17 January 2012 | Nick Martindale
As procurement teams target inefficiencies to cope with cost cutting measures, they are helped by new processes and techniques that can deliver further savings.
The quest for innovation in the field of supply management and procurement has never been more relevant than it is today. With most departments having identified and addressed any obvious spend inefficiencies over the past three years, attention is switching to how new processes and techniques can deliver further savings and perhaps even contribute to topline growth.
Nowhere is the pressure to reduce costs and look at things differently more keenly felt than in the public sector, and local and central government in particular. The UK government may have embarked on its own efficiency reform programme over the past year, but it could certainly learn a thing or two from how Scotland has handled a similar situation.
“We started the procurement reform that the Cabinet Office and the Efficiency and Reform Group started in 2010 five years ago and we’ve created a programme that is government led, but public-sector owned,” says Alastair Merrill, director of procurement and commercial at the Scottish government. “It doesn’t just affect the core Scottish government, but all the public sector, so that’s local authorities, police, fire, health, higher and further education.”
Under the reform programme, supported by governments from across the political divide, centres of procurement expertise for individual sectors were set up alongside a national centre handling common categories such as office supplies, IT and utilities. To date, the programme has delivered savings of around £1.2 billion, says Merrill.
Central to this has been the development of both a common purchase-to-pay system and the Contract Scotland portal, where contracts are advertised electronically and suppliers can sign up to receive alerts of tenders that may be of interest. “That leads directly into our management information so our public bodies have a very clear view of who is spending what, on what and with which company,” says Merrill.
The whole reform programme has not only delivered impressive savings, but has also transformed the way in which procurement is seen. “It’s an incredibly exciting area to work in now,” says Merrill. “It has shed the reputation of being a dry, dusty, technical specialism and is increasingly seen as fundamental to how policy is made and delivered.”
The public sector in general is not renowned for taking an innovative approach to problem solving, but that was exactly what Steph Holmes, head of procurement at the Rotherham NHS Foundation Trust, did when her team sought to design and install a futureproof yet state-of-the-art lighting system in a ward renovation project, as part of its future wards refurbishment programme.
“We knew we didn’t want to buy anything that was on the market today so we threw away all the catalogues, but we couldn’t go out to tender because we didn’t have a specification,” she says. “How do you go about buying what you don’t know?”
Changing patient experience
Working alongside the Knowledge Transfer Network, the trust held a workshop with various lighting manufacturers and invited them to come up with innovative solutions. “We ended up with an output-based specification,” says Holmes. “We wanted a change in patient experience and reductions in our lighting maintenance and energy costs.”
Eventually, the trust opted for an ultra-efficient lighting solution using LEDs, providing each bed with a range of lights for different activities. “We have a medical light so staff can examine patients,” she says. “Patients can read if they want to and if they just want a bit of ambience there’s a back light. There’s also a light for visitors and a night light.”
Taking a different approach even led to solving other problems not part of the initial concept. “We have got a fully integrated unit where the patient has space for belongings and we have space to store linen, consumables and drugs securely,” says Holmes.
Global export packer Neal Brothers, meanwhile, identified opportunities for further savings by re-engineering its supply chain operations. Specifically, this meant dealing directly with saw mills for the timber used in its wooden packing crates, which represented the company’s biggest expense.
Going direct delivered savings of about 20 per cent, says Elena Selezneva, head of procurement, but also meant the company had to develop a system to ensure every piece of timber could be traced back to its original source.
Led by Selezneva, the procurement function provided a specification for a barcode and labelling system to an IT company, which then produced a version that complied with the requirements of the international standard ISPM 15 for wooden materials.
“Developing and implementing a barcoding timber system not only gave individual packs a unique, traceable element, but also gave us a method of knowing what stock was where and a much better and more accurate means of stocktaking,” she says.
The system was subsequently installed in the company’s Romanian operations, bypassing the need for timber to be delivered from the UK and allowing it to use local suppliers. Selezneva admits this was not without challenges as at the time Romania had not signed up to the ISPM 15 standard, but eventually resulted in both compliance and savings in timber costs of 53 per cent.
In many cases, innovation means working more closely with suppliers to devise more efficient ways of running existing processes. Cash-handling company Vaultex UK, for instance, found itself regularly hit by a regulatory charge for substandard production of equipment, caused by two pieces of equipment produced by the same manufacturer that were incompatible with each other.
“We had to work with the supplier to create a common interface that would allow compatibility between the two pieces of equipment,” says Iain Palfreman, head of procurement. “To do that, not only did we have to reconfigure some of the hardware in both pieces of equipment, but we also needed a common interface card that would take the workflow from one feed to the other and be able to tie up through our operating system that it was the same piece of work.”
Example of best practice
The project also involved making software alterations at both the supplier and Vaultex UK and the creation of a new interface card that would be better able to withstand the physical demands of one of the two pieces of machinery, in particular.
The project involved taking a new approach with a key strategic supplier, says Palfreman, including moving from an annual contract to a three-year deal. “There was a lot of mistrust in the relationship and now we regularly have joint meetings with the regulator, telling them that this is what is possible,” he adds. “Our supplier now actually brings its customers to come to see what we have done and how it works as an example of what best practice can look like.”
