SmartProcurement, has always held the view that what the procurement and supply fraternity in SA genuinely needed, was an annual forum at which to gather and exchange thoughts on best strategic sourcing practices in key commodity groups. The Smart Sourcing Conference 2007 has come and gone and, it has made a permanent, positive mark on the P & SM landscape. Speakers included Henry Malinga, Mike Hughes, Anthea Saunders, Karen van Vuuren, Ian Russel, Bernie van Niekerk, Roddy Mann, Pieter Henning, Billy Bell, Alan Low, Natie Bekker, James Yates, Cobus Rossouw Paul Vermaak, Thys Goosen, Elaine Porteous and Kraai van Kraaienberg…
The theme of the conference was “Advanced sourcing strategies and the Service Level Agreements ( “SLA’s”) that make them work”. The content included developing and managing billion rand outsourcing strategies, Entering into mission critical supplier partnerships , Obliterating Maverick Spend in areas of little procurement control… Advanced Strategic Sourcing of services and “difficult” commodities, Adjudicating complex purchases, Setting up multi tiered service level agreements for hundreds of contractors across key commodity groups…
The event was well attended by delegates representing many sectors of the procurement fraternity.
Here follows a short outline of day 1 of the conference and its associated content. Day 2 of the conference will be dealt in the next issue…
Introducing the Conference
The conference was opened by SmartProcurement Editor Bernie van Niekerk,
He pointed out that, “Any leading global company will now have a strategic procurement function in place. It’s the norm and no longer the exception”. Bernie continued, ” Most leading business schools have held the debate and, the decision is firmly in favour of procurement which is presently viewed as strategic to corporations in the private sector as also, strategic to all levels of government and the myriad organizations and allied services of the public sector.” Bernie concluded in highlighting the fact that the debate has now moved on to analyse the meaning and commercial value of key procurement personnel, such as experienced commodity managers, and their “direct impact on the bottom line”.
The first speaker to the podium was Thys Goosen, an independent and highly experienced consultant in the drafting and managing of SLA’s, which in this instance, are relevant to the services environment. He set the framework for the conference and kicked off in underlying the fact that “SLA’s are NOT THAT PIECE OF PAPER WE USE TO PUNISH SUPPLIERS!”.
Thys emphasized the simple ‘rule of thumb’ you can apply to measure
your own success: ” The moment supply does not reach it’s destination,
you have failed. In other words, the SLA is there to ensure that supply
reaches the end- user ( your customer and your responsibility):
- on time;
- at the right quality; and
- for the right price.”
There are essentially three ( inter- dependant) elements to an agreement, or contract, with a supplier:
- The Main Body consisting of the essential legal terms and conditions;
- Annexures and addendums which deal with specific details such as plans or price lists; and
- The service level agreement which regulates and, provides the tool with which to manage, the suppliers performance.
The SLA is accordingly a fundamental document in the ‘ legal protection’ of your business or organization. It will contain all the relevant detail and KPI’s relevant to managing the ASP, ISP, service provider, supplier or vendor in question. It enables you, the procurement professional, to achieve your organisations strategic goals.
In a nutshell, the SLA is a usefull tool in the hands of a procurement practitioner to ” take away the bumps” and ensure a seamless process when differences arise between the parties. Where you have two ( or more) competing parties you need a clear and unambiguous document to frame and manage the potential conflict between the parties. Hence it is essential to provide for ‘ conflict resolution’ by way of a third party custodian, the arbitrator, to efficiently facilitate and resolve areas of disagreement. You opt for the protection of the courts only as a final resort!
“Supply Chain Management in Government”
Second up was Mr Henry Malinga, Chief Director: Supply Chain Policy, Specialist Functions, National Treasury.
