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Developing the Commodity Strategy
Quicklinks
Introduction
Determining the Procurement Route
Areas to examine when developing the Strategy
Strategic Positioning of Product Groups
eProcurement Considerations
Corporate Social Responsibility Issues
Compliance Issues and Strategies
Commodity Strategy Options
Risk Management
The Business Case
Commodity Strategy Summary
Commodity Strategy Review
Introduction
Having produced a Profile of the targeted commodity, the next responsibility of the User Intelligence group is to develop a strategy for the procurement of that commodity. This strategy should guide the purchaser as to the manner in which they should approach the market, identifying the opportunities available to them and the best methods of exploiting them so as to achieve best value. The User Intelligence Group should produce a procurement strategy to a depth and sophistication appropriate to the value, complexity and strategic importance of the commodity
What is in a Procurement Strategy?
The Procurement Strategy sets out the strategy to be followed for the procurement, with the appropriate justification. Key components of a strategy with the suggested minimum requirements are listed in the Commodity Strategy Index provided on the Introduction and Objectives page
Points to Consider
Decisions about procurement options should relate to the objectives for the project and thus to the procurement priorities. The starting point for any procurement strategy should be to identify the objectives and benefits that are sought from the exercise. This should in part have been considered at the stage of Profiling the Commodity, and the UIG should continue the process of identifying its objectives to the point at which a detailed and useful Specification can be produced. Consideration should also be given to the market structure, particularly the issues relating to strategic management of key suppliers - do they have the capability and capacity (as well as the commitment) to meet your requirement as well as those of others in the public sector? Refer to your organisation's overall procurement strategy for policy on key suppliers.
Key factors influencing the procurement strategy relate to the degree of complexity, innovation, and uncertainty about the requirement, together with the time needed to achieve a successful outcome. The procurement strategy should facilitate a collaborative approach and open communication between potential suppliers and the client, subject to the procurement route chosen (i.e. the restricted route limits the extent of dialogue with suppliers). If the requirement is very complex, consider breaking it into several smaller and/or phased procurements, but be aware of the potential to be in breach of the EC aggregation rules.
Determining the Procurement Route.
One aspect of the procurement process which should be considered in the strategy development stage is that of the procurement route or method that should be utilised. The choice of methodology will depend upon the nature and objectives of the project as well as the characteristics of the market, particularly in relation to the supply-side structures. It will also be necessary at this stage to determine whether the contract is one which is regulated by the EC Procurement Directives, as this may affect the methods available to the purchaser.
The purchaser should select the most appropriate route from the following list;
Firstly, the purchaser should consider whether an existing contract, either within their organisation, or at the appropriate regional, sectoral or national level, might be utilised. Then;
Where the EC Directives apply;
- Open Procedure;
- Restricted Procedure;
- Negotiated Procedure or;
- Competitive Dialogue.
May be appropriate. For an explanation of each of these procedures, see Contract Award Procedures.
The decision on the route to take must be justified and documented on the basis of propriety, compliance with EC rules, business benefit and risk. In selecting a procurement route, consider the time and cost involved. For example, the supply-side structure of the market might be such that there are many companies who could potentially reply to tender advertisement. Therefore, use of the restricted procedure might be justified on the grounds that the evaluation of all the tenders that an open procedure might attract could be too costly and time consuming, both for potential suppliers and for the buying organisation. Therefore, putting an upper limit on the number of companies to be invited to tender by using a pre-qualification process could be beneficial. Similarly, a negotiated procedure might be justified in a project where irregular or unacceptable tenders have been received, or in exceptional circumstances where the nature of the prior overall pricing is not achievable. There are strict rules regarding the use of the negotiated procedure and you should be clear that you have sufficient justification before continuing. For an outline of the procedures provided for under the EC Directives see the Contract Award Procedures section in the EC Guidelines.
The purchaser should also consider, where a new contract has to be established, whether it might be appropriate, bearing in mind the information from the Commodity Profile, to implement a Framework Contract or a Dynamic Purchasing System. Whether such structures are utilised shall depend upon whether the commodity is suitable for such a purchasing structure and the propensity of the market to engage in such agreements.
Areas to examine when developing the Strategy.
The following is a non-exhaustive list of areas that should be considered in developing the commodity strategy, along with an explanation that area
Relevant Legislation
The general rules relating to procurement practice are explained in the Guidance on European Legislation affecting Public Sector Procurement, however there may be other legislation which may apply to the specialist commodity with which you are dealing. This should be ascertained at the Profiling the Commodity stage by the UIG.
