How the City of Cape Town used technology to enable its procurement processes

1. How the City of Cape Town used technology to enable its procurement processes Nirvesh Sooful Hetu Consulting

2. Introduction About me About Hetu Consulting Hetu Consulting is a strategic consultancy helping governments to accelerate the benefits of IT enabled change - through transformation of the public sector and the wider economy. Hetu brings together people with a track record of success delivering social, economic and public sector transformation. At the heart of Hetu is a team that has worked at the top global organisations and who led some of the country’s world’s most ambitious and successful programmes of e-transformation. Hetu is 100% Black owned and works in both the public and private sector, but is focussed on the public sector.

3. Agenda • City of Cape Town Context • ICT Enabled Procurement context • ICT enablement of City of Cape Town procurement processes

4. Demographics of Cape Town Population: 3.2 million Share of National GDP: 10.5 %Share of Provincial GDP: 75 % Area: 215 900 ha Rateable Properties: 800 000 Employees: 23 579 City of Cape Town annual budget 2007/08: Operating: 13,45 billion ZAR Capital: 4,316 billion ZAR City of Cape Town annual Income 2007/08: From Utility Services: 4,205 billion ZAR From Property Tax: 5,425 billiion ZAR

5. Electricity Water and Sanitation Solid Waster Roads, Stormwater and transport Public Housing Local Economic Development Social - and primary health services Emergency Services Municipal Policing Urban Planning and Environment Sport and Recreation City Administration Local Government – the delivery arm of Government

6. Transforming Cape Town Merging autonomous Organisations is complex even though enabling legislation was in place: • “Lack of standardised financial policies and procedures” • “IT systems entrench the ‘old order’” • “Back-office systems were deemed to be outdated, functionally inadequate and not properly integrated” • “Difficulty in merging these systems was in fact hindering the merger of the administrations and undermining the objectives which motivated the creation of the Unicity”

7. City of Cape Town has positioned itself to become one of our most technologically advanced cities, through successful IT sector intervention. By implementing its visionary transformation strategy, Cape Town is now a frontrunner in South Africa’s National IT Strategy. The benefits for all have been enormous. E-government services have been developed; the service to its citizens has been improved. All city employees have access to mainstream banking giving low-income employees a measure of economic empowerment. The cherry on top of the cake for this project, is that they have instituted the largest IT training programme in our history, boosting the IT skills of the city by training thousands of employees. IT businesses owned by the formerly dispossessed are also benefiting through this partnership. In order for Cape Town to establish itself as a municipal services leader there had to be a partnership between, business, labour and the community. I am sharing this success story with you because I want to see more of such initiatives. Cape Town in Context Address by Dr Ivy Matsepe-Casaburri, Minister of Communications at Nedlac ICT Annual Forum Meeting, 25 January 2005

8. Developmental local government

9. Agenda • City of Cape Town Context • ICT Enabled Procurement context • ICT enablement of City of Cape Town procurement processes

10. Defining Procurement • Procurement refers to the overall process of acquiring a product or service. Depending on the circumstances, it may include some or all of the following: • identifying a need, • specifying the requirements to fulfill the need, • identifying potential suppliers, • soliciting bids and proposals, • evaluating bids and proposals, • awarding contracts or purchase orders, • tracking progress and ensuring compliance, • taking delivery, inspecting and inventorying the deliverable, and • paying the supplier.

11. Public Sector Procurement Trends • The U.S. federal government is the single largest purchasing entity in the world • The U.S. General Accounting Office (GAO) reports that the federal government alone is wasting billions of tax dollars owing to underleveraged spend and underperforming procurement and supply management operations • Procurement is key to reducing the cost structures of government agencies, improving operating performance and service levels, and satisfying policies and regulations • The need to do more with less and increased scrutiny of legislators and watchdog groups will force government agencies to improve their cost management operations • Public sector procurement initiatives are primarily driven by requirements to comply with contracting regulations and mandates, such as full and-open competition, minority and small business goals, and the spend-to-appropriation culture of government • Most governments have a procurement process that was drafted into law by its legislators, interpreted by judicial branch judges, and carried out by executive branch leaders and their staff members • Government procurement culture maintains a strong belief that competition (manifested via the RFx process) limits cronyism and corruption, and leads to higher performance and lower costs • More than ever, governments across all industries view procurement as a catalyst not only for supply cost reduction and assurance but also for compliance Sources: RAND Corporation, “High Performance Government”, 2005; NASPO Research Brief, May 2005; Aberdeen Group & GCN, “Supply Management in the Public Sector,” May 2004; Aberdeen Group, “Center-Led Procurement”, Nov. 2005