The processes of government are changing, unavoidably and dramatically, in the context of rapid globalization. Collectively, and in all three of it’s primary tiers- central, provincial and local- government is the largest procuring entity in the national economy. And, procurement is becoming the principle mechanism for government to meet it’s strategic objectives . In other words, in and through it’s supply chain management, government excercises its massive influence on employment equity, enterprise development, preferential procurement and, socio- economic development.
Post 1994, the National Treasury was tasked with the SCM policy and oversight role and, immediately conducted an in depth assessment of the poor state of public sector procurement. It then set in motion the steps necessary to over- haul an obviously antiquated and fragmented system. Of fundamental importance is the fact that the new government enshrined the significant role of the procurement function in SCM in Section 217 of the Constitution and legislated that the acquiring of goods and services must in all respects be a “FAIR PROCESS”.
Since 1995 we have accordingly witnessed a tremendous transformation of the manner with which the public sector goes about procurement. For instance, progressive legislation, spear-headed by the Preferential Procurement Act ( as amended), The Public Finance Management Act (??) and the …..Act were introduced on several fronts to sweep away the obsolete Tender Boards ( replaced by a national Validation Board) and, to bring government procurement and SCM in line with globally recognized best practices.
Mr Malinga also touched on the significant strides being made by government in the area of skills development: ” In the past people ended up in SCM by default. That is no longer the case as we now prescribe necessary skills and levels of competency. Government is working closely together with the Institute of Procurement and Supply of SA ( IPSA) to put a qualifications framework in place, and a set of standards with which to achieve measureable competency’s”.
Henry Malinga is particularly passionate about skills development. ” In my department we have an ‘intern programme’ ( with a present intake of 6 recruite) who are being put through an intensive 2 year programme in developing procurement and SCM expertise. This embraces:
- a rigorous academic regime under the auspices of external providers;
- in- house ( or internal) experience in all facets of SCM; and
- a course and practical experience in international trading.
There is still some way to go in optimizing the efficiency’s of Public Sector Procurement and SCM. In the present system, it is the CFO’s that establish the SCM offices in the government departments. “If ( as we now acknowledge) procurement is a strategic function, then why are the CFO’s in charge, or, why does SCM report to finance?” he asks. “We obviously need to address those and other anomalies going forward. For instance, the government procurement system precludes negotiations by SCM professionals. The only way in government to get your “offer” out is in the tender document or via RFQ’s”.
In government all accounting officers are procurement officers in all departments, and, it is the Accounting Officers that, in the present dispensation, have final authority in matters procurement and SCM.
THE INSTITUTE OF PURCHASING AND SUPPLY (IPSA)
As long serving CEO of IPSA, Kraai van Kraaienberg is by now synonymous with matters procurement as is IPSA, with the professional development of procurement personnel. It’s Vision is quite simply: TO BE THE LEADING INSTITUTE THAT OFFERS PROCUREMENT PROFESSIONALISM IN SUPPLY MANAGEMENT.
He kicked off in his characteristically ebullient manner: ” This conference is a good learning school for all of us! What are we all doing here today?…We are sharing knowledge and, by doing that, we are developing professionalism”.
Supply Chains consist in the main of 3 distinct specialist- management functions:
- procurement & supply;
- operations; and
“In the old days, we spoke about buying. Today, procurement embraces the specialist buying function. It is then interesting to consider the evolution
of ‘ procurement’that has gone through 4 distinct stages:
- in stage one it was all about PRICE. Get three quotes and take the lowest bid;
- in stage two it was more about ‘cost management’. We’re now talking about classic ‘purchasing’. You still get the quotes but now look for and get the best quality at the best price;
- in stage three you have migrated to the level of TCO methodology. I.e. you procure goods and services in terms of well negotiated contracts that include crafted SLA’s to manage optimum supply;
- in stage four one is dealing with fully integrated ‘value chains’ and, the crucial step to make is into the realm of strategic sourcing”.
IPSA understands that the key to developing SCM practices lies in providing leading edge Education & Skills Development for the profession. The advantage of being a member of the IFSM ( The internationsl federation of supply management) with 54 member country’s represented, enabled IPSA to consider which country applied the best education standards?
