Constance Cushman, J.D., C.P.M.
Constance Cushman, J.D., C.P.M., New York, NY 10024, 212/799-9986
Public/private/nonprofit/service/manufacturing/construction/ professional/entrepreneur.....When purchasing professionals hear about techniques their colleagues in other sectors or industries use to achieve results, they often wonder whether and how they can apply these approaches in their own quite different environments, and may often even dismiss them out of hand. In this session you will learn through specific examples how Purchasing Best Practices developed in any environment can be applied in other settings.
The idea for this presentation was born at last year's NAPM International Conference in Anaheim. In the question period following a presentation on "Downcosting" which offered specific methodologies for systematically reducing the costs of what we buy, someone in the audience expressed frustration that it was difficult to see how these approaches applied in her setting, a service business. She understood techniques such as designing costs out of specifications, supplier managed inventories, reducing transportation costs for incoming and shipped products, as being appropriate for a manufacturing context. She could see how powerful the techniques described would be; she just couldn't imagine how they relate to her work.
Her observation echoed comments I had heard for years in government as the agency I worked in tried to develop procurement rules that would work for purchasing supplies, services, social services and construction (new, renovation and repair/maintenance). Over and over, agency employees would say, "but a bridge is not a widget; a museum is not a bridge; contracting for foster care is different from buying pencils; these approaches just won't work in my setting; we can't have partnerships with suppliers in the public sector; it's different when everything is done in a fishbowl." Yet, because my work provided the opportunity to explore all these environments in both public and private sector settings, I was growing to understand that their similarities are much more striking than their differences. Often the most creative and effective approaches to contracting dilemmas emerged by adapting innovations first developed in completely different settings.
But few of us learn through abstract talk. We learn best through our own direct experiences, and next through real-life stories to which we can relate. Maybe the questioner at last year's conference would find it easier to apply the techniques suggested through a kind of "storytelling" in which the "plot" would be adapted from one stage to another. Maybe creating environments where such "stories" can be exchanged would help us all develop the skills to adapt best practices to our own contexts.
This article and the conference workshop will open the door to such exchanges by presenting a few examples of purchasing best practices that have been adapted across traditional boundaries. The article focuses on selected examples, presented in discussion rather than the "story" format of the workshop itself, and concludes with suggestions of other candidate "best practices" for the same approach. At the workshop, we will explore some of these as well, and consider ways to continue the exchange of real-life stories --possibly through a "chat" forum using NAPM-Online.
Best Practice: Suppliers as Strategic Partners. In the private sector in the past several years there is a great focus on limiting the number of suppliers with which a company deals. At the same time, attention is placed on increasing the quality, reliability and even intimacy of those dealings while working together to reduce costs and cycle times and improve service. In the private sector, the result of this process, indeed the explicit aim, is often to use a single source/dual source instead of multiple sources. In the public sector, the conventional doctrines requiring "full and open competition" and "arms length" dealings with vendors are often thought to preclude government becoming "partners" with suppliers. But let's take a closer look.
What does strategic partnering in the private sector mean? Typically, it is an approach that begins with the planning phase of purchasing, continues through sourcing and negotiation, and restructures the contractual relationship from one that is short-term, transactional and static into one that is long-term, strategic and evolving. Planning begins with analysis of the "portfolio" or "spend," to identify categories of purchase that are high-risk, high value to the purchasing organization; these are candidates for strategic partnerships.
The purchasing organization establishes criteria which suppliers must meet, and screens suppliers to select those that do best. This activity is both competitive and continuous. The criteria for supplier selection are clearly communicated to the marketplace and competitors not selected as primary strategic partners may be included in the sourcing plan to some degree, either for backup or for diversity. Once a supplier is selected and relationship is established, using agreed-upon goals and measurements, the supplier and purchasing organization work closely together to ensure that performance meets the quality expectations, as well as to reduce all costs in the supply or service chain, and to improve quality continuously over an extended time. Just In Time (JIT) and Total Quality Management (TQM) approaches may be used to reduce cycle time and increase quality, and partners will often share information systems and execute transactions via Electronic Data Interchange (EDI). These relationships are structured for stability: while the purchasing organization continues to test the marketplace for other suppliers that may offer improvements in technology, cost or quality, the total value of the current partnership and the investments made to date in the relationship are weighed heavily whenever a change in suppliers is considered.