12. Government Procurement Drivers Source: Aberdeen Group & GCN, “Supply Management in the Public Sector”, May 2004

13. Procurement Reform: Asia Pacific / ANZ • “E-procurement has been identified as an instrument in public sector reform. It enables government to monitor the efficiency and effectiveness of procurement and provides more transparency and accountability.” • “In many government organizations, the tools necessary to complete the procurement transactions (e.g., search, requisition and payment) often reside in different departments or agencies. Related policies and procedures may also reside outside the procurement organization. Therefore, the full integration of the complete end-to-end process and the deployment of usable policies and procedures to support this process remain a key challenge.” http://www.agimo.gov.au/publications/2005/may/e-procurement_research_reports/Case_Studies_on_E-procurement_Implementations.pdf#search=%22Case%20Studies%20on%20E-procurement%20Implementations%22

14. Procurement Reform: European Commission

15. Procurement Reform: Developing Countries

16. Electronic Procurement 19 31 Supplier Connectivity 16 34 Vital Role Very Important RFx and Auctions 9 17 Automate and Accelerate Processes Spend Analysis 26 31 Supplier Collaboration 17 34 Optimize and Reduce Cost Category Management 12 32 Performance Management 26 36 Improve Strategy and Compliance Contract Management 17 31 • Source: Economist Intelligence Unit, April 2005 EIU 2005 Global Survey • “What role do software tools […] play in ensuring the overall success of your purchasing strategies and initiatives?” • E-procurement is widely appreciated • Supplier connectivity equally important • Spend analysis at top of agenda • Collaboration valued higher than auctions • High demand for performance management • Contract management is seen as key

17. Tactical Purchasing Generate savings Manage compliance Expedite processes Analyze spend history One-off initiatives Strategic Purchasing Generate value Manage contribution Extend processes Analyze supply strategy Continuous improvement General Procurement Trends Moving From Tactical To Strategic Purchasing TRADITIONAL ACTIVITIES VALUE ADDING ACTIVITIES

18. Agenda • City of Cape Town Context • ICT Enabled Procurement context • ICT enablement of City of Cape Town procurement processes

19. Procurement in the City of Cape Town • In terms of Section 217 of the Constitution of the Republic of SA, the City of Cape Town is required to implement a procurement system that is fair, equitable, transparent, cost effective and economical. It is further required by Section 14 of the Municipal Supply Chain Management Regulations to keep a list of accredited prospective providers of goods and services that must be used for the procurement requirements of the municipality though quotations and formal bids. • Fundamental to the city’s supply chain management strategy is the fact that procurement is a Strategic Function within Local Government – through which it is able to influence economic development, give action to its developmental objectives and exhibit good governance. In the private sector the supply chain is predominantly a transactional overhead – best suited to transactional outsourcing and where only those procurement items which provide a competitive advantage is retain in-house. • Been an evolution • Two platforms underpin the strategy • SAP and Internet

20. - Billing to sundry debtors - Financial Accounting SD Sales & Distribution FI Financial Accounting MM Materials Mgmt. CO Controlling - Management Accounting - Procurement & Inventory Management SCADA* R/3 and IS-U/CCS AM Fixed Assets Mgmt PP Production Planning EDI QM Quality Management PS Project System • Plant Maintenance - Asset Management PM Plant Maintenance WF Workflow Field Service Support IS Industry Solutions - Project Accounting HR Human Resources IS-RE Work Clearance* IS-U / FERC SM Service Mgmt GIS AM/FM - Real Estate Management CAD • Human Resources & Payroll IS-U/ CCS • Industry Solution for Utilities • Customer Care & Revenue Management SAP-R3 & ISU Foot Print SAP Fact Sheet • 420 end-to-end Business Processes • Cost: R354mil (2000-2002) • Single Instance – 8 terabyte db • 7 500 Users • 580 SAP Sites City Wide • 3,2 mil ISU contracts • 1,2 mil consolidated invoices per month • 2 mil equipment items.

21. Match PO to Goods Receipt to Invoice Create Purchase Order Expedite Order Receipt Goods Receipt Invoice Make Payment Create Requisition Source Authorize Authorize Render PO Authorize Make Payment Match PO to Goods Receipt to Invoice Create Purchase Order Expedite Order Receipt Goods Receipt Invoice Make Payment Create Requisition Source Authorize Authorize Render PO Authorize Match PO to Goods Receipt to Invoice Create Purchase Order Expedite Order Receipt Goods Receipt Invoice Create Requisition Source Authorize Authorize Render PO Authorize Match PO to Goods Receipt to Invoice Create Purchase Order Expedite Order Receipt Goods Receipt Invoice Make Payment Create Requisition Source Authorize Authorize Render PO Authorize Performed by Line Dept The ERP and Process Based Organisation Design(Business Processes – eg. “Procure to Pay”) Each Dept has its own Procurement and Accounts Payable responsibilities. Accounts Payable services provided by Shared Service Organization. Accounts Payable services provided centrally – but each Line Dept. performs own buying. Procurement now added as a Shared Service but Line Dept still feels the need to approve. High volume buying and paying of vendors centralised for control and efficiency. Performed by Supply Chain Specialists