This led to the present partnership with CIPS, the UK’s Chartered Institute of Purchasing & Supply which, with over 45 000 members world- wide is, the worlds largest institute. With 9 branches in Africa it is providing IPSA with the means to achieve one of it’s primary objectives, namely, to become the leading institute on the continent in the procurement environment.
CIPS has the additional advantage of providing a comprehensive menu of top- class courses covering allthe professional aspects of procurement. It’s qualifications are recognized in 120 country’s across the globe! IPSA is accordingly now capable of offering SA practitioners courses with ‘ local content’ ( adapted to SA and the African environment) and internationally recognized CIPS qualifications. Kraai then went on to congratulate CommerceEdge South Africa with it’s recent accreditation as a registered provider of CIPS courses in Africa.
IPSA also represents the interests of the procurement fraternity in the recently formed FSCMA, the umbrella body for some 16 separate representative organizations of the various interest groups and stake holders in the national supply chains. It is there that IPSA is instrumental in providing a national qualifications framework for P & SM. At present, procurement personnel are fortunate to have several high quality certification programmes in place, viz;
- The CPP ( Certificate of Purchasing Practitioner);
- The CIPS Advanced Purchasing Diploma;
- The CPM ( Certified Purchasing manager); and,
- Advanced programmes in Sourcing and the M-CIPS through UNISA.
Delegates were then reminded to pencil in the dates of 21st and 22nd May in next years calendar, being the occassion of the 2008 IPSA Annual Conference at Emperors Palace when the first PAN- AFRICAN AWARDS will take place.
PROCURING FUELS AND LUBRICANTS, A STRATEGIC APPROACH
Next up was Mr Mike Hughes, Commodity Manager, Energy and Raw Materials at Exxaro Resources ( with Electricity and Process Chemicals also included in his portfolio). He is accordingly responsible for some real tough commodity’s which amongst others factors are, potentially environmentally unfriendly!
In the identification of problems related to these commodities special regard must be had to several factors:
- the lowest price and highest rebate determines supplier selection which can lead to a mix of suppliers which in turn makes it difficult to hold them responsible for performance;
- the impact of product quality on equipment and maintanence & repair is a concern;
Managing the commodity requires an experienced team of buyers ( with a narrow focus on price) and rounded off with a commodity engineer and commodity manager who bring in the broader focus on the logisitical- and lifecycle costs. The emphasis here is on negotiating and monitoring supplier performance.
The TCO Management ( based on the Dofasco model) encompasses:
- HOW: contract terms, inventory strategy and delivery logistics;
- WHO: Supplier selection and assessments, cost drivers ( for e.g. consumption has the biggest impact on fuel) and continuous industry analysis;
- WHAT: application analysis to ensure the right application, specifications and quality.
The recommended strategy included:
- the consolidation of suppliers;
- implementation of an MIS system to track fuels and lubes consumed to vehicle level;
- Passing the inventory over to suppliers who are required to upgrade facilities to ISO standards;
- Greater supplier responsibility for efficiency’s and cost management. For example, the supplier must put a focused and experienced manager on site;
- Generally developing a ‘ fit for purpose’ scenario.
- ( Note: Countrywide, energy has become a scarce resource and it is no longer a ‘ leverage commodity. Energy in the mining environment is in all respects a STRATEGIC COMMODITY!)
In the process of implementation Mike emphasized that:
- you can never communicate enough with your end- user(s) on the one hand and your supplier(s) on the other;
- the drafting of the RFQ is extremely NB and is used to cover all bases. It also sets the perameters for negotiations;
- the MIS is essential to the tracking of, and reporting on spend and savings.
It is imperative to secure maximum supplier commitment to:
- (this is where your SLA is crucial to the management of this commodity group with for e.g. particular emphasis on cleanliness levels. You must set the standards! Also understand the OEM’s specs for guarantee purposes).