This is not to say that partnering is useful only in the "strategic" quadrant of the purchasing portfolio. The key ingredients in partnering involve selecting suppliers on the basis of quality, establishing a collaborative alliance with suppliers in pursuit of mutual objectives, and a focus on effective communication. Some of the same tools are used in managing the other categories of the purchasing portfolio. High volume, low-risk, low-value purchases may be outsourced in different ways (such as through systems contracting for office supplies, or using a procurement card); that outsourcing relationship, if significant enough in total dollars, may itself become a strategic partnership. The so-called prime vendor contracts discussed below are excellent examples. Low-risk, high-value purchases, such as fungible commodities in good supply, may lend themselves to more frequent price-based competition; but even there, ongoing requirements benefit from the kinds of supplier screening, performance monitoring, and supplier involvement in cost reduction initiatives that characterize strategic partnerships.
These variations on the theme "supplier partnering" can offer many benefits when used in appropriate situations. Purchasers reduce their transaction costs, achieve continuity of supply and continuous improvements, and draw on supplier expertise to address business problems. Suppliers reduce their risks and increase their growth opportunities, enabling them to thrive while investing in improvements. The end customers benefit from higher quality and lower costs. This entire cluster of purchasing techniques certainly qualifies to be called a "Best Practice."
Shouldn't taxpayers enjoy these benefits as well? Yes, and in many instances they do. The same tools just go by different names in "best practice" public sector jurisdictions.
In Arizona's Department of Transportation (DOT), "partnering" is used, after a competitive source selection process, in every construction contract. A road construction contract by its very nature can be "high risk, high value." It can go on for a long time, involving many players, disrupting critical traffic flow, literally "unearthing" previously unknown conditions that require changes to plan and approach. In earlier times, the complexity and duration of such contracts generated protracted disputes, delays and cost overruns.
Now all bidders on Arizona DOT contracts are asked to commit to participate in a partnership approach to each project. Soon after contract award both DOT and the contractor meet, bringing the management and front-line teams responsible for the job together in a team-building workshop to identify shared objectives and establish a clear-cut mechanism for early and final decision making concerning every issue that comes up on the job. At the workshops, participants commit to use these mechanisms, to avoid behaviors that the parties identify as potentially harmful to the job, and to meet performance guarantees that are spelled out in the project plan. (Such team building efforts and "performance guarantees" are themselves best practices!) Further, the contracts themselves contain cost incentive provisions that encourage contractors to propose innovations to reduce costs during the contract term, and provide that they will share the benefits of the reductions. Claims have been sharply reduced, and projects come in ahead of schedule and under budget. Everyone wins.
Best Practice: Early Supplier Involvement.
The Arizona DOT version of "partnering" is initiated after a competitive source selection process based on fully developed specifications, and is applied in each project, one at a time, during contract administration. This is perhaps the easiest setting in which public sector purchasers can envision implementing partnering techniques. In the private sector, however, true "strategic" partnering connotes "early supplier involvement:" engaging the creative resources of the chosen supplier/partner in researching and developing a solution which the supplier will then implement. The purchasing enterprise capitalizes on supplier expertise (knowledge of product, processes, technologies, markets) and benefits from shared resources, reduced costs and common commitment to a goal. This may be the most "strategic" benefit from partnering. Public sector purchasers sometimes say that this kind of alliance has no place in public contracting. In the public sector world-view, permitting a supplier to write its own specifications and then perform the contract is anathema to "full and open competition." But is this really so? I don't think so, if we adjust the lens through which we look.
For example, in the services arena, particularly where specialized expertise is required to help address a situation, performance-based specifications rather than design specifications are fairly commonplace in both the public and the private sectors. The scope of work calls for achieving a "result" rather than performing according to a script; the supplier is selected on the basis of qualifications and approach to the task; and payment is made both for level of effort and success of the outcome. Specific methodologies evolve through experience over time--in a sense, the detailed "specifications" are developed collaboratively by supplier and purchaser, after the partnership is established. Design-build contracts or "turnkey" projects in construction are a premier example, but so are most contracts for professional services and technology development. In all these cases, there is certainly merit-based competition--but earlier in the purchasing cycle, the criteria focus on the supplier's qualities and quality, rather than simply on the price charged for a specific defined task. Perhaps we just need to change the name, to recognize that the Best Practice: Performance Driven Contracting supports what the private sector recognizes as "early supplier involvement," and to remember that in all these settings competition is alive and well and very much above-board.
