Tuesday, 10 June 2014

Some best practice techniques for prioritising tender activities

Every procurement team has a method for scheduling their tender activities across their financial year.  Some teams may decide the order based on their existing contract end dates.  Some may decide based on what they ran last year.  Others may plan their efforts around their available resources.  

Yet all teams share a common goal:  they are looking to cover as much spend as possible to secure best value for their organisation by the year-end.  In some cases this can mean hitting their savings targets. 
 
The challenge is what you do next once you’ve put together your accurate spend report, a sample of which may look a little like this:

 

Typically the next step is to interrogate each of the sub-categories in turn to establish historical activity, contract information such as expiry dates and rebates, purchase price & cost driver movements, market forces, product lifecycle & new product development.  These and other critical analyses then fuel the objectives of your tender activities, be it cost reduction, cost avoidance, supplier rationalisation, risk mitigation, etc.

Conducting this thorough analysis can be time-consuming but it really does ensure you invest your resources where it matters most.  Saving 30% on line items that are not going to be purchased in 6 months time whilst omitting other line items that are due to triple in volume is a sure-fire way to concede best value for your organisation.  

The trick is to engage with stakeholders across the spend categories to solicit this information in a consistent, robust way.  This ensures that each category has been prioritised against the same measures to create a set of unified reports.

Ideally you’d want to do this in a fully auditable tool so that if you ever need to drill into your report to establish why a particular tender was given the priority over another, you’ll have all the information laid before you.  This is especially important when communicating your plan back to your line manager or CFO, to ‘show your working’ so to speak.
Here are some of the typical reports that our clients have consulted to derive their optimal tender activity plan:
 
Summary of key information
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This ties back to the advantage of comparing all your categories against the same set of inputs.  If your line manager ever asked you what data and assumptions your reports have been based on, a summary such as this provides the perfect answer.  It will also enable you to tweak your inputs to help further refine your reports.  

Route to market

Your various tender activities are going to follow their own unique path.  However, assuming you are looking to run a tender activity, there are a finite number of ways to do so.  By segregating your tenders into the route to market, which in the example above is for the public sector, you can have an early indication into the complexities, risks, resourcing needs and upside potential that you may subsequently face.

Expected savings

One of the key performance indicators for most procurement teams across the globe is the ability to deliver savings on 3rd party spend.  Estimating the savings potential from one category to the next can be a challenging task, given how many factors can influence them. You could start at the most fundamental question of all:  ‘do we need to even buy this?’.

Savings can be readily achieved by reducing the spec. of what you buy, so setting that solution to one side, other key factors can include when you last negotiated the category and what approach was taken, how competitive the supply market is and whether they are likely to bid on your requirement, and what the key cost drivers have done since the last negotiation.

By comparing the savings potential across your categories, and taking into account the timescales to deliver each of them, you can assess which categories are your classic ‘low hanging fruit’ and which are to be streamlined with minimal resource.

 Understanding supplier relationships
Before you package up your spend category and take it to market, or perhaps before you write that email to your incumbent to ask that they revise their pricing for the coming year, it is wise to have the facts at your disposal.  

In particular, it is worth assessing how important that supplier is to your organisation, not just within a specific spend category but across the board.  Likewise, it is important to understand how much they rely on your business so you can then combine the two perspectives into a single estimate of risk vs. leverage.  

This will prevent you from leaving money on the table with a supplier that is willing to concede more, and, conversely, prevent seeking a negotiation with a supplier that is unlikely to cooperate.  

Prioritising the categories


 
Having obtained all the background data for your categories, you’ll be in a great position to prioritise your tender activities based on your own blend of criteria, be it timescales, complexity, preparation overheads, savings potential, market competition, buyer risk, potential for eAuction etc.

This will help you plan the optimal strategy across your spend to reach that goal of securing best value for your organisation.  

Please note:  all of the reports listed above and more are available within our latest tool, Category Dojo.  To try it out for free on your own spend categories, please visit:  www.marketdojo.com/categorydojo

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