- saving 10% on fuels TCO and up to 28% on lubricant TCO for the first 3 years of the agreement;
- investing capital in equipment and the MIS;
- regular product testing with Univ. of Stellenbosch/ Pretoria;
- implementation of CI projects with end users.
In the impact (or value release) assessment you get the results for all the hard work and SMART STRATEGY!
- Improved fuel rebates. Based on the Australian tax regime where government is prepared to allow rebates for mining vehicles which operate almost exclusively off- road and hence are never on the public roads, the commodity team obtained the co- operation of the Chamber of Mines in negotiating a similar dispensation locally!
- Consolidation of suppliers with buy- in to finance the MIS, upgrade equipment and the facilities to ISO 9000 standards, take over inventory, provide manpower to manage fuels and lubes on- s
iteand, to provide low sulphur content to increase engine life;
- TCO savings of 5% per annum on fuels and 11% per annum on lubes!
- Understanding that the biggest consumer of fuel is ‘old trucks’ and, electricity is still 5 X cheaper than diesel as a source of energy.
In conclusion, your challenge is how to achieve a continuous improvement process?
- in your supplier selection process understand that you need people who are familiar with your business. E.g. volumes and unique complexities play a major role;
- do not penalize the supplier, rather incentivise the relationship by, for example, offering a carrot; ‘ if you improve performance we will improve volumes’. (That way you achieve your supplier consolidation objectives as well);
Key take- aways:
- the commodity team found a procurement opportunity in a tax break!
- As procurement professional ask yourself what role you played in the success story? You directly contributed to the development of a mature company which now fully understands the intricacy’s of the commodity group. What would be the result if you remove the expertise of the commodity manager or a key team player?
BUYING CONSULTING SERVICES
Presented by Elaine Porteous, an independent Industry Consultant and procurement specialist with focus on services.
Business consulting services constitute a commodity within the Commodity Group: “Professional Services” which includes a basket of specialized business disciplines viz: BEE Strategy, Change Management, Corporate Governance/ Compliance, HR, Legal, Marketing and ICT or IT etc.These services are of an advisory & expert nature.
What are you buying? In a nutshell, it’s principally about EXPERTISE. Accordingly the consultant sells time and expertise with a view to adding value to the client. The commodity is continually subject to a changing business landscape which is constantly influenced by many factors viz; mergers & acquisitions, changing legislation and, fluctuating economic cycles.
The commodity often sits with top management, under direct scrutiny of the board and accordingly requires carefull handling by the commodity specialist. It is, generally speaking, not a well- managed category of spend which, in itself offers a low- hanging cost saving opportunity by simply asking – do we really need to do it? Ask fundamental procurement questions:
- What are you presently spending on consulting? ( You’ll often find that it has never been studied throughout the organization as a whole);
- What are the rates being asked by the Consultant? Discuss the merits in detail and analyse all possible fees, charges, costs, expenses;
- Why are the fees not generally negotiated? So, don’t accept the first quote.
All engagements must be ALIGNED with company stated objectives. This will then translate into the terms of reference ( TOR), which must be clearly stated in detail and, endorsed at the highest level:
- TOR is the specification of the job to be done and, the guidelines according to which it must be carried out;
- TOR must include all detail including the objectives, scope of work, activities, and responsibilities of both the SP and the principal/ client;
- (This is the backbone of your SLA).
Spend Analysis is essential to mapping the commodity impact on your organization. You need to track the annual spend of ‘ business consulting” in detail. Example:
- Commodity is ‘business consulting’. Spend is RXX
- Sub- commodity is ‘tax consulting’. Spend is RYY
- All sub- commodities add up to the overall spend for the commodity
- Be sharp and look in unusual budgets like ‘ Discretionary or general expenses’.
