South West Employers

1. South West Employers Obtaining Value for Money & EU Procedures Trainer: Date:

2. Activity 1 - Icebreaker How many points do you have? _______ One unusual fact I have found out about someone here is? ____________________________ (5 points)

3. 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

4. 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

5. Sections • Tools and techniques

6. 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 Definitions

7. Realising benefits – the 3 E’s • 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 • Economy • Efficiency • Effectiveness

8. Define & review need Exit & termination Manage contract performance Develop specification Manage implementation and transition Determineprocurement strategy Contract award Invite Pre-qualify suppliers Negotiate? Evaluate tenders Issue RFQ or ITT Procurement cycle

9. 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

10. What is profit? Profit Mark-up (%) Margin (%) Costs Materials + Price Labour + Overheads The supplier’s profit is the difference between the price a product is sold for and the cost of producing & selling it.

11. Pricing theory: (In)elasticity of demand Elasticity of Demand Inelasticity of Demand Volume has major effect on price Volume has limited effect on price

12. 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

13. Pricing Model: Example in use: 1. Premium Pricing 2. Market Pricing 3. Skimming 4. Cost-based Pricing 5. Marginal Pricing 6. Penetration Pricing 7. Loss leaders Pricing models in practice

14. 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

15. Application of pricing/profit analysis 1. Supplier pricing / profit analysis • 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. 2. Supplier category analysis 3. Whole-life costing

16. 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)

17. Pareto Analysis or ABC Analysis

18. Kraljic’s ‘purchasing portfolio’ matrix

19. 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

20. 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

21. 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?

22. 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)

23. 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’

24. Activity 4 – Relationship strategy Split into small groups and use the information provided to: • identify the type of relationship with each of the 5 suppliers • determine whether it should be changed • highlight the specific factors that need to be considered in order to obtain value for money

25. Application of pricing/profit analysis 1. Supplier pricing / profit analysis 2. Supplier category analysis • Application 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 3. Whole-life costing

26. Price Inspection Support Maintenance Delivery Inventory Research Training Defects Handling costs Repair Consumables Disposal Delay Whole life costing (WLC) “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)

27. Whole life costing elements Whole Life Cost Buy Use Dispose Own 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

28. Activity 5 – Whole Life Costing Split into small groups and use the information provided to: • Calculate the whole-life cost of each of the printer options over a three-year life period • Recommend which represents value for money (and why) • Discuss what other factors need to be taken into account

29. Achieving Value for Money • Make determined efforts to find, investigate and assess new sources of supply • Carry out continuous benchmarking exercises • Ensure the use of the competitive tendering processes • Understand suppliers pricing models and endeavour to obtain open book accounting to enhance cost analysis • Focus on obtaining the right balance between quality and whole life costing

30. 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