|
3. Results
of Spend Analysis towards Procurement Savings Analyse des dépenses - Possibilités
d’économies sur les approvisionnements |
Committee Recommendation
That
Council receive this report for information.
Recommandation du Comité
Que le Conseil prenne connaissance de ce rapport.
Documentation
1. City Treasurer’s report dated 13 May 2008
(ACS2008-CMR-FIN-0022).
2. Extract of Draft Minutes, 20 May 2008.
Corporate Services and
Economic Development Committee
Comité des services organisationnels et du développement économique
and Council / et au Conseil
Submitted by/Soumis par : Marian Simulik, City
Treasurer, Trésorier municipal
Contact
Person/Personne ressource : Daniel Farrell, Program Manager – Purchasing /
Gestionnaire de programme, Achats
Financial
Services/Services financiers
(613)
580-2424 x21505, Daniel.Farrell@ottawa.ca
SUBJECT:
|
Spend Analysis – Procurement Savings Opportunities |
|
|
|
OBJET :
|
Analyse des dépenses – Possibilités d’économies sur
les approvisionnements |
That the Corporate Services and
Economic Development Committee and Council receive this report for information.
Que le Comité des services
organisationnels et du développement économique et le Conseil prennent
connaissance du présent rapport.
In August 2007, the Long Range Financial
Planning Sub-Committee (LRFP) approved potential management efficiencies
totalling $100 million over three years. These targets were subsequently
approved by City Council in September 2007 and became part of the directions
for building the 2008 tax-supported operating budget estimate, and were
approved by Council as part of the 2008 budget. During the 2008 budget
deliberations, Council passed a motion to reduce budget pressures for 2008 by
advancing $2.5 million from 2009 and $2.5 million from 2010 and allocating
these to the targets in the areas of productivity and procurement for 2008.
The efficiency improvement targets were allocated as follows: $25 million in 2008, $29.5 million in 2009 and $45.5 million in 2010 (refer to table 1 for additional details), and are to be realized through productivity improvements, investments in technology, asset rationalization and procurement savings.
Productivity Savings – achieved through continuous process improvement initiatives to administration and service delivery operations.
Technology Savings – realized from the investment in technology, premised upon the completion of a business case analysis and approval of funding. Savings would be realized as a return on the investment over a period of time, normally within four to five years.
Asset
Rationalization - Savings (e.g.
facility closure or consolidation) would require investment in some instances.
These initiatives would be brought before Council for consideration prior to
implementation (savings would be realized over time).
Procurement
Savings- Purchasing savings from
modifications to the way in which the City procures goods and services.
Identification of savings potential will be established through a consultant
facilitated analysis of corporate spending and associated procurement strategies.
The table below shows the savings targets by year, and their impact on the net City budget.
|
Table 1 - Council
Directed Savings Targets 2008 - 2010 |
||||
|
($000) |
||||
|
|
2008 |
2009 |
2010 |
Total |
|
Productivity |
10,500 |
10,750 |
13,750 |
35,000 |
|
Technology |
- |
5,000 |
10,000 |
15,000 |
|
Asset Rationalization |
2,000 |
5,000 |
8,000 |
15,000 |
|
Procurement |
12,500 |
8,750 |
13,750 |
35,000 |
|
Total |
25,000 |
29,500 |
45,500 |
100,000 |
|
|
|
|
|
|
|
Impact of Savings Targets |
||||
|
($000) |
||||
|
Net
Budget Increase |
2008 |
2009 |
2010 |
Total |
|
Before Savings |
91,021 |
114,686 |
119,495 |
325,202 |
|
After Savings |
66,021 |
85,186 |
73,995 |
225,202 |
During the summer 2007, the Mayor retained the
services of an external consultant to assess the savings opportunities in the
City, which included an assessment of current procurement practices. Based on this review, targets of 2% per year
resulting in a cost reduction of $12 M in each of 2008, 2009, and 2010 were
brought forward as reasonable and achievable.
In total, a proposed target of $35 million was included in the efficiency
improvement opportunities presented to the LRFP sub-committee, however, it was
recognised that extensive additional analysis was required to confirm the
viability of this target.