This commodity group requires a cross- functional team with Procurement taking the lead and then co- opting members from ( project) relevant disciplines viz; strategic planning, financial director/ nominee, legal, tax, marketing, HR….. and so on.
The point being to harness and use company- wide expertise to the best advantage. This team is then tasked with managing the commodity ( group) and, understanding the total cost of ownership of the commodity. The commitment and support of your ‘top level’ management is critical to success. Most NB is to determine ‘Who owns ( and is responsible and accountable for) the commodity?
In UNDERSTANDING TCO you need to ask ‘what is the real cost!’ The purchase price in this case is only the proverbial ‘tip of the iceberg’. Direct costs are obvious by you need to also consider internal business costs and, joint supplier- customer life cycle costs. For instance, in addition to time- fees the supplier invariably charges staff costs including benefits, expenses for transport & accommodation, communications, allowances, production costs of reports, contingency costs… the list is endless.
Identifying Opportunities is the upside of the procurement discipline. To do so you need to understand the peculiar characteristics of the commodity:
- the service being contracted ( content, features, issues, users);
- the current spend by supplier, business user, sub- type);
- the full cost model 9 purchase price+ internal costs);
- the market ( supplier capability, benchmarks, who qualifies to do it);
- supplier drivers ( different cost structures, competitiveness)
- strategic drivers ( aligning with your company objectives).
This is where you earn your spurs. Do you understand the supply- market? Regional, National, Global? Do you understand the SP’s cost drivers/ structure? E.g. Cap Gemini, a leading business process consultant, introduced a hi-tech ICT communications system to make themselves more competitive. Send them an RFQ.
While this is a complex and difficult commodity, the fundamental procurement principles and, disciplines remain the same. As with other commodities, ask yourself, can you reduce consumption? Or, do you acquire the skills in- house or, look at your supply chain as a whole and analyse whether you can improve processes and thereby manage the costs better.
The first step is to address your strategy and refer to the executive summary.
The latest trend is to first set up a PANEL OF SP’s covering all areas of External/ Third party expertise required by your organization.
Get your legal department/ SP to negotiate the OVER- HEAD Agreement with all members on the panel. This provided the business framework and provides the parties with legal protection. Rates etc
NOTE Legal services are in themselves a commodity and must be negotiated.
The crucial issues are:
- conflicts of interest/ indemnity/ confidentiality/ liability;
- who owns the IP on outputs?
SLA 1- Time frame and sub- contractors
SLA 2- Project based consulting like IT which has outputs + results.
Put formula in to cater for changes in scope.
The crucial issues are:
– NB who owns what? If they’ve learnt new stuff in a competitive environment, can they sell it?
– KNOWLEDGE TRANSFER (‘KT’); on the job training/ stand alone courses/ instruction manual- KT must be im
bedded in the price
PITFALLS: Collaboration is key. Golden rule ” Communicate 7 times in 7 different ways”.
THE PROCUREMENT OF LOGISTICS SERVICES
Next up to the podium was Cobus Rossouw, a local doyen of the highly specialized field of logistics. He kicked off by pointing out that this commodity offers interesting insights into the convergence between the ‘ old style of purchasing or buying’ and the modern approach of ‘ end- to- end’ supply chain management. His task is to enable delegates to get to the crux of this commodity.
Based on a 2006 Survey by the CSIR:
- At the macro level the costs of Logistics Services are significant in an economy and, in the SA context, account for some14% of GDP!
- on the micro scale, it can claim a very high percentage of a company’s revenue ( it is NB to have accurate stats for your organizations spend on this commodity);
- The primary elements of logistics are transport, warehousing & ports;
- Direct costs comprise: Customer delivery ( transport), storage, international trading ( clearing & forwarding;
- Indirect costs comprise: Inventory holding ( funding), imbedded in delivery price, customer storage & delivery and, value- added services.
