0State Procurement: An Engine for Taxpayer Savings
1Agenda Strategic Sourcing eProcurement Cooperative Purchasing Total Cost of OwnershipBest ValueeProcurementCooperative PurchasingOrganizationShared ServicesCommodity Alignment
2IntroductionDeputy Secretary of Pennsylvania Department of General Services ( )Responsibilities:Statewide procurement ($4B in annual spend)Fleet management (17,000 vehicles)Inventory management (17 warehouses)PrintAccomplishments:$360 million in annual procurement savingsQuadrupling of state’s MWBE participation rateWarehouse consolidation, closing 14 warehousesEliminated 1,000 vehicles from fleet
4Two Divergent Public Sector Procurement Philosophies “Share the Wealth”Goal – Spur economic development through procurementTactic - Allow autonomy by agencies to disaggregate volume and ensure that procurement pie is split among a multitude of suppliers.“Strategic Sourcing”Goal – Generate best value for agencies and taxpayers – decrease cost, enhance quality, increase MWBE participation.Tactic – Aggregate demand across all agencies and consolidate number of suppliers to maximize leverage.
5Multi-award Contracts with Local Decision Making Leads to Wide Pricing Variances
6Seven Step Sourcing Process Negotiate & Select SuppliersSolicit & Evaluate BidsBuildTCO ModelDevelop Sourcing StrategyCollectSupplier InformationImplement ContractsProfile Internally & ExternallySeven Step Sourcing ProcessSelect DGS lead and agency end users to commodity teamCollect and analyze detailed data from agencies and suppliersReview as-is ordering processIdentify cost driversDevelop specifications and market basket of itemsResearch capabilities of supply baseDetermine supplier diversity opportunityAnalyze risks and opportunities in the industryDevelop evaluation criteria and weightingSelect sourcing and lotting strategyEstablish streamlined to-be ordering processSelect sourcing strategy and review with executivesDevelop and publish bid document (RFP, RFQ, IFB)Evaluate responsesNegotiate Best and Final Offers (BAFOs)Finalize contract terms and conditions and signTrain end users on new ordering processesData GatheringRequests for InformationTotal Cost of OwnershipRequests for ProposalNegotiations
7Results: $140. 7M in Annual Savings Through 2005, $360M to Date Results: $140.7M in Annual Savings Through 2005, $360M to Date. Quadrupling of Small Business, MWBE Participation RateBy using a new set of tools and this seven step sourcing process, we were able to dramatically increase our buying power and our leverage with suppliers. Pennsylvania became a buyers market, not a sellers market. And the taxpayers of the state benefited to the tune of $140M in annual savings. Unfortunately, we don’t have time today to go into detail about each of the contracts. If you would like to learn more about how we sourced any of the commodities, feel free to give me a call or . My contact information will be available on the last slide of the presentation. But I am going to give you some detail now about two of the contracts because I think they give you a good sense of the shortfalls of the old system, the benefits of strategic sourcing and the road we took to get there.
9Critical Success Factors Unwavering (chief) executive supporte.g., 6 press conferences with PA GovernorBest value awards – not low bid – to select world-class supplierse.g., PA food contract that went southDrive adoption of contracts
11eProcurement Reduces “Maverick Spend” For strategically-sourced contracts to have value, they need to be used.If the system for ordering is too difficult, end users will find other ways to obtain product, including paying retail.End users are accustomed to buying items online for personal use. Make the way they buy at work just as easy.
12eProcurement Can Improve Efficiency from “Procure-to-Pay” SourcingCatalogue Management (like ordering from Amazon)WorkflowCreating/Distributing Purchase OrdersGoods ReceiptInvoicingDistributing Payment to Vendors
13Case Study: Georgia Implemented eProcurement system Integrates with PeopleSoft ERP systemAdoption of contracts increased from 20% in FY08 to 80% in FY11$2.1B additional spend being managed by FY11$303M in savings through FY12
15Cooperative Purchasing Most states, cities, counties, school districts have the ability to “piggyback” on contracts established by other jurisdictions.Piggybacking entity receives same or better pricing as original entity.Piggybacking entity can insert its own terms and conditions which take precedence.Cooperative purchasing is a widely accepted, procurement best practice, endorsed by American Bar Association (ABA), National Institute of Government Purchasing (NIGP), National Association of State Procurement Officials (NASPO).
18Challenges of Legacy Organization Each buyer had to manage a large number of unrelated commodities.Example: One buyer had to manage the following commodities:Body ArmorTelecommunication EquipmentSoftwareIT Staff AugmentationAuction ServicesLegal ResearchWith such a wide portfolio, it was impossible to spend the time required to strategically source a commodity and execute the implementation of the contract.It was also impossible to develop deep expertise in an individual commodity because buyers could never focus within a specific industry.
19Benefits of Shared Services Center Reductions in cost of purchasing goods and services by:Aggregating demand of all agencies to maximize volume and decrease cost.Building commodity expertise where shared service center buyers are experts in the industryTraining buyers on online bidding, value engineering, cost-modeling, negotiating, etc.Eliminates redundancy of multiple individuals in multiple agencies contracting for the same goods and services.Consistent application of Rendell Administration procurement policy objectivesSimplifies state procurement for suppliers with consistent RFPs, terms and conditions, protest processes.Frees up agency management time to focus on programmatic goals, not administrative functions.