The project has been running since the beginning of 2011 and is well on its way to paying for itself. “The business case just stood up on its own when you looked at the benefits we were going to get,” he says. “We were talking about a less than two-year payback; normally you’d be looking at at least five.”
Harnessing the knowledge of internal customers and suppliers has also delivered significant savings and more collaborative working relationships for nationwide gym chain Fitness First.
“It’s taking a balanced approach between the best commercial deal and the overall return on investment for the business and it supports the age-old adage that cheapest is not always best,” says Andrew Neilson, the then head of procurement.
One example of this has been the choice of air-conditioning manufacturer and product in a new £2.25 million project, where divisional surveyors were able to advise on the total lifetime cost of various systems, resulting in savings of £250,000 over the first year as a result of maintenance and energy efficiency savings.
“We monitor it on a monthly basis so all cost-saving activity is logged and auditable in terms of what we’ve saved,” says Neilson. “Every single project is revisited and the reports publicised monthly and we bank those savings. That’s how my role is judged; in the savings and commercial benefits we as functional stakeholders bring to the business.”
A similar conversation led to savings of around £100,000 on the costs of steam kettles used in saunas, adds Glyn Allen, head of facilities (and now procurement too, following Neilson’s departure), while further areas to explore include lighting, the use of cleaning materials and energy consumption.
As well as delivering better supplier relationships at a time when any immediate savings had been realised, the new approach has also furthered the reputation of procurement internally. “It’s certainly raised the business awareness of what can be achieved by having the right suppliers within the correct contractual terms for the business,” says Neilson.
Working closer with internal customers and suppliers has been crucial in Durham University’s attempts to reduce its expenditure in core categories such as food, as well as cut its carbon footprint. The procurement team has been instrumental in bringing chefs and catering teams from its colleges to meet with suppliers and discuss how meals could be bought and made efficiently.
“We’ll look at the items that have had very big increases and maybe just decide that we’re not going to use that particular product,” says Laura Watson, deputy director of procurement at Durham University.
“By having this dialogue we can determine what we’re making and how we’re making it to work out whether those products are actually needed. We’ve made substantial savings on food this year by taking a different approach. We also introduced the sustainability angle, so not flying produce in from overseas where we could use seasonal vegetables instead and reducing the number of deliveries and the amount of packaging.”
The procurement team is also undertaking similar initiatives in the areas of estates and IT, working with customers to shape specification requirements and involving suppliers in any new projects.
It has also created a supplier engagement programme, consisting of a trade fair where suppliers can showcase their products and talk to internal customers and programmes to bring suppliers up to speed in areas such as electronic procurement and EU legislation.
London universities have also been making efforts to tackle potentially significant but often difficult areas of spend around estates.
Representatives from estates, facilities and procurement departments from institutions including Royal Holloway University of London, Kingston University, the Institute of Education, the School of Oriental and African Studies and Goldsmiths University have been working with the London Universities Purchasing Consortium (LUPC).
“We started getting a lot of members coming to us and saying they thought there was a real gap around estates,” says Clemmie Smith, senior contracts manager at LUPC. “Individual members were having to go out on their own or were having problems running their own tendering exercises.”
Over the past year LUPC has signed up a number of suppliers around fabric maintenance, mechanical and electrical services, lift maintenance and compliance services around asbestos and legionella.
Individual members tend to have their own bespoke requirements, making it difficult to identify specific savings, says Smith, but she is confident suppliers have offered very competitive rates.
“There are lots of other benefits too, such as the saving in time,” she says. “Because these tend to be high-spend areas, if each individual institution was undertaking its own full procurement process it could take up to six months to go through the full EU procurement timeline. Under these agreements, it shouldn’t take more than a couple of weeks.”
Pooling purchasing power was also vital in a project by the Medical Research Council to procure a number of high-volume DNA sequencing hubs around the country. The hubs were to be set up in universities, including Cambridge, Oxford, Liverpool and Edinburgh, and would be sourced through RCUK Shared Services Centre (SSC), which provides procurement services to the UK’s seven research councils. “Buying these high-cost and complex machines using traditional processes would have delayed research and used a lot of researchers’ time in the evaluation of each tender,” says Nicola Dunne, chief procurement officer at SSC.
The solution was to involve other potential partners, including Cancer Research, and the universities themselves to pool buying power, ensuring a competitive purchase process and agreements, which included discounted equipment and enhanced levels of product support. Dunne estimates this approach has achieved annual savings in the region of £1.2 million.
Building strong relations
A dedicated supplier skills team at the Greater London Authority has been working closely with five key suppliers to Transport for London (TfL), to develop 12 apprenticeship opportunities at those organisations in quantity surveying.
Working with the Chartered Surveyors Training Trust (CSTT), the partnerships with Balfour Beatty, EC Harris, Morgan Sindall, Franklin+Andrews and Wates are designed to help develop skills in TfL’s supply base, which will be vital for the organisation’s future projects in the city.
Apprentices will work on a range of projects across London, including the upgrade of stations such as Tottenham Court Road and Crossrail.
The agreement was announced in October last year and after completing a two-year programme, apprentices will be able to achieve associate membership of the Royal Institution of Chartered Surveyors, giving them a route to full chartered status and providing TfL and its suppliers with the surveying skills required for future projects.