Bearing in mind that there are three parts to the value chain ( manufacture, distribution 7 sales to the customer), there are also different types of Supply Chains namely:
- Consumer centric, satisfying consumer demand like super- market chains;
- Asset centric, utilize major assets like manufacturing & mining;
- Service delivery centric, like education, finance & healthcare.
An SA Market Analysis by Barloworld Logistics enables one to differentiate which sector what logistic service supports. For instance do you outsource or insource or, do it yourself, rent it in or buy it in? For SA the 2007 picture looks like this:
- warehousing 21%
- outbound distribution 27%
- forwarding and clearing 28%
- supply chain consultants 14%
- 4PL 4%
The procurement or strategic sourcing of logistics ( which is not a procurement skill!) concerns not only the cost aspect but also general business acumen. For instance ask the simple question, ‘what functions are core and business critical?’ Bear in mind that the sourcing of logistics mostly takes place in a cross- functional environment and you will need to decide on procuring additional expertise where necessary. For example, a logistics expert will specify and measure while the financial specialist will be concerned with commercial aspects and consequences and accordingly, the contract.
What role is there for the procurement function when the specifics are to be defined by logistics? It’s simple, procurement sticks to it’s knitting. For e.g. the service level agreement will deal with the ‘nitty gritty’ operational stuff and will impact on the total cost of ownership. Hence you need to consider opportunities upfront:
- clearly define the service(s) required;
- in the RFI focus on the capabilities you require of the SP;
- subject the SP to stringent tests viz; response times, are other services included such as on- selling; the SP must provide proof of a claimed capability; what is their pricing format- do they for instance separate the cost elements?
Cobus suggests that the attitude to adopt during negotiations and concluding the final agreement is one of focusing on the commercial consequence and, ‘ sharing benefits’ with the supplier. Then like all good procurement professionals, make the service providers contractually aware of the penalties for poor- or non- performance!
SOURCING STRATEGY and SLA MANAGEMENT OF TRAVEL & RELATED SERVICES
Roddy Mann, Procurement Analyst, Old Mutual Group
All the way from Cape Town- Roddy was next up to share his considerable knowledge and experience in this major spend category which affects the bottom- line of most organizations, whether in the private or public sector.
When considering the commodity group designated as ‘travel & related’ one must clearly distinguish between Corporate Travel (the subject of his paper) and MICE ( meetings, incentives, conferences and events). The magic number to assist you is the No. 10. I.e. Corporate Travel relates to less than (or never more than) 10 people travelling together whereas MICE has to do with 10+ travellers and this is a completely different ball- game.
The old mutual experience of managing this commodity is presented as ” A road map in Travel Procurement”, a work- in- progress as it were. As a group- wide project, it’s scope embraces all possible cost elements from basic travel policy through HR, corporate legal, accounting and tax departments. Fundemental to the case- study is an understanding of the components (or cost drivers) of Travel:
- Internal costs are procurement, reporting and payment;
- Travel supplier costs are identified as Air, Hotel and Car;
- Travel agency costs translate into management and/ or transaction costs;
- System costs are found in e- travel requisitions and/ or self- booking systems (including the internet).
‘KNOW YOUR COSTS’ are the catch- words of this project. The exercise of identifying the TCO of travel is certainly not straight forward as the data is difficult to gather into one single statement and, as in the case of (travel) consultancy fees will often be off your radar. Roddy cautions that most of the costs are simply scattered throughout the organization like in the marketing budget where you’ll find they flew to Sun City with clients!
“Beware” warns Roddy, ” we’re all being over charged!”. Where you employ the services of a TMC ( travel management company) it is essential to to get their report BEFORE THE TRIP so that expenditure can be challenged and reduced. You need to be disciplined in watching out for opportunities as you can buy both ‘cheap’ and/ or ‘expensive’ travel – and don’t just look at the LCC’s, as the large airlines can often, for a specific trip, be as- if not more- price competitive.