In the public sector social service delivery context, a different variation on the partnership theme has been developed which takes the notion of contracting for "results" rather than for "process" yet another step. Called "outcome funding," it, too, approaches delivery of social services in terms of desired results, not the specific process or approaches used. Like any business organized to achieve results, the social services provider develops a business plan spelling out those goals; government funds the resources to achieve them. The supplier is accountable only for results, and is free to change approaches in response to data about their effectiveness.
Best Practice: Reducing the Supplier Base.
Supplier partnerships require time and effort to establish and to maintain, and it follows naturally that strategic partnering initiatives go hand-in-hand with initiatives to reduce the overall numbers in an organization's supplier base. It seems to be a little like keeping class sizes small in education; too many pupils leave the teacher spread too thin. Yet often in the public sector one encounters the notions that "you can't have too much competition" and that "reducing the supplier base" is somehow unfair to other market participants. Gradually this perception is shifting, however, as taxpayers and public managers grow to appreciate the costs associated with transactions, the benefits of more stable contract relationships, and the need for a more complex screening of suppliers based on quality in order to assure the quality of government's service delivery. Governments are also learning that both competition and fair access to contracting opportunities can be preserved while using these new tools. Thus, the private sector "supplier certification" process that accompanies initiatives to reduce the supplier base to a size that is cost-effective to manage and to increase quality standards for suppliers has its counterpart in public sector "prequalification" programs. And multi-term contracts for both supplies and services have long been recognized as a public sector best practice in appropriate circumstances. In combination, these are producing yet another variation on the partnership theme in the public sector: as the "prime vendor" contract.
The "prime vendor" contract is a variation on the fixed-price-indefinite quantity contract long a staple of government Central Purchasing Departments' repertoires. Today, however, rather than contracting item-by-item, state and local governments use prime vendor contracts to outsource the procurement, inventory and delivery-on-demand of whole chunks of government's portfolio: food and pharma-ceuticals for institutions such as hospitals and prisons; automotive repair and maintenance parts for fleet; warehousing; office supplies; commodity computers and peripherals; even certain kinds of routine repetitive construction work. Individually, transactions in these categories qualify as "low risk, low value;" transaction costs far exceed purchase price. Prime vendors must be seen, however, as strategic partners, whose performance will directly impact government's operations. Typically these contracts are for several years; suppliers may be prequalified before being invited to compete for award and are certainly screened closely prior to award; and incentives are usually built into the contracts to reward the supplier for cost reduction initiatives.
Best Practice: Buying Value.
It has long been thought that the public sector, nonprofit sector and private sector all make purchasing decisions within quite different frameworks when it comes to buying value. Thus, the public sector is seen to make awards based primarily on price rather than total cost; rigorous cost analysis, where it occurs, is performed for compliance monitoring in cost-reimbursement or non-competitively negotiated contracts but seems more intended to police fraud than reduce overall expense. The non-profit sector, often funded by third-party reimbursement mechanisms, sometimes seems to disregard cost altogether and at other times to be operating on a shoestring or in deficit mode. Only the private sector, driven by the bottom line and competitive pressures to serve customers, strives ever to reduce total cost and achieve better value. To the extent these truisms were ever true, they are no longer, though their traces remain. We increasingly understand that public and nonprofit sector costs come back to roost in taxpayers' pocketbooks, and purchasers in all environments are seeking mechanisms to reduce the impact of cost drivers wherever they are found. Nonetheless, world class private sector businesses certainly provide the benchmarks for use of "downcosting" techniques.
Downcosting involves two major factors: evaluating total cost of ownership and purchasing with that in mind, and measuring and minimizing all cost drivers for all participants in the supply/service value chain.
No matter where used, techniques for cost analysis require: reliable information about activity-based costs, and personnel skilled in analyzing that information. In the public sector the technique of making even sealed bid awards on the basis of "total evaluated cost" is officially approved in many jurisdictions, but lack of information and skilled personnel to perform the analysis frequently limits its effective use. Also in the public sector, techniques known as best value procurement (used mainly at the federal level) and best or highest evaluated bids or proposals (at the state and local levels) provide structured methods for making award decisions on the basis of factors other than or in addition to price. Whatever the terms, the basic principle is the same in all settings: all cost drivers must be identified, and whatever factors are to be considered in the award decision should be communicated early on so as to gather all relevant information, should be measurable, and should be compared "apples to apples" among all competitors to arrive at the most cost-effective result.