The following motion was carried at the CSEDC
meeting on September 18 and then at Council on September 26. “…the City Manager
be directed to move forward aggressively on improving administrative and
process efficiencies to reduce spending on an on-going basis and bring back a
plan to City Council when the 2008 Draft Budget is tabled with City Council on
November 14, 2007, so that:… A full,
independent review of the City’s procurement process is undertaken, and the
results and potential savings from changes to that process are brought forward
as quickly as possible...”
Within the City of Ottawa, procurement is undertaken in compliance with the Purchasing By-Law, which embodies applicable procurement legislation, trade agreements and City-based practices and processes.
The Supply Management Division of the Financial Service Branch is responsible for providing centralized procurement and contracting activities which includes:
· Providing professional procurement advice and services to Directors;
· Monitoring compliance with the Purchasing By-Law No. 50 of 2000;
· Ensuring that contract pricing represents fair market value; and
· Reporting all procurement and contracting activity including instances of non-compliance with the Purchasing By-Law.
Supply Management is responsible to ensure that a fair procurement process is undertaken. In so doing, Supply Management ensures that the process is in compliance with the City’s Purchasing By-Law and is compliant with applicable public sector procurement principles and policies such as adherence to fair, open and transparent processes and applicable trade agreements. However, Supply Management has little to no authority to ensure that the City obtains value for money. As stated in the Purchasing By-Law, Directors are responsible for procurement activities within their departments and branches and are accountable for achieving the specific objectives of a procurement project. To support this accountability, the responsibility to establish the specifications for inclusion in procurement documents e.g. tenders, rests with the Directors as does the responsibility to manage the consumption of contracted goods and services which includes approval of change orders and any resulting contract amendments.
In response to the need to reduce the cost of procurement, and in advance of the Spend Analysis, Supply Management has implemented the following continuous improvements to the process of procurement of goods and services:
· Increased availability of standing offers providing the City with access to a broad range of goods and services through 140 standing offers.
· Used Requests for Tenders to ensure supplier selection is on the basis of lowest responsive bid, for a full 70% of city spending on goods and services.
· Increased financial weighting in the Request for Proposal process, where cost is only one of several evaluation criteria.
· Reduced non-competitive contract awards from 11% in 2001, to an industry best practice of 4% in 2006.
The City engaged PPI Consulting Limited (PPI)
to undertake a high level spend analysis and identify key opportunities to
improve the procurement process to enable the City to reduce its spending on
materials, goods, and services.
Spend Analysis
A spend analysis is a process whereby organizations categorize and evaluate historical expenditures (at the commodity/buying category or item level) in order to identify areas of spend where there may be potential savings opportunities.
The spend analysis performed by PPI included the following:
· Conducted a high level analysis of Supply Management’s 2006 spend data which included segmenting the total spend of $769M into major spend categories. The spend categories that have significant dollars and therefore offer the greatest potential for savings were included in the opportunities analysis.
· Reviewed the procurement processes used by Supply Management for the acquisition of goods and services including a review of City documents to obtain an understanding of the methods and processes followed by Supply Management.
· Engaged two sub-contractors to perform targeted reviews of the potential savings from expanded use of p-cards and the introduction of e-Auctions.
· Conducted a market analysis reviewing the types of savings opportunities in other public sector jurisdictions (primarily provincial governments and other municipal governments).
· Analysed the PPI experience and lessons learned in undertaking other procurement review initiatives within the public sector.
The initial
findings indicate potential opportunity in four areas: Prompt Payment Discount,
Sliding Discounts on Professional Services, Fleet Opportunities, and
Innovative Procurement Methods. (The full PPI report is attached as Document 1)
The following should be considered when determining the City’s ability to achieve the potential results outlined in the consultant’s report:
· The spend analysis was undertaken using gross spending which includes spending funded from non-tax sources (i.e. development changes, gas tax etc.). Savings from expenditures funded from these sources will not impact the tax-supported budget.