Strategic Positioning of Product Groups
The product group 'matrix' considers the relative importance of the commodity group to the organisation against two key dimensions:
Business Impact:
considers the expenditure on the commodity group, the amount relative to total expenditure and the level to which the commodity group supports the core business.
Supply Market Challenge:
considers the technical complexity of the commodity group, the market availability and the purchasing leverage the organisation has with that sourcing group.
Plotting against these two dimensions provides four commodity group types. The templates/diagrams below illustrate the characteristics of each type and highlights possible strategies that could be adopted with each type.
Positioning of Supplier View
Positioning of how the supplier views the organisation will ensure that a strategy is defined for developing the appropriate relationship with suppliers. The two dimensions to map against are:
Account Attractiveness, determined by how essential the supplier perceives the account to their future business plans; and
Relative Value of Business, determined by percentage of total turnover derived from a particular customer
Understanding the gap between current and future state will help to shape the sourcing strategy.
These strategies are designed to provide the commodity with a starting point. They must be further defined in the context of the specific commodity and opportunities identified using the best value triangle. By having an understanding of the customer and supplier expectations and relationship types, opportunities can be fully developed. The following illustrates opportunity areas that may be more appropriate to pursue according to the commodity positioning.
This illustrates opportunity types around Purchase Demand Management, Supply Base Management and Total Cost Management. The commodity team should review the appropriateness of opportunities to the commodity.
Further indications of possible strategic options based upon the product position are set out in the Strategic Positioning Action Plans. These set out possible actions that may be beneficial for commodities depending upon their commodity group type.
eProcurement Considerations
There are different eProcurement routes that can be considered within given segments of the commodity positioning matrix:
The eProcurement Scotl@nd approach takes into account the organisation specifics and is driven by the sourcing strategy and the characteristics of the commodities purchased. For eCatalogues, commodities are divided into classes:
GREEN - those that lend themselves to catalogue purchasing
AMBER - those that may require more variable pricing arrangements, or involve quotations
RED - those that are generally procured on a low-frequency and non fixed-price basis, and are not suited to catalogue purchasing
More detailed information on eProcurement can be found at eProcurement Scotl@nd
Supplier Readiness Assessment
The Supplier Readiness Assessment can be used to understand how ready and able supplier organisations are to participate in eProcurement Scotland. This information enables:
- An indication of what effort and resources will be required to ensure successful enablement
- An early indication of any technical or other barriers which will hinder successful enablement
- An understanding of the degree of resources and time involved post enablement - associated with the maintenance of content in the system
- Essential contact names and contact details within the supplier organisation to ensure effective and regular communication is maintained between parties
A sub-set of the Assessment document can be included in the ITT to assess supplier's eProcurement capability. Any ITT must also include details of eProcurement tools to be used during the strategy implementation e.g. e-Auctions.
Corporate Social Responsibility Issues
When developing the commodity strategy, User Intelligence Groups should have reference to the Corporate Social Responsibility (CSR) obligations to which their constituent organisations may be bound. This may affect the manner in which they conduct the procurement operation and influence the sourcing options available to them These considerations can be complex, and will require to be incorporated into the procurement process within the confines of the law.
This section is intended to be an informal, broad summary of CSR in procurement- not a definitive guide. More detailed guidance is available on the Scottish Procurement Directorate's Corporate Social Responsibility page. Sustainable procurement is variously known as sustainable procurement, sustainable development in procurement, sustainability in procurement, Corporate Social Responsibility in procurement etc. In broad terms it means full account of environmental, social and economic factors in public procurement.
CSR and the Procurement Process
Legislative Issues
All Public Bodies are required to comply with EU procurement legislation. The main ways in which this affects sustainability issues at the various stages of the procurement process are set out below
Procurement Process - Specification
EU rules are less concerned with what you buy than with how you buy it and public bodies are, in general, free to specify sustainable options, provided that doing so does not distort competition unreasonably or discriminate against products and suppliers from other EU Member States. It is possible, for example, to specify recycled paper or energy-efficient IT equipment. It is at this stage of the process that sustainability issues can have their greatest impact. It is much easier and more cost-effective to build sustainability into the procurement process at the outset, when requirements are being drawn up, than later in the process.
See "What should be in a specification?"
Procurement Process - Selection of Tenderers
Selection criteria must focus on candidates' economic and financial standing and their technical capacity. When looking at CSR issues they have to be directly related to the performance of the contract in question. It is not permissible to ask questions about potential suppliers' general policies on environmental issues, for example, where they do not relate to the performance of the contract.
