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South West Employers. Obtaining Value for Money & EU Procedures. Trainer:. Date:. Activity 1 - Icebreaker. How many points do you have? _______. One unusual fact I have found out about someone here is? ____________________________ (5 points). Activity 2 - Groundrules.

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south west employers
South West Employers

Obtaining Value for Money & EU Procedures

Trainer:

Date:

activity 1 icebreaker
Activity 1 - Icebreaker

How many points do you have? _______

One unusual fact I have found out about someone here is? ____________________________ (5 points)

activity 2 groundrules
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
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
Sections
  • 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

Definitions
realising benefits the 3 e s
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
procurement cycle

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
application of pricing profit analysis
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
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.

slide11

Pricing theory: (In)elasticity of demand

Elasticity of Demand

Inelasticity of Demand

Volume has major effect on price

Volume has limited effect on price

supplier s perspective
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

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
activity 3 markup and margin
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 analysis1
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

category management approaches
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)
non critical
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
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
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
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
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
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
application of pricing profit analysis2
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

whole life costing wlc

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)

whole life costing elements
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

activity 5 whole life costing
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
achieving value for money
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
objectives1
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