How to minimise costs and maximise benefits
Procurement is one of the key professional tasks of any government or non-government organisation. One of the important aspects of performing such a task is the sound knowledge of the individuals involved in the procurement process. Efficient procurement ensures the successful functioning of any organisation in performing its specified mission and vision. Senior and mid-level leadership in an organisation is involved in decision-making and providing staff input, respectively, for implementing procurement at various levels and tiers. In performing such responsible tasks, there is no set procurement-related training to develop the efficiency of the leaders in this particular field in many organisations. Procurement is an expert job that requires both theoretical knowledge and on-the-job experience. It also requires thorough knowledge and negotiation skills. Lack of background knowledge in this field causes difficulties in acquiring the right kind of goods and services at the right time with the available budget. Leaders at different levels of government and non-government organisations must have some understanding of procurement. This paper is written specifically to pique the interest of different levels of organisational leaders in procurement, which is an important issue but often an overlooked area of study and research.
What is procurement and why is its understanding important?
“Procurement” is the complete process by which an organisation acquires the goods and services necessary to fulfill its mission assigned to them. Its understanding is important as it relates to the efficiency of the organisation. For any organisation, the total budget for procurement is never sufficient in the face of other developmental priorities. Therefore, a key question in procurement is what to buy within the limited budget. However, for an organisation with a limited budget, the importance of sound procurement is crucial since with the available budget, organisations do not have the luxury of making a remedy for a faulty procurement later.
The above diagram gives a comprehensive idea of the factors that influence procurement. All these factors are interlinked and contribute to each other. However, the organisational strategy and its structure, with their parameters, are the domain of senior level leadership, while perspective planning, policy, and procedure are the areas of mid-level leaders.
Organisational strategy: It is the basis of all procurements. The strategy must outline the profile of the organisation consisting of its mission and vision. A clear statement of the capability and requirements of the organisation should be derived from the organisational strategy. It also provides policy guidance and resources available for procurement.
Organisational structure: The organisational strategy, its mission and vision would evaluate and recommend the proposed structure of the organisation, including its goods and services, required to accomplish the tasks. It directs the execution of planning and the determination of an affordable organisational structure in terms of its strength, goods, and services to operate the organisation within a given set of resources.
Perspective plan: As not all the requirements of the organisation are achievable and affordable within given resources at a given time, there is a need for a perspective plan. It should include the broad timeframe by which the goods and services should be inducted into the organisation. This should include not only the initial cost of purchasing the main equipment, but also the life cycle costs of repair, maintenance, and training of operators and employees associated with the equipment.
Policy and procedure: The procurement policy and procedure give guidelines to the concerned agencies for selecting and procuring the best equipment within the given budget in a systematic manner. Presently, government organisations in Bangladesh are procuring based on the guidelines given in the Public Procurement Act (PPA) 2006 and Public Procurement Rules (PPR) 2008, which outline the detailed procedure, including the guidelines for the vendors. Understanding these policies and procedures is very important.
Procuring entity: There is a requirement for an organisational body that will carry out the procurement. Basically, it is a coordinating body between the agencies that set the requirements, carry out tendering as per the set rules and regulations, negotiate and finally conclude the contracts. This has clearly been specified in the PPR 2008 for government organisations in Bangladesh. Besides, non-governments and other organisations have their own organisational bodies for procurement.
Broad stages of procurement
and their limitations
Identification of the need: The first step of procurement is the identification of the need for the required goods or services. It also sets the performance standards so that they reflect the needs of the users and the urgency of the requirements. Decisions are required on the timeframe for service delivery and the preferred contracting method for the goods and services to be procured.
Planning the procurement: The procurement plan defines the procurement process, the sequence of actions required for procurement, the responsible organisations, budgetary involvement, and the time frame of the procurement process.
Tendering and awarding contracts: During the tendering process, specifications are prepared, tenders are invited from prospective bidders and evaluated, negotiated and the contract is awarded.
Finalising and monitoring the contract: The final step is the post-award stage, where contract monitoring, implementation, and evaluation occur. This includes deciding whether the organisation responsible will resume the services at the end of the contract, or whether it will continue to contract them out, although the monitoring of the contract will continue.
Some of the procurement system’s limitations include the lack of a strategic plan during need identification, time constraints during procurement planning, a lack of expertise during tendering, a lack of evaluation during the monitoring stage, and a lack of contract monitoring.
Minimising costs and maximising benefits
Procurement at the end of the fiscal year is always dangerous: Procurement at the end of the fiscal year might result in last-minute procurement of inferior quality of equipment or services at a higher price. This point must be kept in mind, and steps may be taken to complete the procurement process well in advance. This can be done through the preparation of a comprehensive perspective plan.
Monopoly is not always caused by a single model: In general, the concept prevails that there should be more models to avoid the monopoly of the suppliers. The issue requires understanding at all levels. More models may reduce monopoly, but this may result in increased training, inventory management, and maintenance costs, which cannot maximise procurement budgets.
The concept of lowest price is not always appropriate for selecting the lowest bidder: Besides the offered price, the reputation of the company, its service support, and other back-up facilities should not be ignored. In the short term, apparently, it minimises the cost, but in the long run, it causes more financial burden. The concept of the lowest financial bidder is not followed in many countries. A proposed criterion for selecting the lowest bidder from both a technical and financial perspective is given below:
Lifecycle costs should never be overlooked: It should always be considered in procurement to minimise costs and maximise benefits. The concept is ignored in many cases. In procurement, life cycle cost is like the hidden portion of the iceberg, which means it is always invisible. It must be understood that, in procurement, nothing is free from the supplier. Different hidden portions of a procurement cost are shown graphically below:
Requirement of deliberate evaluation and test and trial: Paper-based evaluation is not always an appropriate method. Pre-procurement visits by experts may be conducted to ascertain the capabilities of the factories and also the equipment performance. Equipment may be very good in the manufacturing countries but may not be suitable in the user countries because of weather and maintenance factors. Paper evaluation and lack of test and trial also lead to specification change after the contract, which is contradictory to the procurement policy.
Md Abu Sayed Siddique, PhD is serving as Major General in Bangladesh Army. He is an expert on procurement, contract management, contract negotiation, and supply chain management.