THE measure of competitiveness in a procurement process has generally been the comparison of at least three competitive quotations. The measure of attaining at least three quotations is easy to establish, you merely quantify the quotations being compared.
The challenge is on the measure of competitiveness in the invitations of three quotations. The misplaced assumption is that there are a variety of suppliers with comparable solutions. In measuring competitiveness in a procurement process, value for money is not achieved by simply selecting the best out of a set of submissions. It results in the selection of the best out of the worst.
Buyers base their decisions on competitive tension within the market. It is generally assumed that the tension gives leverage to the buyer to contract on the best terms and conditions. There are instances where the supply markets lack that competitive tension. Distortions in the supply markets could be as a result of the market structures in terms of the quantum of suppliers in that market, or the market concentration where there are a small number of dominant suppliers. The extent of suppliers’ competitive rivalry in terms of the desire of the suppliers to compete contribute to market distortion.
The situation then requires professional procurement practitioners to use their discretion to apply techniques that match the market characteristics and its environment. A market in this sense relates to two dimensions of the technical and geographical scope. Technical scope relates to the same type of goods, works or services or solutions that address substantially the same need. Geographic considerations relate to local, national, regional and global markets. The more the definition of the market is broader, the wider the choice to the buyer.
Some markets lack competition because the number of suppliers may not be sufficient to generate free and open competition. This is very common in monopoly and monopolistic markets that do not support open and free competition. Free and open competition implies that the suppliers in the market are genuinely competing so that the basis of the competition is free to the buyer. It is assumed that such markets have two or more suppliers with low barriers to entry and limited differentiated solutions.
Open competition is achieved when there are no or low entry barriers that afford players premium profits such that new entrants are attracted to enter that market. Attractiveness of the market would depress profitability in the long run when margins are reduced at the benefit of the buyer.
Distortions to the market also arise from a situation where a buyer is not capable to secure three quotations not because of a monopoly markets, but other technical factors that create a de-facto monopoly. There are situations where patents or intellectual property limitations restrict the ability of other suppliers to offer competing products thereby limiting the choice to the buyer. Some distribution channels are closed limiting the discretion as to the source of supply.
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Use of standards and certification processes limit market availability to products technically accepted by the system. This was the case with fire extinguishers for use on vehicles before the acceptance of products certified by other national standards bodies. Technically, switching costs may inhibit the choice on the market when it is envisaged that the potential benefits are lower than sticking to the existing supplier. All these and other issues require a buyer to wear a thinking cap to ensure procurement decisions with respect to choice of the market propels the organisation to effectively compete nationally and globally.
●Nyasha Chizu is a fellow of the Chartered Institute of Procurement and Supply writing in his personal capacity. Feedback: [email protected]; Skype: nyasha.chizu