Measuring and minimizing cost drivers throughout the supply/service value chain includes considering such factors as specifications (where costly designs may be avoided and standardization may streamline processes) and transportation--any "upstream" costs that must be passed along for the supplier (and supplier's supplier) to survive. Innovative purchasing organizations may even provide technical assistance and coaching to their suppliers, or establish consortium purchasing arrangements with them, to help suppliers reduce their costs of acquisition, production or service delivery. The same approaches can be used in the public sector. For example, imagine the potential savings, where non-profit organizations provide publicly funded social services, if the full potential of true downcosting in a service organization (see discussion below) could be realized!
Best Practice: Joining Forces to Leverage Buying Power.
We should not conclude that powerful innovations are always developed in the private sector and only later recognized by government. Consortium purchasing, in which distinct organizations pool requirements to leverage their buying power, were first developed in government as "cooperative purchasing" and for many years discouraged in the private sector because of fears of running afoul of antitrust laws. (Governments, being generally exempt from antitrust regulation, could experiment freely in this area.) Public sector cooperative purchasing organizational frameworks have varied over the years, from the simple practice of permitting localities to buy under state requirements contracts to the more sophisticated commodity-specific arrangements among various states in regional buying cooperatives. Because such pooled requirements can inspire considerable respect and interest from suppliers, small wonder that we are seeing more and more consortium buying arrangements in the private sector (all the while involving legal counsel to ensure compliance with all applicable laws).
Best Practices Migrate Among Industry Groups.
All of these practices can migrate from industry to industry as well as from sector to sector. The Arizona DOT example has its origins in another public sector construction environment, the Army Corps of Engineers. It is part of a broader initiative within the construction industry to reduce the antagonism and litigation historically associated with construction projects by re-framing the Owner-Builder relationship in collaborative terms focused on shared goals. The construction industry participants who developed and promote this approach communicate it by emphasizing how "different" construction projects are from "ordinary" contracts. But are they really so different?
Take, for example, New York City's multi-billion dollar social services contracting portfolio, which recruits nonprofit social services providers to deliver a broad array of social and health care services to third party clients. Or take the burgeoning for-profit health care industry, or education. All have many critical characteristics in common with complex construction projects: many semi-independent players, strategic importance, long time frames, complexity, evolving needs and evolving understanding of those needs, and fundamentally shared goals though different roles among the parties to the contracts. Although I have not yet seen this done, I believe that the specific techniques developed in the Arizona DOT could be most productively applied in these other contexts, that when it comes to contracting and contract administration, all these distinct industries are not as much "different" as they are alike.
Likewise, downcosting can be equally effective in service businesses as in a manufacturing environment. Rarely if ever do service businesses perform without an infrastructure of supplies, materials, communications, information, transportation, administration, training and education, services provided by outside suppliers and so forth. Each component presents opportunities to evaluate overall spending patterns, assess suppliers, explore opportunities for outsourcing or cooperative purchasing, and restructure to reduce overall costs.
Wherever we look today, in every enterprise or project, we see old boundaries and barriers becoming blurred. Business process reengineering levels "silos" to streamline communications and coordination within organizations; "privatizing" government services brings government and private sector workers into jointly managed projects; people everywhere are forming "cross functional teams" to tackle common problems. We sell to our suppliers and our competitors; we buy from them as well. Technology and modern transportation systems wipe out time differences and distances of space; to thrive, companies find themselves buying and selling in a fast-paced global market where practices, customs, laws and cultures are quite diverse.
In the search for excellence in this environment, it becomes all the more important to be able to adapt best practices to "foreign" settings. We need to share our stories and our tools across these boundaries. The Internet, and on-line services such as NAPM-Online, provide a ready-made infrastructure for just this kind of dialogue. At the workshop we will reserve a period of time to brainstorm how such a forum can best be established and maintained. Other "Best Practices" To Share Across Boundaries. The potential list of techniques proven in one innovative or world-class setting that may serve as inspiration to those in other settings is long and growing. For example: