Economy or efficiency in procurement implies that goods and services are acquired on the best possible terms, are appropriate to requirement and that the chosen provider has competence to perform the required contract in both the private and public sector.
Purchasing and Supply by Nyasha Chizu
These three requirements are the dimensions of value for money procurement. A procurement process is regarded efficient only if all the three requirements are demonstrated in a single transaction.
The first dimension is that specifications satisfy the requirements. Over specifying is commonly referred to in procurement as “gold platting” and under specifying as “skeleton” or “mini skirt” specifications are common problems in a procurement process. The obvious result is a handicapped product or service that lacks capacity or that has excess capacity to requirements. Value in both cases is lost.
As an illustration, procurement of an information technology system require appropriate specifications capable of handling all relevant information at the required speed, with the required features, and storage capacity.
There is risk of acquiring information technology system that has less speed or the speed is exceptionally more than requirements; the system might have fewer features or has more than the required features, and; the storage capacity is very little or it is more than what is required. The bottom line is that value is wasted by insufficient and unnecessary attributes on requirements.
The second dimension is that the specified requirements are obtained at best possible terms. Value for money terms is not only reflective of the lowest price after considering total life cycle, running and maintenance costs.
Although total life cycle costs are not irrelevant, they are incomplete when considering value for money. Non financial factors of quality of the product and service, the speed of service delivery and additional financial considerations of payment conditions sum up issues that need consideration for value for money terms.
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The third and final dimension is the one concerned with the capacity of the contract. Value for money procurement is only achieved when the chosen contractor has both financial and technical capacity to fulfil the contract on the agreed terms. Financial capacity could be reflected by the contractor’s cash flows, wherein the general rule of the thumb is that a contractor should have resources to fund a project phase while the client processes a previous claim.
Mathematically, minimum cash flows are the project value (PV) divided by the estimated duration (ED) multiplied by the maximum invoice processing time (IPT) summarised as (PV/ED) IPT. Alternatives to own funds could be availability of credit facilities equivalent to the required cash flows.
Technical competence refers to the availability of technology in the form of tools and equipment, skilled and experienced personnel to undertake the project. The quality of the project is depended on the technology available and the calibre of the staff involved. Inappropriate technology and insufficient skills produce poor quality projects that inevitably add costs eroding value.
Value for money procurement requirements are the same in all sectors. The three dimensions must occur concurrently if procurement processes are to achieve value for money. It is therefore the obligation of the procurement manager to ensure that requirements specified satisfy value for money objectives.
lNyasha Chizu is a Fellow of the Chartered Institute of Procurement and Supply writing in his personal capacity. Feedback: [email protected]; [email protected]
