Connecticut Takes a Bite Out of Food Costs
By David Yarkin
Anyone who has set foot in a grocery store believes that he or she is an expert at purchasing food. But, as any buyer who has attempted to apply strategic sourcing to the procurement of food will tell you, few commodities are more challenging. Despite the difficulty, the State of Connecticut tried—and succeeded—with a procurement that stretched from 2003 into 2004.
The story of Connecticut’s food procurement goes back to the 1980s. Like many states, Connecticut had a large central warehouse and a distribution system that stored all types of products—from office supplies to antifreeze—and sent them to field offices throughout the State. Among the laundry list of items were various categories of food: baked goods, meat, and canned goods. Over time, the agencies served by the distribution system gradually decided that the citizens they were feeding had unique needs that made standardization of specific food items across multiple agencies impossible.
While the need for more shelf space grew, the physical limitations of the warehouse made such growth impossible. The purchasing staff realized that contracting out food distribution would give them the flexibility to meet the growing demands of their customers in the agencies.
The resulting procurement was won by U.S. Foodservice, Inc., the nation’s second largest food distribution corporation. At the end of the seven-year contract, it was bid out again and won again by the incumbent.
Like many states facing challenging financial times in 2003, the State of Connecticut made the decision to apply the practices of strategic sourcing that had succeeded in the private sector to the way it bought goods and services. In May of that year, the State went out to bid to hire a consulting firm to assist it in implementing strategic sourcing and chose Silver Oak Solutions (now CGI Spend Management Solutions).
Sourcing Serves Food For Thought
The consultants spent their first weeks in Hartford going through reams of data, trying to understand how much the State spent in the major categories of goods and services. Connecticut’s Director of Procurement, Carol Wilson, with the Department of Administrative Services (DAS) explained, “We identified commodities that would be good matches for our first wave of strategic sourcing. We looked for commodities that offered significant anticipated savings where the status of the contract lent itself to our timing.”
With a contract coming due and spend of greater than $15 million annually, food was chosen as an early strategic sourcing project.
When a state begins contemplating the strategic sourcing of a specific commodity, it assembles a committee of end users to help gather data, define requirements, develop a solicitation, evaluate the responses, and ultimately select a winning supplier. Many states in their first year of strategic sourcing assemble these committees—often hastily—for the first time in preparation for the upcoming procurement. The haste is usually due to a state’s desire to complete the procurement as rapidly as possible in order to reduce consultant fees.
When time came for the food-sourcing project, Connecticut was fortunate to have a well-established committee already in existence. Headed by DAS contract specialist Jim Gotta, the Food Advisory Committee was comprised of all the food buying agencies. The Committee meets monthly, adjourning for the summer months, to discuss food standards and issues related to the current contract.
Members of the Food Advisory Committee were invited to join the Evaluation Committee.
“Prior to that, we sat down with every end user to understand their unique requirements and incorporate those requirements into the RFP,” said Gotta.
As with any strategic sourcing project, the first task for the State was to develop a very granular understanding of the way the State spent money on food. Gathering that data was a very time- and labor-intensive effort. By pulling data from accounts-payable reports from the comptroller’s office, agency invoices, and vendor-generated reports, DAS was able to check the reliability of each source, a process Wilson refers to as “Triangulating the Data”.
“We compared all three sets of data to come up with the real number,” said Wilson.
In the RFP that would result from this data-gathering effort, the high volume items identified would become a market basket on which the suppliers would be asked to quote fixed prices. This approach allowed DAS to make an apples-to-apples comparison.
RFP Bundles USDA Program
One of the interesting innovations in Connecticut’s food solicitation was the inclusion of the U.S. Department of Agriculture’s (USDA) Food Distribution Program (FDP). In Connecticut, the FDP was responsible for acquiring food from the USDA and distributing it to Recipient Agencies (RAs) throughout the State, chiefly school districts in 169 towns. The food items were distributed equally across all participating RAs, regardless of whether they were needed or wanted. In concert with the USDA, Connecticut changed its processes allowing RAs to order food directly from the USDA based on their true needs.
The DAS published an RFP in late 1999 soliciting a vendor to manage the FDP program. No firms offered a cost effective way of distributing the food through a stand-alone contract. However, the DAS management team decided that the upcoming solicitation for food distribution services presented a fantastic opportunity to meet the State’s needs with regard to management of the FDP program.
“Bundling it with the State food contract, was the only way we could get someone to bid on the USDA program,” said Gotta. “The message was, ‘If you want to sell to the State, you have to pick up the USDA program.”
The scope of products covered in the RFP was fairly broad, including:
• Perishables (produce and fresh food)
• Canned and dried goods
• Frozen Foods
• Miscellaneous items (personal
care products, plastic cutlery, etc.).
The RFP also stated that janitorial supplies may be included as well. DAS published an MRO RFP concurrent with the food solicitation and stated in each that the contract with the better proposal for janitorial supplies would be utilized.
The food RFP encouraged prime contractors to utilize small and minority-owned business enterprises (SBEs and MBEs). The State also encouraged the prime to source as much product from Connecticut farmers, growers, and food manufacturers.
In the cost section of the RFP, vendors were informed that the contract pricing would be structured on a cost-plus basis. The vendors were asked to propose a markup that they would apply above the invoice price. To make an apples-to-apples comparison, the vendors were asked to quote prices on a handful of specific, high-usage items in a market basket. Vendors were asked to propose discounts to encourage specific behavior from end users, including prompt payment and drop size.
Committee Sets Evaluation Criteria
In addition to cost, the other primary evaluation criteria were broken into three categories. In the first, Service and Capability, the evaluation committee probed the vendors’ geographic coverage, reporting capability, large government references, and implementation plan, as well as their ability to partner with SBEs and MBEs and provide Connecticut grown produce.
