San Diego County ‘Reverses’ Ways
The County of San Diego’s Department of Purchasing and Contracting has embarked on a vision to “be the best business run by a government.” Over the past four years, the County purchasing team has implemented innovative technology, creative partnerships, and a renewed commitment to customer service.
The County selected four tools used by private- and public-sector organizations to address the challenge of buying “faster, better, cheaper.” The County’s successful purchasing initiative includes reverse auctions, cooperative purchasing, business process outsourcing, and streamlining processes.
Reverse Auctions Drive County Savings
“The e-sourcing model of reverse auctions allows the County to acquire supplies and services for use by the 50 departments throughout the County,” says Winston McColl, Director of San Diego County’s Department of Purchasing and Contracting. “These strategic sourcing opportunities drive down costs while maintaining quality in the procurement.”
The County began conducting Web-enabled reverse auctions in December 2002. The first event, which covered the purchase of administrative and public safety vehicles, was valued at over $4.5 million. The County saved more than $75,000 per year for the contract’s two-year duration. The second reverse auction, held in January 2003, enabled the County to secure fixed vehicle pricing.
In each event, suppliers tailored their bids to the online bidding process, a practice that was not possible in a competitive, sealed-bid environment. Unlike sealed bids, reverse auctions allow bidders to change their bid based on the response by other bidders. This dynamic pricing tool provides significant savings by ensuring that the prices submitted by the competing suppliers are real time, lowest possible, visible to all participants, and auditable.
Rather than commit to a long-term financial agreement with an electronic auctioneer, the County chose a company to run individual events during the pilot phase. Based on the event size and value of the procurement, a fee was paid to the electronic auctioneer. The minimum fee for an event was $2,750–to be paid by the County or by the winning supplier.
“We had Procuri (an OnDemand Supply Management provider) run the first two reverse auctions for us until I was comfortable that [the software] was workable in the County,” says McColl.
The highly configurable online process allowed buyers to select what information was to be shared with suppliers at various levels of detail, including the ability to show all bids, the low bid only, no bids, bid rank, number of bids, bidder names, and bidder comments.
When the County decided to proceed with an open, reverse auction, event specifications were finalized and suppliers were contacted, trained, and instructed in the use of the software tool.
“With those two procurements, we found a vendor base that was willing to compete online,” says McColl.
In the first auction, a mix of undercover vehicles, such as Toyota, Nissan, and Honda, was requested by the San Diego District Attorney’s Office. The purchasing team selected the Honda and Nissan vehicles because these dealerships were more inclined to participate in an Internet-based auction. The County saved approximately six to eight percent, or $12,000 to $15,000, versus using competitive sealed bidding.
During the second reverse auction, the County bid out over 200
administrative and police vehicles. The County is authorized to standardize its fleet of vehicles by using Ford products. This auction was conducted exclusively among Ford dealers from the surrounding area.
“Ford was willing to work with the dealers in providing aggressive pricing,” says McColl. “Based upon that, we decided to lock in pricing for two years.”
Based on the number of vehicles involved and the contract terms, Ford and its dealers jointly contributed to reducing the price of vehicles across the board.
The fixed, two-year pricing gave the manufacturers and dealerships a reliable idea of the number of vehicles required, allowing production line programming. The pricing gave the County a reliable price point to budget vehicle purchases for the next 24 months.
“With the two vehicle procurements, we saved in the neighborhood of $100,000 by driving down the price with Internet auctions,” says McColl.
An additional benefit of the contract included an increased selection of vehicles. County departments were able to rethink vehicle platforms due to reduced pricing. For example, in lieu of downsizing a command vehicle to a less expensive one, the contract provided the opportunity to upgrade to a larger vehicle with little increase in cost.
“In other words, you are getting a larger, safer, more accessible vehicle with a smaller increase in price over previous platforms,” says McColl.
“The advantages of securing annualized dollar savings in excess of $75,000 for the two reverse auctions in a low margin product, the ability to lock in two-year pricing, and the use of proven technology to assist in driving down costs, especially in lean budget years, are significant,” says McColl.
The county rebid the contract via reverse auction in 2004 and realized even greater savings. That contract is still in place today. Participants in the second round of contracts were generally the same local group of Ford dealers within the County of San Diego and areas of Orange and Los Angeles Counties.
Via the Internet, officials from other public entities, such as the Commonwealth of Massachusetts and the Cities of Durham, NC, and
Livermore, CA, were able to view the reverse auction in real time to judge for themselves and evaluate the benefit to their own programs.
A number of cities and other public entities within the County were invited to view the vehicle purchase in the County’s conference room on the day of the auction. All participants came away with high praise for the reverse auction as another procurement tool to drive costs down.
“We allow other governments within the State of California to use our contracts,” says McColl. “The only difference is that they have to pay the transportation costs from the distribution point in Los Angeles.”
In order for entities to use the County’s contracts, or those of another entity within California, the State requires that the contracts must be competitively awarded by another governmental agency.
“State legislature does not specify additional approval for reverse auctions,” says McColl.
Satisfied Vendors Return for Rebidding Events
“Vendor satisfaction really comes down to the writing of the contract and ensuring that you have departments that are willing and able to manage contracts properly,” says William Broderick, formerly Senior Procurement Manager for the County. “With contracts that are awarded via reverse auction, you must have good contract administration to be truly successful.”
During the pre-bid conference and supplier-training process, Broderick emphasizes the need to spend the taxpayers’ dollars wisely.