PRICE= direct costs+ value add ( staff/ agent) + profit. ( So, know the costs and you can then calculate the value add and the profit0. Which brings one to the issues of ‘hidden costs’. If my agency earns an override from the air- line then the higher the price of the tickets the more the
y will earn? Add to that your internal issues such as- is there a travel policy and, if so, who manages it? Reports must be in real time and, by changing corporate behaviour large savings can be achieved.
The integrity of management information is accordingly critical to the success of such a project:
- Get to grasp the bigger picture and don’t hesitate to test new ideas;
- Manage resistance to change with great care. You need co- operation;
- Exhaustively check all corners all the time;
- Be a positive influence and engage with your corporate family.
Procurement must take charge and build a bombproof business case. Old Mutual set out to save R20 million; communicated that upwards and managed it. Those who stalled were challenged. Key to success is knowing your IT people and applying project management techniques. Prince 2 is globally accepted.
What then is the outcome, the Old Mutual solution?
- they book their own travel and are installing their own Gallileo system whilst allow the agency to issue tickets;
- this counters intermediary indiscretions and disciplines their company travelers;
- staff ( travel bookers) are trained and are paid to save money and provide best price & service;
- they contract direct with all suppliers and consolidate all reporting which, must be in real time.
And finally, need I say it? Old Mutual Procurement exceeded their savings target!
EDITORS COMMENT: this case study, presented by the initiator and ongoing manager of this excellent cost management project, is a proud testament to the:
- definitive role of the procurement function in corporate spend management;
- successes that are achieved by employing procurement expertise & disciplines and, deploying highly experienced spend managers;
- (enormous) and calculable value contributed to this organization by a highly qualified, experienced and dedicated commodity manager;
- fact that all medium to large organizations need to escalate the role and function of procurement across all departments of spend and, the need for the procurement reporting line to be linked directly to board level.
The SOURCING STRATEGY AND, SLA MANAGEMENT OF FACILITIES MANAGEMENT
By Thys Goosen Procurement Training and, Specialist in procuring Facilities Management and
Anthea Saunders (CPO TFMC)
What stands out when considering FM contracts, is the high cost of ownership and commensurate increase in risk to your company. By definition then, procuring facilities management is a spend area with high TCO:
- expect it to be time consuming up to RFQ;
- usually urgent but not strategic;
- many ‘ low expense’ events with cost- and quality control difficult;
- no time to manage supplier relationships with ‘ on the job’ amendments to job- card and quote.
You accordingly need to know exactly what your control-, processing- and tasking activity’s cost your organization as, this can average as high as R450.00 per order. Also differentiate whether the area in question is non- strategic MRO, strategic or, mission critical.
The solution lies in volume tier agreements which will solve your problems as:
- volume tiers involve simultaneously managing cost, quality and relationships;
- you work with set ( base) prices which ensure common best rates with no negotiations or quibbling and, everyone knows what to expect;
- you manage the volumes and set perameters which for eg avoid ‘loading’ invoices & false time sheets and, overheads & materials come at a set mark-up
- you are then free to drive and manage quality;
- this results in efficient supplier relationship management as, with the perameters in place, everyone knows what to do and to expect.
Fundamentally to apply volume tier flow one begins working with the 3- way SLA between the ‘user’, the ‘supply agent or buyer’ and the ‘supplier’.
- the Supplier, user & supply intermediary are involved primarily with control and audit;
- utilize modern technology for virtual real time control, even when on the move;
- being in real time, the SLA can be effectively controlled;
- the SLA including all product & service element costs & standards are pre- set.
A word of advice is necessary at this juncture. The drafting and management of volume tier agreements is a complex business and requires specific expertise. If necessary get your personnel to attend an Advanced Course on drafting SLA’s and Volume Tier agreements. The cost of the course will pay you back many times in the increased efficiency’s and cost savings your organization will achieve.
- Response time to call- out;
- Response time AND accuracy for jobbing process;
- Quality control ( camera’s, inspections and so on);
- Job duration and completion times.
