The buying game

Spend analysis increases efficiency of purchase

Much of the transparency comes from a full understanding of how money is being spent in the organization. With new tools now available, procurement officials can move from downloading data and analyzing spreadsheets to real-time data on spending patterns and potential inefficiencies.

“It’s important to identify what we are buying, how can we find the best thing for the buck,” says Darin Matthews, director of contracts and purchasing at Portland State University in Portland, Ore. “Inevitably, there comes an ‘Aha!’ moment. We look at the amount of spending on some item. Why are we buying these?”

In some organizations, buying decisions are decentralized, with individual departments purchasing their own materials up to a set dollar limit without placing their order through central purchasing. However, using the data from a good spending analysis, procurement can act as a consultant to these departments so they can use their limited dollars more efficiently.

“We work with them so they know it’s not an ‘us vs. them’ situation,” he says. “We’re both partners.”

Sometimes, departments try to avoid procurement because they are convinced that there will be inordinate delays in finding the needed item, because of the buying process. Many times, this costs the department in the end, because of wasted money and sometimes poor service or quality, officials say.

Instead, the procurement operation should be seen as an effective partner with the other departments in the organization, says Michael Bevis, the chief procurement officer in Naperville, Ill. “If we are getting bogged down in compliance, if that’s all we do, that’s not achieving the goals of the organization,” he says.

Matthews points, as an example, to the purchase of a heat pump. If a department only goes with the lowest bid, without understanding all of the nuances of the purchase, they could be making a big mistake in the long run. A more expensive heat pump could pay for itself many times over during the life of the machine if it is more efficient in its use of energy — and may fulfill one of the organization’s other goals, such as sustainability.

“We would look at the past performance of the machines, how it functions, its quality and its warranty,” he says. “One machine may have an attractive sticker price, but over five or 10 years, the cost of a better machine may be the same.”

At the same time, experience has taught that not every purchase should come through a central source. Clark says that at one point Arizona saved money by no longer keeping whole warehouses of office supplies and going to next-day delivery from local stores.

Yet, another consolidation effort was less successful. She says the state was considering putting all of travel under one contract with a single travel agent. “But we learned that wasn’t how the customer purchases travel,” she says. “Today, people purchase their own over the Internet. We didn’t need the hoops. It didn’t meet the needs of the state. We eliminated that sourcing effort.”

Dise notes that governments have to pay attention to major purchases, because a small number of projects usually drive a vast majority of the government’s spending. While it’s important to watch small purchases for possible abuses or waste, the spend analysis can produce far greater efficiencies if a major project can be reformed.

“Look for the big wins,” he says, “and avoid waste on smaller contracts.”

A variety of management skills necessary

At the same time, other procurement professionals point to the increasingly important need for strong talent management as an essential ingredient for a highly valued operation. “Talent management will either make us or break us,” says Johnson.

She argues that the new technology and analysis can only be as valuable as the people who are using the tools. Moreover, building the data analysis system can absorb huge amounts of time that might be used more efficiently in higher-value projects.

“We’ve really made a lot of headway with diagnostics,” she says. “But we need people who can synthesize and optimize the legal, accounting and other aspects of the operation.”

She and other leaders in the field emphasize the need for strong communication skills as a key requirement for success in the procurement area, since the operation acts as the translator, of sorts, between the buyer in the government and the provider. Being able to write specifications that meet all of the requirements for an effective purchase is highly valued.

“People have to be equipped with the right skills,” Johnson says. “People with excellent gifts of all sorts are needed. Documentation is the essence of contracts. It’s the meeting of minds. It’s important to interpret the contract so the purchase fulfills the buyer’s needs.”

Often, the procurement professional must help the buying department figure out exactly what is needed to meet their objective. “It’s dynamic,” she says. “They come to us to help them solve their problem. We have to diagnose what the problem is and find the solution that meets their need.”

Adler agrees that a strong staff is a critical component of the operation. “You need the right mix of people,” he says. “You need a diverse mix of different perspectives and skill sets – good negotiators who grasp complex problems and find solutions and who stay abreast of the changes in the business.”

The rise of purchasing cooperatives

With the data in hand, procurement officials are increasingly relying on cooperatives as a source for finding good quality materials, at reasonable prices, without the expense and time involved in writing their own requests for proposals. These group programs come in all variations – local, regional and national.

Bevis says that cooperatives have been around for decades, but that their use has greatly expanded because of the Internet. While in the past, a search might have surfaced one or two cooperatives selling an item, today a search brings in six or seven large cooperatives. “It’s a tremendous advantage,” he says. “But you have to verify and validate that the cooperative follows the same rules that you would.”

For routine business, he says, he can do the vast majority of his bids online. He can research the vendors, search out various product alternatives and seek out specials. “I can find the best price for each day,” he says. “I can do a cost analysis and know what the price should be.”

For his operation at the Dallas transit authority, Adler can ask for bids from any company in the world, a truly global market. With this “crowdsourcing,” he gets a better idea of the market price for the service or material he’s seeking to purchase. “There’s a tremendous demand for innovation in the procurement process,” he says. “We learn every day from the private sector. There are new tools and technologies every day.”

Looking to the future, procurement leaders cite sustainability as one of the emerging trends that consumes more of their focus in making their purchasing decisions, which also goes hand-in-hand with the trend toward “best value” purchasing.

Don Buffum, the director of contracts and purchasing for Mississippi State University, says that he was faced with the need to replace the lighting for three buildings. At the end of his review process, the school chose the most expensive vendor because the savings from the more efficient lights paid for themselves in four years, meaning that over 20 years, the savings would be significant. “We got better lighting and it was more efficient,” he says.

Adler notes that sustainability goes far beyond the concept of “being green,” beyond even the concept of environmentalism. “We need to know that a T-shirt that we buy was not sewn together by child labor,” he says. “It involves not just our purchase, but the whole supply chain.”

Another trend is the globalization of the procurement process, Buffum says, noting that he is actively involved in organizations that operate internationally. “I go to conferences and there are people there from around the world,” he says.

As a result, purchasing practices are becoming more consistent globally, he says, which means that sourcing purchases from other countries will become part of the routine. “There’s a common body of knowledge,” he says. “It means we can share easier and do better research.”

Bevis says that the trends and challenges, such as greater compliance regulations, facing the function means that advanced skills and more training will be required of those entering the profession. “It’s a brave new world of government procurement,” he says.

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