See - "Supplier Selection and PQQs"
Procurement Process - Contract Award
Only two options are available - (1) Lowest Price and (2) Most Economically Advantageous Tender (MEAT). MEAT is likely to be used in the vast majority of cases and is equivalent to Value for Money. Value for Money is not about securing the lowest initial price; it is defined as the optimum combination of whole-life costs and quality to meet the user's requirement. This emphasis on whole-life costs encourages the consideration of environmental issues where such issues are part of the organisation's objectives. Resource consumption (e.g. energy, water) and disposal costs are examples of possible award criteria. Criteria for determining the most economically advantageous tender must be relevant to the subject matter of the contract and should be appropriately weighted, according to the importance of each to the performance of the contract.
See - "Contract Award and Debriefing" or
- Guidance on European Procurement Rules: Contract Award Criteria
Contract Management
Authorities may, after contract award, work co-operatively with suppliers to reduce their environmental impact, and that of their supply chain, by, for example, reducing packaging, looking at delivery frequency and scheduling, or addressing -the hazardous material content in products.
Aspects of CSR
Social Issues
The need to relate factors to the subject matter of the contract means that the opportunities for incorporating social issues into public procurement are more limited than is the case for environmental issues. The explanation above of EC rules and environmental issues is just as relevant to the consideration of social issues. As with environmental issues, contracting authorities should not ask about tenderers' general policies on social issues where this goes beyond what is relevant to performing the subject matter of the particular contract in question.
An example of where the consideration of social issues during the procurement process is likely to be appropriate is where a public authority has obligations of a social nature in relation to a particular function, the performance of which it is contracting out. For example the "duty to promote" under discrimination legislation can legitimately be passed on to a contractor where the contractor is carrying out a service which would have been subject to the duty were it being performed in-house.
As with environmental issues, it is usually best to take social issues into account early on in the procurement process. For example, ensuring that an IT system is accessible to disabled users or that a caterer will provide meals suitable for special religious or other diets.
Economic Issues
EC rules do not permit preference being given to any sector of suppliers such as local suppliers, social enterprises or SMEs. It is permissible, however, to remove any obstacles which might be preventing such groups from competing for public business. This might be done by, for example, ensuring they are aware of where opportunities will be advertised and making the tendering documentation and the tendering procedure as simple as possible for all suppliers. Meet the buyer events might support this activity although such events should not be linked to any particular tendering opportunity in order to ensure that competition is not distorted by any actions which might be seen as discriminatory against other suppliers. For more detailed guidance and to read about the Suppliers Charter which has been agreed between the Scottish public sector and business, see: http://www.scotland.gov.uk/Topics/Government/Procurement/Selling/Supplierscharter2 (contact Jo Mitchell, Josephine.mitchell@scotland.gsi.gov.uk tel: 0131 244 3731 for more information).
Fair Trade
Public procurement can support fair trade items. It is not permissible to specify in a tender opportunity that only fair trade produce may be offered as this would be discriminatory against other suppliers. It is permissible, however, to say in tender documents and advertisements that fair trade options would be welcomed. The tender evaluation process must then seek to achieve the usual value for money solution without taking into account the fair trade aspect. Once the contract has been awarded on a value for money basis the successful tenderer can be asked to make fair trade items available where this does not change the nature of the contract or distort competition. It is also possible to require caterers to supply fair trade products as part of a catering contract (e.g. tea and coffee for official meetings) as this does not distort competition between caterers. More detailed guidance can be found at: http://www.scotland.gov.uk/Topics/Government/Procurement/PublicProcurement/policy-notes/SPPN(2)2005 (contact Dave Cook, details below).
Further Information
For further information on sustainable public procurement, contact Dave Cook, Scottish Procurement Directorate, Scottish Executive, 1st Floor, Meridian Court, 5 Cadogan St, Glasgow G2 6AT, dave.cook@scotland.gsi.gov.uk , tel:0141 242 5598.
The Scottish Executive has produced guidance on Sustainable Development which is also relevant to all publicly funded contracting authorities.
Communities Scotlandhas produced a set of guides available at www.socialeconomyscotland.info including case studies that highlight the social, economic and environmental benefits for our communities that can be gained by working with the social economy.
Compliance Issues and Strategies
Strategic Procurement creates opportunity for benefit however it is compliance to the commodity strategy that delivers the benefit. A strategy for how compliance is to be addressed is therefore a key part of the commodity strategy. Compliance requires involvement from all levels - all relevant employees, independent of their job role and status in the hierarchy, should be in compliance with the strategy.
As stated in the "Components of a compliance strategy" document, effective communication is essential to ensure compliance with your strategy. To ensure optimum uptake of a new contract, User Intelligence Groups should contact relevant departments and end-users to advise them as to its implementation using the Compliance Letter Template provided.