The Annexures to the Contract will cover specific detail:
- Prices and material add- ons are fixed and listed;
- Time perameters are set;
- Volume perameters are set;
- Detail the jobbing process (es);
- Work standards are specified.
Thys then handed over the podium to Anthea Saunders, the CPO at TFMC, the leading Facilities Manager in the Mvelaphanda Group of Companies. She proceeded to “add the flesh to the bones”, as it were. She runs the operations of a large facilities manager and, speaks direct from the rock- face.
ADVANTAGES, DISADVANTAGES AND THE IMPORTANT RULES OF VOLUME TIER IN THE REAL WORLD.
Her point of departure is that the VTA is an extremely useful tool in the hands of the procurement professional, sourcing specialist and commodity manager. She confirms that it will be worth your while to take time out to get the relevant expertise and know- how around this strategic tool.
ADVANTAGES of VTA’s are mainly that they assist you to optimize SRM!
There are several aspects to this, the most NB being:
- The modern trend is to move to “Smart Partnering” with suppliers and SP’s. It’s now about long- term relationships and the strategic alignment of mutual objectives;
- Speed of job completion (reaction time)
- Low cost process (reduction in administration)
- Pre-defined cost base & quality standard
- Optimal Supplier Database
- Compliance to SHEQR, BBBEE
- Addresses previously fragmented procurement practices (governance)
- To establish early settlement/ payment methodology
(money for jam)
- Mis-use of services ( beware of potential abuses)
- Perceived subjectivity/objectivity by end user
- Lack of user understanding of process
- Continually train the end-user
- Does not allow for vast supplier rotation
WHAT ARE YOUR SUPPLIER SOURCING/ SELECTION OPTIONS?
(a) “PICK SUPPLIER” RANDOMLY FROM VENDOR DATABASE
- Greater number to choose from
- You will pre-accredit your “Preferred” vendor database
- Greater number to choose from
- No loyalty from your supplier (hence need for smart partnering)
- Inconsistent quality
- Huge risk to your client and ‘you’
PRESENTERS COMMENT: (a) is not a recommended route
(b) “PICK SUPPLIER” FROM PRE-ACCREDITED (PREFERRED) DATABASE
( To establish a ‘preferred’ base subject each supplier to a balanced score- card. In the case of TFMC they apply 66 qualifying criteria on their check- list!)
- Minimize risk
- Good understanding of your company’s ethos and standards
- Ensuring consistency of quality by setting measureable standards
- Assist’s in showing commitment to your supplier
- Supplier complacency
- Dependency of your supplier on “your” company
- Complacency by end user
PRESENTERS COMENT: (b) is the recommended route
“DEFINED SCOPE AND DETAIL OF JOB”
- No hidden costs
- Pre-determined costs (schedule of rates)
- Speed of delivery for execution (benchmarked)
- Common understanding – external / internal
- Technical expertise in qualifying the “Scope” and setting the standards
“CLOSING THE LOOP” AFTER EXECUTION
Feedback to “you” should be by means of a qualified checklist determining all elements of job execution, namely:
- Photo’s pre and post
- Quality of the job execution
- Safety standards
- Health standards
- Environment standards
- Quality standards
- Risk standards
In order to make this approach work for “you”, you pre-determine your RISKS’s and ensure that you choose the correct suppliers through a pre-accreditation process.
This methodology / process needs to be supported by an integrated IT system 9 it’s well worth the sweat).
Ensure you have developed a well planned change management program to your internal and external clients / suppliers thereby ensuring acceptance of the process by all stakeholders.
This methodology of “Volume Tier” can be as flexible as “you” allow it to be whilst maintaining “Good Corporate Governance”.
Editors comment: According to a PWC report, this case study exceeds international ‘best practise’ standards. In terms of your company ethos always ask: ” what do you want delivered and, to what standard!”