The second category, Business Information, spoke to the financial wherewithal of the company and the team that would be managing the contract for the vendor. Finally, in the third category, the State rated the vendors’ experience and capability in managing the USDA food program.
One month after the RFP hit the street, responses were due back to DAS. In all, three firms responded: the incumbent, U.S. Foodservice, the second largest food services company in the country; Sysco, the largest; and Fowler & Hunting Co., a local produce company. After being held by U.S. Foodservice for more than a decade, the contract was won by Sysco. The term stretched four years through October 2008 with two additional one-year options.
Discounts, Private Labels Drive Award
Sysco offered a markup of 6.7 percent above invoice price. This was a dramatic improvement over the 9.25 percent markup that existed on the previous contract.
Sysco also offered the State an assortment of discounts. For an average drop of $10,000 to $20,000 per delivery, the customer receives a discount of 0.25 percent. An average drop of more than $20,000 yields a 0.5 percent discount. Roughly 13 percent of the contract users qualified for the drop discount.
In addition, invoices paid within 10 days carry another 0.5 percent discount. Those paid within 15 days net a 0.25 percent discount. More than 90 percent of the contract users have received the prompt payment discount.
Another cost-saving initiative within the food contract is the opportunity for end users to utilize the wide array of Sysco’s private label products. For example, rather than ordering Heinz ketchup, a customer can order Sysco’s House Recipe ketchup. In so doing, they are able to provide their consumers with the same level of quality at a fraction of the price. To date, more than 93 percent of contract users have taken advantage of this program.
Sysco’s Jay Kelleher, Program Sales Manager, points to the steps taken by Sysco to mitigate customer’s concerns about quality. “Our products are controlled by Sysco from the field to the end user and every step in between. Our staff of more than 150 quality control professionals goes around the world to make sure that what we say is in the can is in the can.”
The agencies are able to see additional savings and enhancement to their menus and recipes by leveraging the decades of food service experience that Sysco brings to the agencies. “We can make recommendations on products that would help the agencies meet their goals at a better value,” said Kelleher.
Contract Benefits SBEs and MBEs
Since the contract went live several years ago, roughly 10 percent of the spend has gone to Connecticut small businesses, a significant accomplishment in an industry dominated by multi-national manufacturers. Wilson and Kelleher give credit to the Food Advisory Committee for this accomplishment. Members of the Committee can bring products produced locally to Sysco. The company will apply its standard markup to inventory the product and distribute it to the agencies. Similarly, as Sysco discovers new locally produced items, it can bring them to the Committee for their acceptance.
Sysco’s consultative services are delivered not just to the agencies but also upstream to some of their suppliers. Especially with small, Connecticut-based businesses, Kelleher and his team have helped them align their businesses to drive sales to the State. A perfect example is Hartford-based Scott’s Jamaican Bakery. Scott’s manufacturers Jamaican Beef Patties that are popular with inmates in institutions managed by the Department of Corrections. As is the case in all states, the Department of Corrections was facing significant budgetary pressures. Kelleher worked with Scott’s to tweak the ingredient mixture to produce a patty that was nutritionally acceptable to Corrections at a more aggressive price point. This modification has helped Scott’s increase their overall sales volume to the State and helped the State increase its MBE participation rate.
Site Streamlines Purchasing Process
Gotta hailed Sysco’s online ordering site as a marked improvement over the earlier attempts at food eProcurement. Under the previous contract, end users were required to place their orders through the State’s ERP system.
“With all of the checks and balances and approvals required, it made it difficult for the line people who worked in kitchens to get what they needed quickly and easily,” said Gotta. “If they forgot to order a case of tomatoes and needed to order them quickly to prepare food, they’d be out of luck.”
The power of the Food Advisory Committee became apparent when the Sysco contract was in the implementation phase. The members of the Committee, all of whom were affected by the cumbersome ordering process, banded together to convince the Comptroller’s Office to accept a compromise. End users would still encumber funds through the ERP system, but they would place their orders through the Sysco site.
For a commodity like food, all considerations—even ones as critical as cost and supplier diversity—are secondary to service. If the supplier is unable to get the right product to the facilities on-time, crises can erupt. The populations served by a typical state food contract include inmates in correction facilities and patients in state hospitals. Given the very specific nutritional requirements for both groups, there is very little margin for error.
Agencies Admire Service With a Smile
Wilson and Gotta tipped their hat to Sysco for the outstanding service that the State has received to date. “The folks at Sysco are so receptive and great to work with,” said Gotta. “None of my customers in the agencies are calling me with any complaints about delivery, quality, or pricing.”
According to Wilson, “while the contractual aspects of the USDA program had been so problematic in the past, it has never run smoother.”
Kelleher conceded that in the food distribution business there will always be bumps in the road.
“We handle the issues that come up for the State the same way we would for an upscale national restaurant chain or food service contractor,” said Kelleher. “Our goal is to always ensure that our customers have what they need so they can provide a pleasant dining experience for the people they are caring for.”
By applying the principles of strategic sourcing to the complex and critical area of food distribution, Wilson, Gotta, and Connecticut’s Food Advisory Committee delivered a contract that was a dramatic improvement over its predecessor. With more aggressive pricing, a significant amount of business staying in state with local producers and farmers, and strong customer service, the contract is a model for food buyers across the country.
About the Author
David Yarkin, former deputy Secretary for Procurement in Pennsylvania’s Department of General Services, is President of Government Sourcing Solutions, LP, headquartered in Harrisburg, PA. Contact Yarkin via e-mail at [email protected]