South West Employers

Obtaining Value for Money & EU Procedures

Trainer: Date:

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

Sections

1. Tools and techniques

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

Kraljic’s ‘purchasing portfolio’ matrix

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