· Not all spending will or can yield savings as the City may already be obtaining best price, or the nature of the market does not allow for much price variance.
· The City is currently receiving best pricing in particular areas e.g. office supplies.
· Any cost that the City may incur to implement the key opportunities have not been considered.
Table
2 – Target Opportunities and Potential Savings
|
KEY OPPORTUNITIES |
POTENTIAL SAVINGS |
|
Prompt Payment Discount 2% 15
days payment terms on 15% of the total SMD spend (for details refer to sub-section 4.1 of
the PPI report) |
$2.3M |
|
Sliding Discounts on Professional Services
Based
on 50% of the total professional services spend and an average discount rate
of 7.5% (for
details refer to sub-section 4.2 of the PPI report) |
$2.4M |
|
Fleet Opportunities 15%
savings on 15% of the total fleet spend (for
details refer to sub-section 4.3 of the PPI report) |
$2.5M |
|
Innovative Procurement Methods designed to reduce cost e.g. BAFO, e-Auctions Based
on approx. 13% of total spend on commodities (excluding Fleet and IT equipment,
peripherals) (for details refer to sub-section 4.4 of
the PPI report) |
$3.1M |
|
TOTAL POTENTIAL SAVINGS |
$10.3M |
Prompt Payment Discount
This opportunity leverages supplier’s willingness to offer discounted pricing for prompter payment terms. Depending upon the commodity or the services being purchased, suppliers may offer a discount for prompt payment in the range of 1% - 5%. Some jurisdictions are changing their standard payment terms to enable discount pricing, others are requesting bidders to offer discount pricing based on prompt payment terms for inclusion in the offer as rated criteria.
Activities
to be undertaken in the next quarter:
Professional
service suppliers typically offer a discount based upon a
longer-term contract as it can minimize the uncertainty often associated with
follow-on public sector opportunities and in some instances removes/reduces the
business development cost. Savings
opportunities of $2.4M have been identified on the assumption of a 5% discount
on contracts extending between 31 and 90 days and a 10% discount on contracts
with a duration greater than 90 days.
The proposed approach for obtaining discounted rates for longer term or higher value contracts when undertaking standing offer procurements is the inclusion a Rate Bid Form that encourages proponents to offer discounted rates.
When undertaking procurements for professional and consulting services, financial proposals should be evaluated in a manner that encourages proponents to propose reduced rates for any follow-on / continuation work.
Fleet
Opportunities
From a procurement process, there are a number of “techniques” that can be incorporated into the procurement process for fleet, which may provide the City with opportunities to reduce the cost of fleet and increase the overall value for money. They can be grouped into three predominant concepts:
· Consolidation of requirements and standardization of vehicles across the City to increase purchase volumes enabling discounted pricing and cost reductions in the initial capital acquisition. Larger volumes may also enable the City to take advantage of OEM manufacturing cycles/capacities and could enable purchases direct from OEM’s (with local delivery).
· Greater consideration of ongoing life cycle costs during the procurement process including developing pricing models that consider lifecycle costs. The use of Requests for Proposals (RFP) instead of Requests for Tenders (RFT) could allow inclusions such as fuel efficiency and longer-term contracts as evaluation criteria.
·
Leverage opportunities to participate in joint procurement initiatives
with other entities for common requirements, which will enable larger volume
discounts, e.g. Ottawa Emergency Services, Ottawa Hydro, school boards, and
other municipalities.
Savings achieved from reduced capital cost in the initial
acquisition of fleet will be limited as a high percentage of the funding for
these acquisitions comes from non-tax sources.
For example, of the $270M capital budget for Transit in 2008, $93M is
from provincial revenue, $50M is from gas tax and $17M is from development
charges. Only $47M is from taxation with the remaining $64M from debt. Therefore, any savings would be prorated by the funding source.
Activities to be undertaken in the remainder of 2008:
· The City already standardizes and combines procurement across City departments. To take further advantage of this, Fleet Services Branch and Supply Management will undertake a study in Q4 2008, to assess cost reduction opportunities through multi-year contracts for light fleet using either local dealerships or OEM’s as suggested by the PPI Report.
