation.Other issuesOther issues, which may impact upon the selection of an appropriate strategy,may include: Local area sourcing, Regional area sourcing, for example, from within South Australia, National sourcing, for example, from within Australia/New Zealand, International sourcing, Organisation wide, or whole of government purchasing, Regional development, Delegations, Urgency, and Cost of tendering – to both department/agency and suppliers.What supply sources are available?The supply baseThe selection of a specific market strategy begins with the development of apotential list of suppliers. The list may be generated from a variety of sourcesincluding:  The organisation’s procurement profile,  Other buyers,  End-users of goods or services,  Supplier representatives,Final Draft 8
  • 9.  Information databases, and  Trade journals.It is also important that the buyer understands how potential suppliers view theorganisations business. A number of questions a buyer could ask are:  Is our buying position strong?  Do suppliers want our business?  Are we seen to manage procurement activities professionally?  Do we work closely with our suppliers and offer opportunities for mutual improvement?The information gained will indicate to the buyer if they will be dealing with:  Suppliers who may, or may not want the work,  A manufacturer or distributor,  A large or small supplier,  A national, regional or local supplier,  An international or domestic supplier.Degree of competitionThere are many forms of competition and each can impact upon the choice of anappropriate strategy. Competition can include:  full and open competition – many suppliers,  limited competition – few suppliers,  single source – a buyer selects only one supplier when many are available, and  sole source – only one supplier available.The use of preferred or pre-qualified suppliers?For some goods and services, it is not unusual for a buyer to maintain a list of“preferred or pre-qualified suppliers” who receive the first opportunity forbusiness. Relying on a list of preferred or pre-qualified suppliers can reduce thetime and resources required to progress a procurement. By maintaining apreferred supplier list, a buyer has immediate visibility with known performancecapabilities. Do you maintain a list of “preferred or pre-qualified suppliers”? Further information regarding pre-qualification is contained in the State Supply Board Draft Policy – Strategic Whole-of-government Contracts dated April 1999.Knowledge of known and potential suppliers will assist the buyer in identifying anappropriate strategy when approaching the marketplace. It is also important thatFinal Draft 9
  • 10. suppliers are not in a position to influence buyers at any time during theprocurement process. What knowledge do you have of your potential suppliers? Does you organisation maintain a “profile” on all of its suppliers? What sources do you use to obtain information about potential suppliers? Further information regarding procurement profiling is contained in the Dept. Strategic Procurement Guide – Procurement Profiling.Potential strategiesBefore an appropriate market strategy is identified, the buyer, or the procurementteam must be satisfied that the identified strategy: Is appropriate to the task. Will achieve best value for money. Will encourage open and fair competition. Will be implemented and conducted with professional integrity and probity. The risk will be commensurate with the significance of the activity. Encourages the accountability of individuals and organisations involved in the activity. Is simple, easy to understand and is robust. Encourages local industry sourcing where local suppliers can demonstrate competitiveness and capability. The identified requirement will be best met through the identified strategy.The following flowchart identifies the steps in identifying an appropriate marketstrategy leading to the issue of the invitation documents. Do you need to source goods or services? How do I do this? Determine the requirement Identify the procurement team Identify the organisational issues impacting on the procurement activity Identify potential sources of supply Identify market strategy optionsFrom an existing contract? From a new source? From stock on hand?Final Draft 10
  • 11. Develop Business Case/Acquisition Plan/Evaluation Plan Develop the invitation documents Issue the invitation documentsA “one-step” or “two-step” process?A number of strategies may be used in combination when procuring goods orservices. The purpose of each is different and one or more strategies may beused in combination.A single step process is used for low to medium value, low to medium riskprocurement activities whereby solutions are sought from potential suppliers inone process.The aim of a two-step process is to create a short list of potential suppliers withdemonstrated capacity to satisfy the requirements of the buyer. The two stepsare:  an assessment of the potential suppliers by calling for a Registration of Interest (ROI) and the development of a list of prospective suppliers, and then  an invitation to those on the list to submit tenders against detailed criteria, for example via a Selective Request for Tender (SRFT).It is appropriate to use a “two-step” process when:  the need is high value and high risk,  the need is imprecise or when creative, alternative solutions are sought,  there is a need to conduct product and market research, and  the requirement is such that many suppliers are capable of supplying the goods or services so it is preferred to reduce the suppliers to a manageable number.Invitation documentsInvitation bid documents for the procurement of goods and services, provide themeans buyer’s approach the market. The documents are the primary means ofproviding information to potential suppliers.There are a number of processes available and can be classified into two groups,firstly the informal Request for Information, and secondly the formalFinal Draft 11
