Public Sector Procurement

lesson 11

OPM 3206
Procurement Management
Introduction
• Government expenditure on non-pay-related areas covers a vast range of
equipment, goods and services: weapons systems, stationery, furniture, uniforms,
food, capital projects including consultancy services, banking services,
information systems and services, the management of facilities, as well as medical
services, road building and maintenance and utilities.
• This requires an insight into the background and context of government
procurement and the changing and challenging nature of such procurement in the
light of commercial best practice.

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 Context Of Public Sector Procurement
• Initiatives and policies such as market testing, contracting out, private finance
initiative, competing for quality, NHS internal market, facilities management and
partnering all affect how equipment, goods and services are procured within
government and the public sector.
• They help to shape the approach to the market, the preparation of the specification
and evaluation of the most economically advantageous tender followed by
pertinent relationships in order to meet the requirement.
• However, in order to appreciate this contextual setting it is useful briefly to
consider the background to the current public sector procurement environment.

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Historic Background
• The government’s first major statement on procurement strategy was set out in a report to
the Prime Minister in 1984, Government Purchasing: A Multi-department Review of
Government Contract and Procurement Procedures (Cabinet Office, 1984).
• Second procurement strategy in the form of a white paper, Setting New Standards: A
Strategy for Government Procurement (HM Treasury, 1995).
• Mid-1970s the influence of Japanese management philosophies and their subsequent
derivatives have had a considerable impact on the survival and profitability of commercial
organizations. Approaches such as JIT, TQM, the recognition of the importance of
customer-supplier relationships, the increasing strategic significance of supply chain
management and the adoption and adaptation of lean and agile concepts have all had
major impacts upon the commercial sector.

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• In 1998, Peter Gershon, Head of the Office of Government Commerce, reviewed:
• “Civil procurement in Central Government in the light of the government’s
objectives on efficiency, modernization and competitiveness in the short and
medium term.” (Gershon, 1999)

• Telgen and Sitar (2001) conclude that it is possible to generalize for every type of
organization that value can be added by the procurement department through:
• better contracts;
• improved purchasing efficiency;
• customer satisfaction (improved quality and service);
• closer and more cooperative relationships with suppliers;
• reduced costs, improved quality and time to market (as a result of being
involved in the new product design process).

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Public Accountability
• Considerable sums of money are spent annually in the public sector on goods and
services.
• The procurement of these is for the good of the population at large and the expenditure
that is incurred is, in effect, the taxpayers’ money.
• Public sector buyers are accountable to the public whose money is being spent, including
disappointed tenderers and potential suppliers. They must produce procedures and
practices that will stand up either to scrutiny during government audits or to the challenge
through the courts of any purchasing decision that has been made.
• A primary purpose of public accountability is to prevent abuses of taxpayers’ money.
• A secondary purpose is to let it be seen that any such abuses have been prevented.

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General Principles Of Government Procurement
• The approach that has been taken for many years within the public sector can be
summarized as follows:
• Purchasing should be based on value for money.
• Competition should be used to acquire goods and services (unless there are convincing reasons
to the contrary).
• There should be clear definition of the roles and responsibilities of personnel involved in
specifying the need, giving financial authority and making procurement commitments.
• There should be separation of the financial authority and the purchasing authority.
• There should be separation of duties between personnel who make contracts, those who
receive the goods or services and those who authorize payments.
• Requirements above a certain financial threshold are normally required to be advertised in
accordance with EU regulations on public procurement.

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Best Value:-
• Targeting optimum value in public sector projects is best achieved through ‘best
value’ focused contractor selection.
• The best value concept is ambiguous and there
may not be a commonly agreed definition for
‘best value’ (Palaneeswaran et al., 2003).
• When selecting a ‘best value’ proposal the
public clients should carefully balance the
procurement objectives and ‘value for money’
within the constraints of public procurement
principles and governing rules/regulations in a
public accountability framework.

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Professionalism in Public Sector Procurement
• In order to ensure public accountability, yet to gain optimum impact through the
use of commercial best practice, there is a need for professional training and
education of those personnel responsible for the strategic direction and practical
application of procurement action.
• Professionalism can only come from a full understanding of all the issues
involved, a sound knowledge of the legal and commercial aspects and the
confidence to make decisions that effectively balance these tensions.

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Practical Example:
UK National Health Service (NHS)
• A decision was made to outsource the work of the NHS Logistics Authority and much of the buying done by
the NHS Purchasing and Supply Agency (PASA) to German supply chain firm DHL and its subcontractor, US
health-care company Novation.
• Under the new agreement, DHL will manage the entire supply chain. If they can deliver leverage they can not
only use it to get lower prices but also it becomes more attractive for suppliers to work with them. Previously,
that was not happening across a range of products, as suppliers were going round the trusts and doing separate
deals. They now need to work over time to get more commitment from the customer base so that they can
work with them to deliver long-term value.
• Areas such as IT and stationery, which have a large number of suppliers, will be rationalized. Through the
DHL-managed catalogue, suppliers have their products presented to 80,000 ordering points in the NHS. It is
believed that the innovative contract will radically improve performance and cost in the health service and
that it will in effect create strategic procurement in the NHS for the first time.
• Less than £1 billion of the £3.7 billion spend is currently supplied through the central channel. Reverse e-
auctions carried out for hospitals averaged a 25 per cent saving in price against delivered prices from the
NHS Logistics catalogue. If that can be done with individual hospitals in isolation, then with the volumes
being bought DHL should be able to make bigger savings. 10
Smart Procurement/Acquisition
• A subject as diverse and as complex as defense acquisition needs a suitable
organizational structure, the ability to manage corporate knowledge and the
retention of a suitable skills mix.
• Specific aims of smart acquisition are:
o To deliver projects within the performance, time and cost parameters approved when
the major investment decision is taken.
o To install a procurement process that acquires military capability in a progressive
way, at lower risk and with the optimization of trade-offs between military capability,
time and through-life cost.
o To reduce the time taken for new technology to reach the front line where it is needed
to secure military advantage and industrial competitiveness. (MoD, 2002.)

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Smart acquisition strategy

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The Integrated Project Team (IPT)
• The role of the IPT is central and crucial to the success of smart acquisition; it is widely
drawn and has a wide area of responsibility.
• The ethos behind the IPT is that it focuses on the whole-life management of a project
(known as the CADMID cycle, i.e. Concept, Assessment, Development, Manufacture, In
service, Disposal – often referred to as ‘cradle to grave’ life-cycle management).
• Membership of the IPT draws in many stakeholders, bringing together large numbers of
highly skilled, highly trained and motivated personnel who focus upon the management of
achievement and not upon procedure.
• The working practices between the IPT and the customer are laid out in a customer–
supplier agreement, which records as a minimum the expected levels of performance, in-
service date and cost parameters and the range within which the IPT leader can work.
• In line with commercial best practice, there is considerable emphasis upon the (internal
and external) customer–supplier relationship.

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• Typically, it is expected that the core members of the IPT are likely to have skills
in the following areas (Boyce, 2000):
• requirements management;
• project and risk management experience;
• knowledge of project engineering and technical, quality and reliability expertise;
• experience in integrated logistic support (ILS) management as well as the traditional
equipment support functions;
• knowledge and experience of commercial management;
• knowledge of financial management;
• secretariat skills;
• general industrial and commercial expertise.

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