“The competitiveness helps us,” says Broderick. “The vendors know that they have to be able to perform the service or provide the product for the dollars that they are bidding.”
For Varied Vendors, County Calculates Costs
With cost-over-invoice contracts, the County is able to make accommodations for varying supplier costs.
“Leveling the playing field is a matter of identifying quantitative items and coming up with an equation,” says Broderick. “The mathematical formula ensures that we are comparing apples to apples.”
During the auction, the software automatically adjusts suppliers’ pricing in real time. The suppliers view the real pricing in the Procuri system.
Because the County has a one percent local business preference, this type of price differential was used in the vehicle auctions.
“We are able to upload the information so when a supplier puts in a lower price, that one percent is immediately reflected in their price,” says Broderick. “That way everyone can see the change.”
County Trains Staff and Vendor Community
The County is responsible for training the Contracting and Purchasing staff, as well as suppliers.
“I went through one day of training with Procuri,” says Broderick. “Then it was really just a matter of using the tool.”
Within the County’s Department of Purchasing and Contracting,
the Purchasing group handles contracts for goods and services that are mainly lowest-bid awards. The Contracting group handles the best-value procurements.
Employees in Purchasing have received training to oversee the running of the auctions. Depending on the type of purchase, the original contract may come from either department.
“For example, our tree services contract was a construction support services operation, so the requirement came out of the Contracting department, but Purchasing oversaw the running of the auction,” says McColl. “With the vehicle and copier awards, the requirements came from Purchasing.”
The County’s contract with Procuri specifies that the company provide a person to assist in forming auction strategies. The company also provides updated best practices that have proven to be useful.
“[Procuri] helps me develop my pitch in talking to and training the suppliers,” says Broderick. “I have found that spending public dollars has helped us because the supplier base recognizes the need for transparency in the reverse auction process.”
Software License Award Brings Auctions In-House
After awarding a number of successful contracts via reverse auctions, the return on investment promised to be substantial. The County purchased the software license from Procuri and began running its own auctions in January 2004.
County Selects the Right Services and Products
As further opportunities were identified for reverse auction, the savings to the County increased.
In selecting procurements to be awarded through reverse auction, the County has followed the recommendations of Procuri. Foremost, an entity must have multiple vendors that are willing to participate in the process.
“You also have to review your statements of work for the commodity and tighten up the specification,” says Broderick. “There is a lot of training up front, but once you’ve got the supplier base trained, they can respond quickly, the process does speed up, and that’s really the bid advantage.”
Broderick cautions the biggest challenge with reverse auctions is the need for continuous contract administration. “The suppliers are typically trying to find a way save money,” says Broderick.
Well-Defined Contracts Focus Vendors on Delivery
“The tree service contract was initially written in the standard format until contract administrators knew they had a tight process with which they could hold the contractors to the terms and conditions in the bid,” says McColl. “At that point, they realized that they had a large supplier base that was interested in doing the service, and that’s when it became a good candidate for the reverse auction online.”
Reverse Auctions Drop Trees and Pricing
During the dry season of 2003, the County experienced extensive fires that burned 400,000 to 500,000 acres. Subsequent to that time, approximately one million acres of dead, dying, and diseased trees needed to be removed in order to eliminate fuel for the next fire. The County received grants to cut down trees from the Federal Emergency Management Agency (FEMA) and the Federal Forestry Service.
“We used the reverse auction tool to bid out $10 million worth of
service contracts for trees,” says McColl. “Comparing our pricing to that of the Counties of Riverside and San Bernadino, we estimated that we probably saved almost $5 million over the traditional way.”
Riverside and San Bernadino were charged approximately $235 per tree.
“We got it down to $115,” says McColl. “The benefit of that is with the dollars that were saved, we were able to cut down more trees.”
In other significant reverse auctions, the County had a very good response from the copier industry for a multiple-year contract that is being used by other entities. A multiple award for temporary services also realized savings.
“On the temporary services contract, we drove down the hourly rate for accounting and clerical staff significantly,” says Broderick. “We tend to do things for five-year increments, where feasible and proper.”
The County plans to hold a multi-million dollar reverse auction late this year or early next year for office supplies.
“We constantly consider different commodities,” says Broderick. “Because government suppliers are already operating on very low margins, we try to be very careful in what we put out there as a reverse auction.”
According to McColl, the County will hold five to seven reverse auctions in 2006.
Auction Tool Controls Price
“The reverse auction is another tool for the procurement departments to use in trying to control price,” says McColl. “It’s a good tool, but you’ve got to pick and choose the procurements that you want to target.”
As with all procurement reform initiatives, support from senior management is critical. McColl also cautions that resistance within an entity’s procurement organization might need to be addressed.
Peers Recognize County’s Success in Procurement
The team’s success has not gone unnoticed by industry peers. The County of San Diego has received the Achievement of Excellence in Procurement Award (AEP) from the National Purchasing Institute (NPI) and is one of only 42 counties in the nation to have earned this recognition six times. With 3,066 counties in the nation, San Diego County’s team is in the top one percent.
The County continues to search out new technologies, best practices, and creative partnerships that will streamline its operations, create competition, drive down costs, and allow officials to maintain their
vision to “be the best business run by a government.”
Editor’s Note: William Broderick recently accepted a position as Contract Specialist within the San Diego Superior Court’s Purchasing Department.
For more information on Procuri, visit www.govinfo.bz/5969-112.