  • 12. Registration of Interest, Request for Tender, Request for Proposal andRequest for Quotation.Request for information (RFI)This approach to the marketplace is usually used at the planning stage of aprocurement activity, when there is a need to obtain more information about thepurchase, costing and market and to assist with further definition of the goods orservice being sourced.RFI’s are usually advertised in the same manner as a Tender, but are not used toidentify or select suppliers. If the procurement continues, a formal and publicinvitation in the form of a ROI or RFT will be made at a later date. These futurearrangements need to be planned in advance and be stated in the RFI.An RFI provides all suppliers with early and equal opportunity to presentinformation and influence the direction of the purchase. No pricing information isrequested. The RFI would be in the form of a brief that would be short, broadand open, and require minimal resources from all potential suppliers in providingthe information.Registration of Interest (ROI)(also referred to as an “Expression of Interest”)An ROI can be used when the need is imprecise and/or the buyer is looking formore information. No pricing information is requested. The ROI involves twostages:  Short listing potential tenderers, based on a brief statement of requirements.  Issuing an RFT to the short listed tenderers, inviting a formal offer using a more detailed specification.The ROI process is used for major purchases as the preliminary step to aRFT when:  The requirement is complex, difficult to define and/or capable of several technical solutions.  There is a need to identify innovative ideas and creative solutions.  To ensure that those tendering have technical, managerial and financial support necessary to sustain and complete project on schedule.  Tendering costs are likely to be high.  Procurement may involve high technology equipment, software or plant and machinery is unique or complicated and where there may be little cost information or minimal requirements needed.Final Draft 12
  • 13.  Available specifications are not sufficiently definitive to permit open and effective competition and to ensure mutual understanding between client and prospective tenderer(s).  Acquisitions are of high value.Eliminating suppliers unlikely to be successful, by using an ROI, saves having toevaluate a large number of tender responses. The ROI may identify one, or asmall number of potentially successful suppliers. From evaluation of theresponses to an ROI, it is likely that the next step is to call for a SelectiveRequest for Tender or to a Quotation.The details provided in a request for an ROI will depend on the goods or servicesought. As a general rule, it should be of sufficient detail to ensure that onlyrealistic potential suppliers are revealed. If the sourcing requirement is complex,it is generally better to describe the required complexity at this point, rather thanat the tender or quotation stage.The information sought from the potential suppliers could include:  profitability, turnover, ownership details and copies of the latest Annual Report and Accounts,  a description of research and development capability,  details of the Quality Assurance System,  a description of the production process,  details of the distribution system,  details of previous relevant experience,  details of the management structure, and  any ideas they may wish to contribute.Request for tender (RFT)A RFT is the most common approach to seeking offers from the marketplace.It is a document inviting suppliers to offer, at their best price, their mostappropriate product or service to meet a particular requirement, by submittinga response in the manner prescribed. A well prepared RFT documentfollows the principles of equity, fairness and open and effective competition.This strategy can be used where a buyer has a clear set of specifications.Also a RFT would be used where:  the requirement is fairly well known and fixed,  the requirement is complex,  the goods or service may be required over a period of time,  may be of high value,  is sensitive and involves risk.Final Draft 13
  • 14. Under this strategy, buyers decide what price to assign to the specificationsset.A typical RFT would include:  Detailed technical specifications.  Detailed commercial requirements.  Detailed outcomes/deliverables expected.  Specific delivery date, time and location information.  A firm price schedule.Selective request for tender (SRFT)A SRFT is suitable when there is sufficient evidence that only one or a fewsuppliers are active in a particular market and a public tender is not warranted.A SRFT or Restricted Tender would typically be used after responses from aROI had been received and considered. The ROI may enable the buyer toidentify the one or two suppliers that have a chance of successfully providingthe goods or service. In such an instance, the SRFT or Restricted tenderwould only be provided to this limited number of suppliers.Request for proposal (RFP)This option can be used to great effect by a buyer in a situation where it is knownwhat is needed, but is unsure as to the best way to achieve the end results. ARFP asks potential suppliers to suggest ways and means of meeting theidentified needs. Proposals received may differ. A RFP is more flexible than aRFT.Request for quotation (RFQ)A RFQ is appropriate where there is no identified need for detailed information orconditions to apply to the sourcing requirement. A RFQ can seek bids from oneor more suppliers from a short list identified from a ROI. A key consideration isthe complexity of the complete sourcing requirement. Quotations would beappropriate for a one-off purchase of an item or service:  of relatively low value,  low complexity, and  low sensitivity and risk.As with ROI, the specific information provided would depend on the goods orservices sought. As a general rule, RFQ are usually specific and could include:  An unambiguous description and specification of the goods or service required,  Quantity required,Final Draft 14