· Lifecycle costing as part of the procurement methodology will be piloted with Financial Services in Q4 2008. Procurement documents will be developed in Q4 2008 for use in 2009 procurement. A pilot to evaluate the impact of using RFPs instead of RFTs will be undertaken and evaluated by Supply Management in conjunction with Fleet.
· The opportunity to leverage joint procurement initiatives for light vehicles through the Provincial contract will be undertaken and reviewed to ensure “best value” as incorporated in the Purchasing By-Law prior to any award recommendation. Fleet Services will work with MTO for the bus contract, and when advantageous, will take advantage of it.
Innovative Procurement Methods
Procurement methods such as Best and Final Offer (BAFO) and e-Auctions enable bidders to offer the best (lowest) price without compromising compliance with requirements and can therefore increase value for money.
Best and Final Offer is a procurement process designed to enable the buyer to achieve best value, better solutions at a better (lowest) price, i.e. it results in the selected bidder’s best and final price.
·
Supply
Management has successfully used BAFO for unique contracts such as in the
procurement of software.
·
This
technique is used for complex financial evaluations (P3s) where cost is a
determining factor, i.e. Source Separated Organic and Light Rail Transit and
therefore may have limited use.
An e-Auction is an on-line procurement method in which bidders compete for the opportunity to provide a good or service. Bidders are incented through the e-auction process to increase the competitiveness of their bids – generally by reducing their bid price until the bidding time expires and the successful bidder is declared.
This procurement instrument is best suited for a mature commodity on which there is no
strategic dependency on the supplier.
Success is dependant on having a marketplace
with sufficient, viable, trained vendors that can participate in an e-Auction.
Utilization in Canada has been sparse with much of the experience lying in the private sector.
Activities to be
undertaken:
·
The
potential savings identified is a rough estimate requiring additional
review. Staff will come back with an
analysis to determine if e-Auction is an appropriate procurement vehicle for
the City including confirmation that a marketplace with sufficient, viable,
trained vendors that can participate exists.
·
Investment
in technology and procedures as well as external support expertise may be
required.
·
The City
will attempt to identify an opportunity to partner on a trial basis with other
public sector jurisdictions or expert organizations.
P-Card Optimization
The
City’s purchasing card program provides an efficient and cost effective method
for procuring and paying for low dollar value goods and services. The card is
similar to a personal credit card, except there are features available to the
City to limit how much a cardholder can spend and what type of goods and
services can be purchased. Spending activity is limited by establishing dollar
limits on individual transactions and on the cumulative monthly transactions
for each card. The types of good and service that can be purchased is limited
through the use of merchant category codes that are assigned to each vendor by
the card industry. Although a cardholder’s name appears on the card, the City
is responsible for the purchases and pays the monthly bill to the financial
institution.
Management
had previously conducted a review to assess opportunities for efficiency
savings through increased use of purchasing cards. PPI’s report confirms
management’s finding that further savings are available and identifies the
following opportunities and benefits.
Opportunities:
· Immediate - Increase P-Card transactions with current
suppliers with whom the City currently uses the P-Card. Incremental P-Card
spend is estimated at $8.6M representing 27,000 additional transactions.
· Future - Expand the use of P-Cards to include suppliers
with whom the City is not using P-Cards.
Benefits to the City:
·
Process efficiency savings of
$369,000
·
Performance rebate revenue
$53,000
The benefits shown above are not included in Table 2, Target Opportunities and Potential Savings. Savings from the use of purchasing cards are considered efficiency savings and are derived through reduced administrative effort supporting purchase order creation and invoice processing. Savings from the increased use of P-cards will go towards the efficiency targets within the branches.
Concerns with
internal controls over the purchasing card program were expressed following a
2003 audit conducted by the City’s Internal Audit. In response to the original
audit findings, management enhanced the internal controls to ensure the
program’s continued viability. The
effectiveness was confirmed by the Auditor General in his 2005 Annual Report,
in the comment, “Purchasing cards are generally well managed with a
well-defined process in place for the procurement and payment of low dollar
value goods and services. Almost all recommendations pertaining to Purchasing
Cards in the 2003 Audit of the Corporate Card and Purchasing Card Program have
been implemented and are operating as intended.”