22. Key System Statistics The SAP transactional environment : • 23 000 payroll members. • 1 200 000 invoices every month • 22 592 Purchase Order Line Items per month • 2309 Cost and 1550 Profit Centres • 25 Business Areas • 7 500 named system users (12 500 user licenses) • 554 SAP sites in the City • 19 977 254 online transactions per month • + 50 overnight batch jobs • Prod 24x7, 99.85% availability for 2006 (includes planned down time) • Average online response = 0,7 sec / transaction (1.5 sec design) • Database = 8TB, growing at 60-80GB per month • 130 calls per day logged with our SAP Support Desk

23. MM : Procurement and Inventory Management • Standardised and structured Procurement process implemented. • Single master record of all vendors created • (21 000 vendors reduced to 8 000) • Compliance with procurement policy (SMME’s) • Consolidated inventory management through standard material codes across 100 stores. • Real time postings and reconciliation of store ledger to main ledger. Implemented 30 December 2002 • MM : Creating Financial Value through: • On-line authorisation of expenditure with full audit trail. • Improved financial control through visibility of financial commitments and the lowest level of detail relating to all expenditure. • Stock holdings optimization through maximising stock turns, visibility across all stores and facility rationalisation. • Procuring against contracts and use of Electronic Bulletin Board for quotations. • MM : Opportunities • Better use of Supply Chain Management functionality and E-procurement.

24. Financial benefit realisation:Inventory Optimisation How is this benefit realised? • Inventory holdings to be kept to a minimum, while ensuring adequate availability. • Stock visibility across all stores is the primary driver of this benefit. • Stores Consolidation will be a function of Organisational Restructuring. • Reducing the cost of holding inventory by, e.g. disposal of redundant stock and improving stock turns; and • Optimising the Stores infrastructure based on optimal stock holding. • Calculation: • The year on year value of stock holdings was compared. • Value of stock compared to March 2003 • Monthly Stock value discounted by CPIX back to baseline date. • Interest saving calculated and allocated to • Financial Benefits (R millions) • Inventory Optimisation • Stock Value reduction = R 55mil • Recurring Interest saving = R 6.6mil pa (@ prime = 12%)

25. Financial benefit realisation:Procurement: Price Standardisation, Inventory Optimisation • Procurement will be done in a consolidated and standardised fashion with the maximum use of tenders and in accordance with City’s procurement policy. • Inventory holdings to be kept to a minimum, while ensuring adequate availability. • Eliminating price discrepancies between administrations and vendors on the same commodity – goods & services; • Reducing the cost of holding inventory by, e.g. disposal of redundant stock and improving stock turns; and • Optimising the Stores infrastructure based on optimal stock holding. • Financial Benefits (R millions) • Price Standardisation • Low Road = R 60mil pa (@ 5pm) • High Road = R 96mil pa (@ 8pm) • Inventory Optimisation • Stock Value reduction = R 55mil • Recurring Interest saving = R 6.6mil pa (@ prime = 12%) • Calculation: • Minimum prices across all commodities were compared to the prices paid over the period that SAP has been live for Store purchases only; • The top 20 stores were assessed for their stock value and turn. • Total stock holding = R 141mil (ideal = R 86mil); • Ave ST = 2.4 (best case = 4); • Total materials = 52 000 (34 000 active); and • 3500 materials contribute to 97% of all stock movement in stores.

26. E-Fuel • Average Daily Value            R744,201 • Average Daily No. of Txns    1140 “Another interesting area has been the automation of fuel payments through e-fuel system and interface into SAP. Through this we pay approximately R750 000 per day for fuel to the respective suppliers without any human intervention...... ......What makes things even better is that the price is checked against contract pricing and payment is optimised to ensure that we only pay on due date. In the past we had the fuel supply cut to the city due to late payment, now nobody worries about it.” Andre Stelzner, ESC Manager, City of CT

27. Tactical Purchasing Generate savings Manage compliance Expedite processes Analyze spend history One-off initiatives Strategic Purchasing Generate value Manage contribution Extend processes Analyze supply strategy Continuous improvement In conclusion – it is a process of evolution Moving From Tactical To Strategic Purchasing TRADITIONAL ACTIVITIES VALUE ADDING ACTIVITIES

28. Thank You Questions/ Discussion Nirvesh Sooful nirvesh@hetuconsulting.com Download this presentation and other information from: www.knowledgecommune.com/blog