  • 15.  Quality required,  Service standards including delivery date, time and location,  Requirement for a firm price, and  Requirement to supply the goods or service under a Standard supplier Agreement.Direct NegotiationDirect negotiation is a logical approach, both when competitive bidding is notappropriate or indeed as an adjunct to a competitive tender process.Negotiation is designed to arrive at a mutually satisfactory agreementbetween parties involved. Its purpose is to optimise buying power and notmerely to accept the best offer received from a tender call.Circumstances where direct negotiations could be appropriate include:  Supplier is an overseas organisation with no Australian office and the contract is largely performed overseas.  Procurement involves plant, machinery and equipment, which is unique or complicated and hasn’t been purchased before (no cost or historical information).  Contract involves using unusual services.  A tender call wouldn’t provide fair and competitive bidding.  A number of suppliers have tendered but none are completely satisfactory.  Reasonable prices can’t be ensured or agreed by any other means.  Difficulties arise over an existing contract and significant amendments are required to existing contracts and conditions.  Response to a RFT indicates that some of the conditions considered to be important by the purchaser are unacceptable to potential suppliers.  Cancellation or termination is required or will be considered if a suitable basis can be agreed.Verbal quotesVerbal quotes can be used for goods and services with an estimated value of upto xxxx and are not sensitive or unique. Whilst it is not necessary to publiclyadvertise, there maybe circumstances when it will be appropriate to do so,especially when a number of suppliers are known to be able to meet theidentified need. Three quotes are required.How can we add additional value?Additional value can be achieved through the use of activities, which complementthe market strategies previously identified.Final Draft 15
  • 16. E-commerce. E-commerce is the use of information technology to conductprocurement activities including ordering, payment and associated activities.Historically, preparing and managing the documentation required to supportprocurement has been a time-consuming process. Many organisations arestreamlining the document flow process to reduce the amount of paperwork,usually through the use of E-commerce. E-commerce has a number of benefits:  A virtual elimination of paperwork,  A reduction in the time between the release and receipt of an order,  Improved communication between the buyer and potential suppliers,  A reduction in errors, and  Lower overhead costs in the procurement area.Supplier briefings. Where the organisations needs are new or complex, it maybe appropriate for the buyer to brief potential suppliers. These briefings can takeplace at different times during the procurement process.Review of the procurement activityFollowing completion of any procurement activity, it is important that the marketstrategy process be reviewed.A critical review of all steps in the procurement task including how and why themarket was sourced will provide valuable information to the buyer, theorganization, COA, Dept. and the SSB. The information will be used to assist in:  planning, managing and controlling future procurement activities,  developing its procurement profile,  understanding the marketplace,  understanding how suppliers view your business,  streamlining procurement processes, systems and procedures, and  measuring and evaluating the success of the procurement activity and the procurement team.Who should conduct the review? A buyer with experience in the area, eitherfrom within the organization or from an appropriate COA or Dept.. It isimportant that the review be undertaken immediately on completion of thepurchasing task. It is also important that the buyer documents all decisions. Further information regarding measurement of procurement is contained in the Dept. Strategic Procurement Guide – Procurement Performance Measurement.SummaryFinal Draft 16
  • 17. Selection of an inappropriate strategy can have unfavorable consequences so itis critical that this part of the purchasing task is well thought through and astrategy appropriate to the good or service sought, risk, and needs of theorganisation is selected.Final Draft 17
  • 18. Where can I get more help?People(Dept. to complete)Materials(Dept. to complete)Training(Dept. to complete)This Strategic procurement Guide describes a procurement activity referred to as‘market Strategies’. This activity is widely practiced and a number of variationsexist.In developing this guide, it is appropriate to acknowledge the work of theCommonwealth, other State Governments, UK Treasury and Asia Pacific. Theconcepts underlying the activity, however, have been adapted for use in theGovernment.Final Draft 18

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