In
recognition of the significant improvement in program governance and the
efficiency savings available to the City, management recommends a controlled expansion of the purchasing card
program. The expansion includes increased use of cards with suppliers and
broadening the goods and services eligible for purchase, to include such things as
travel-related purchases for staff required to travel on City business. A commercial card would be used in place
of the more restrictive purchasing card. Formal travel reporting would continue
to be required. Financial Services, in partnership with
cardholders and their respective branches, will ensure continued compliance
with internal controls.
Activities to be undertaken in the next quarter:
·
Seek
an endorsement from Council and management for the expanded use of the
purchasing card program.
·
Review
the existing policies and procedures to ensure clarity of purchasing card
procedures and restrictions for all potential cardholders including Councilors
and management.
·
Conduct a
preliminary review of the impact of upgrading the purchasing card administration software to
facilitate improved integration with the corporate financial system and
improved financial reporting.
Additional Procurement
Process Opportunities
Other
specific opportunities within the procurement processes were discussed within the report, however, the associated potential
savings were not determined as they may differ by procurement and the
applicability of the procurement methods.
In the next quarter, Supply Management will undertake a review of the
other opportunities identified by PPI and report back on the feasibility of
potential savings.
CONSULTATION
The high-level spend analysis put forward in the report included a series of discussions between staff within Supply Management and various key stakeholder branches. Further consultation is required to determine applicability and implementation opportunities as indicated within the body of this report.
The ability to realize these savings will be affected by procurement activity in any given year i.e. procurement initiatives to address new requirements; the expiry and re-tendering of existing contracts; and the extent to which the contract terms and conditions of extended contracts enable the City to leverage the applicable savings opportunities. The results of any savings achieved will be reported in the quarterly operating status report.
In addition to the actions identified within each of the opportunities, staff will undertake a review of the purchasing by-law to identify potential required changes. Staff will report quarterly on progress of the initiatives, savings achieved, and findings of the outstanding reviews.
Results of Spend
Analysis towards Procurement Savings
Analyse
des dépenses - Possibilités d’économies sur les approvisionnements
ACS2008-CMR-FIN-0022 city-wide / À l’Échelle de la
ville
Appearing before Committee on this item were Mr. Glen Ford, Deputy City Treasurer, Mr. Phil Andrews, Manager of Supply Management, Mr. Ron Gillespie, Director of Fleet Services, Ms. Joan Ramsay of PPI Consulting and Mr. Howard Grant of PPI Consulting. Ms. Ramsay spoke to a PowerPoint presentation, which served to provide Committee with an overview of the report. Mr. Ford then gave a presentation, which served to outline the next steps. Copies of these presentations are held on file with the City Clerk.
The following information was provided in response to questions with respect to a prompt payment discount:
· Ms. Ramsay maintained that PPI Consulting had looked at the potential for savings. With respect to implementation, she acknowledged that there were a number of factors the City may wish to take into consideration in making a decision such as the cost of implementing and the trade-offs in terms of relative benefits. She maintained that analyzing these factors was not within the scope of the study.
· Mr. Ford confirmed that the savings associated with prompt payment discounts would far outweigh the interest earned by keeping the money in City accounts for an extra 15 days.
· Ms. Ramsay indicated they had not consulted the City’s suppliers directly to find out how many of them would be prepared to offer prompt payment discounts. However, she explained percentages outlined in the report were based on the fact that some of the City’s suppliers had expressed an interest in pursuing this and on the fact that many of the City’s suppliers were also suppliers to many other public sector jurisdictions and, in the context of that business, were extending prompt payment discounts in the range of 1% to 5%, depending on the terms and the nature of the commodity.
Responding to questions with respect to the purchasing card program (P-card), the following clarifications were provided:
· Mr. Ford explained that the purchasing card program would be for small dollar, high volume purchases. Some would replace the current Payments Without Reference, though most would be for purchases where the City was currently using purchasing orders. He indicated using a P-card would result in efficiency savings because it would reduce the need to have staff issue the purchase orders, document them and then input the invoices.