Commodity Strategy Options
This section describes the various options for the commodity strategy. Each option covering purchase demand management, supply base management and total cost management. The strategy options at this stage include a benefits or business case that clearly assesses the benefits against the costs as well as the pros and concerns/risks associated with each.
Risk Management
Risk Management is a continuous process, and although preliminary Risk Assessments should already have been undertaken, it is at the stage of strategy development, when the purchaser's and the UIG's knowledge of the commodity and its market should be at its most sophisticated, that a more detailed Risk Assessment becomes possible. This is crucial prior to embarking on a more formal engagement with the market in relation to the procurement. It may be useful to have reference at this stage to the following pages -
Risk reporting templates are provided in the Commodity Planning and Reporting Tool provided earlier in the toolkit.
The Business Case
The cost versus benefit analysis or business case is fundamental in deciding the direction of the sourcing strategy. Assessing the options above in terms of the business case, pros and cons and risk assessment should enable the objective selection of the commodity strategy to be pursued in the short, medium and long term.
The business case combines findings from the commodity profiling with financial justification with an action plan. This step should quantify each option to enable a suitable commodity strategy to be recommended. The contents of the business case include:
- Nature and magnitude of benefits (benefits logic, benefits area, quantification)
- Nature and magnitude of costs (costing logic, cost areas, detailed costing)
- Time-phased benefits and costs (Over what period is the investment required and when are the benefits expected to be delivered?)
- Time-phased cash flow impact (When will the benefits begin to impact the cash flow?)
- How will these be measured?
Information on estimating benefits within a commodity area can be obtained from sources such as benchmarking, market testing, market trends, past discounts, past experience
Costs to implement sourcing strategies include contract switching costs, supplier switching costs, manpower investment, communications and roll out and cost of going to tender.
There will be a number of possible options for the delivery of any requirement. These will vary with the type, size and complexity of the requirement but is likely to fall within the range of options shown below. In all cases, the 'Do Nothing' option should be considered as a benchmark:
The presumption is that all commodities and services should be periodically exposed to genuine competition, unless there are compelling reasons to recommend a different course. The organisation should be able to demonstrate that external options have been given serious consideration, providing robust justification where services continue to be provided 'in-house'.
Evaluating the options
The most effective way to undertake the appraisal is in two stages:
Where there are a number of external delivery options it is likely that a structured approach to discussing your requirements with the market will be invaluable in helping you to decide how to progress. Care must be taken to ensure that the consultations do not result in a competition that is skewed towards a particular supplier.
The recommended option must satisfactorily meet the requirements and be affordable and viable. It should be agreed with key stakeholders. The business case should be updated with the new information.
Refine the Business Case
Once the preferred option has been identified, procurers should compare the option's characteristics with the outline business case to ensure that the objectives can be met. Agreement from key stakeholders will be required.
Commodity Strategy Summary
Once the User Intelligence Group has reached the stage where it has developed a strategy based on the guidance set out by the toolkit, it will be useful to summarise the decisions taken and the reasons behind them for future reference and as a matter of best practice in documenting the procurement process. This will also be an opportunity to have the strategy approved or signed off by an appropriate reviewer, further guidance on which can be found at the Review and Sign-off page.
A template for the Commodity Strategy Summary is provided below -
Commodity Strategy Review
User Intelligence Groups should note that commodity profiling and strategy development should not be an isolated or 'one-off' occurrence. Whilst a subset of the group needs to be assigned to carry out the ongoing activities of supplier relationship management, monitoring the implementation, compliance and benefits tracking, the team will also need to conduct a periodic review of the chosen strategic option to validate its applicability for the current/changing environment (both internal to the procuring organisation and external to market supply).
There are a number of triggers for conducting a commodity strategy review, many of which will relate specifically to the commodity in question. However, there is a strong link between Commodity Profiling and understanding when to review, particularly in the case of supply market analysis and commodity expenditure analysis as these tools can be used to provide a supply and demand input for the strategy review process. Typical drivers for commodity strategy review include:
Market Developments: Any changes to the commodity supply market, for example, in terms of regulation or technological innovation. Review may also be prompted by any cyclical price or supply trends identified during supply market analysis (this may be particularly relevant for 'Fast Moving Goods');
Internal Changes: To the organisation, for example, in its procurement processes
Contract Expiration: Termination of current supply contracts
Commodity Demand: Changes to the demand profile for the commodity within the organisational (typically identified by Spend Analysis)
In course of strategy development and implementation, commodity teams should highlight the relevant drivers / triggers, and use these to build appropriate review points into the overall lifecycle of the commodity in question.
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