· Mr. Ford indicated the City was currently operating on a very limited usage of the P-card relative to what PPI Consulting was recommending. He noted the policies, procedures and controls were in place and that they were effective. Notwithstanding this, he advised that staff wanted to review this again to ensure everything was proper before issuing more cards and that expansion of the program would be done in phases. He expressed staff’s intention to take this away and come back in the next quarter with a report on an implementation plan.
· Mr. Andrews indicated he was comfortable with the recommendation from PPI to expand the current purchasing card program. He re-iterated that P-cards were used to pay for goods and services the City had already procured in accordance with the By-law. Adding to this, Mr. Ford referenced a quote from the Auditor General, contained in the staff report, in which the AG stated that purchasing cards were generally well managed with a well-defined process in place for the procurement and payment of low dollar value goods and services and the fact that almost all recommendations from the 2003 Audit pertaining to purchasing cards had been implemented and were operating as intended.
· Mr. Ford indicated he was not aware of any recent consultations with the business community with respect to the P-card program. However, he indicated he would take this away and that staff would consult with some of those agencies to see where the City could improved.
The following responses were provided to questions relating to fleet purchasing:
· Mr. Gillespie confirmed that staff currently took advantage of opportunities to partner with other agencies in order to have greater purchasing power and therefore get the best discounts on fleet purchases. He referenced some examples of same. However, he advised that, on a go forward basis, the City should be more aggressive in doing this.
· Speaking to the estimated potential savings related to fleet purchases, Ms. Ramsay explained the intent behind using only a small percentage (15% of 15% of the total fleet spend) was to take any anomalies out of the annual spend but to recognize that there were a number of purchases within the overall fleet purchase continuum to which a discount could be applied.
The following information was provided in response to general questions with respect to the staff and the consultant’s reports:
· Ms. Ramsay explained that the estimation of potential savings was based on the experience of other public sector jurisdictions having implemented similar opportunities.
· Mr. Andrew acknowledged that the targets set for savings in the area of procurement were aggressive. However, he expressed staff’s commitment to meeting or exceeding those targets and his confidence that they would be achieved. He noted that PPI Consulting had identified four areas for potential savings and indicated staff believed there were other opportunities within purchasing.
· Although he believed the City’s Purchasing By-law was sound in that it allowed some flexibility and had been recognized as a Provincial template for municipalities, Mr. Andrews conceded that it might need to be amended in order to move forward in finding efficiencies and savings. Furthermore, he felt there would need to be some corporate buy-in at the highest level for some strategies that would allow procurement to move towards the savings.
· Mr. Ford confirmed that the savings targets had already been built-into the budget. He re-iterated staff’s intent to review some of the PPI Consulting’s recommendations and report back to Committee and Council with respect to how they could be implemented. However, he noted that some things could be implemented right away in order to start realizing savings.
· Mr. Ford confirmed that staff could ask the Auditor General (AG) to review these recommendations and comment on them. However, he submitted it might be more appropriate for Committee to ask that of the AG.
· In terms of standardising the approach to purchasing for certain goods and services, Ms. Ramsay referenced an opportunity identified in the report with respect to establishing a procurement review committee, which would identify where there were common requirements, either within the City or with other area agencies and organizations.
· Responding to a follow-up question, confirmed that the City had a cooperative purchasing group, which looked at various commodities to see if there was common usage amongst the group. He noted that in such instances, the agency with the highest dollar amount would take the lead on the particular procurement. He noted that the PPI report was encouraging the City to become more aggressive in this area and to take the lead in a number of such situations.
· Mr. Andrews indicated one of the next steps involved consulting with current suppliers firstly to get some sense of the ones that would be prepared to offer prompt payment discounts and secondly, because the City often had partnerships with its vendors and staff felt it was important to maintain positive relations.
Following these exchanges, Committee voted to receive the report.
That
the Corporate Services and Economic Development Committee and Council receive
this report for information.
RECEIVED