Route 3 - Develop Strategy - Develop Commodity/Service Strategy
As with all aspects of the Procurement Journey, the activities at this stage must be carried out in a carefully managed manner that supports the Principles of Procurement. As a minimum the processes must be carried out in a transparent way that ensures there is no distortion of the market place, the outcome cannot be a procurement that unduly favours or disadvantages a particular bidder and it is the responsibility of the Organisation to make sure that these requirements are met.
A commodity/service strategy should not be confused with a Procurement Strategy, which is now a mandatory legislative requirement under The Procurement Reform (Scotland) Act 2014 for an organisation which estimates that the value of its regulated contracts in a year will be equal to or greater than £5 million. Further information on Procurement Strategy requirements can be found in the Leadership & Governance section.
Non commodity/service specific aspects of the procurement exercise, such as in respect of the Procurement Reform (Scotland) Act 2014, the Public Contracts (Scotland) Regulations 2015 and the Procurement (Scotland) Regulations 2016, conflicts of interest and fraud must be considered by you as part of the Commodity/service Strategy development in line with your Organisation’s own governance. You must ensure that you take all appropriate measures to prevent, identify and remedy conflicts of interest and include measures to combat fraud through your Procurement Exercise. Key components of a commodity/service strategy with the suggested minimum requirements are listed in the Commodity/Service Strategy Index.
Strategic Positioning of Commodity/Service
The aim of strategic positioning is to consider the commodity/service from both a buyer’s and potential supplier’s perspective in relation to:
- Importance of the commodity/service to the business
- The complexity of the requirement
- The relative power of the buyer/supplier in the marketplace
- The attractiveness of the business to the potential supplier
- Risks to the business
- The Strategically Positioning the Commodity/Service slide considers the above aspects from the buyer’s perspective against both business impact and supply market challenge. Understanding the Supplier's View of the Buyer considers account attractiveness and relative value of business to the potential supplier.
[For Care and Support Services, please consider Strategic, and Public Social Partnerships:
An organisation may seek a long-term (for example, over a period of 10 or 20 years) strategic partner or partners to redesign and achieve major changes in the delivery of a service and/or the use of resources. For example it may decide to work with a supplier or suppliers to determine what could be provided across a range of services within the available resource, rather than tendering for particular services. In this situation, the choice of strategic partner(s) should be on the basis of a transparent and competitive process in accordance with the public procurement rules.
Public Social Partnerships (PSPs)
PSPs are strategic partnering arrangements, based on a co-planning approach, through which the public sector can work with third sector organisations to share responsibility for designing services based around service user needs.
The Scottish Government published guidance on developing and running Public-Social Partnerships in July 2011.
A PSP typically comprises three stages:
- third sector organisations work with public purchasers to design a service;
- a consortium of third sector organisations, which may also invlolve the public sector, conduct a short-term pilot, helping to refine service delivery parameters and maximise community benefits; and
- if the service is deemed successful, commissioners then need to consider the most appropriate approach to sustaining the PSP. This could involve a competitive tendering process but other methods of securing service delivery should also be considered. ]
You should also consider the current and possible future state of relationships between the Buyer and Supplier to demonstrate how you intend to develop any relationship with a potential supplier going forward.
If you are entering into a joint procurement exercise with one or more public sector organisations it is important that you agree at this stage the legal status of and requirements of such an exercise.
It is essential to recognise that where a procurement is being undertaken that encompasses different areas such as Works, Services and/or Goods then the approach taken should be determined by the main subject of the contract e.g. where there is a Works / Goods subject split of 60%/40% respectively then the entire exercise should be treated as a Works procurement exercise. Where a contract consists partly of services and partly of supplies, or partly of social services (or other specific services listed in schedule 3 to The Public Contracts (Scotland) Regulations 2015) and partly of other services, the main subject of the contract is determined by reference to which of the services or supplies has the highest estimated value. Please note that where works or contracts include elements of ‘utilities’ activities (e.g, running tramways) which are not separable , or which are separable but which constitute the main subject-matter of the contract, then the Procurement Journey does not cover these areas of procurement.
A “lead” authority may be agreed on at this stage and from a legal perspective they will be the organisation responsible for forming the contract with the successful supplier(s), or a truly “joint” exercise may be initiated where the conduct of the procurement is entirely carried out in the joint name(s) of the participating organisations. In either case, the organisations are jointly responsible for ensuring that they comply with the relevant procurement legislation.
In some cases, you could consider having only part of the procurement operating as a joint exercise. In this case the organisations would be jointly responsible for those areas of activity that are declared as joint, while each organisation would retain sole responsibility for the activities carried out on its own behalf.
[For Care and Support Services, additional guidance on determining the type and duration of the contract, and on transitional arrangements can be found in the 'Care and Support Services Contract Type, Duration and Transitional Arrangements.]
There are also practical considerations in this context that should be planned for at this stage, such as the responsibility for contract management; how Key Performance Indicators (KPIs) will be managed and communicated and the reporting / communication network that will be needed both between the organisations and the potential supplier(s).
Your decisions should include the consideration as to whether a Framework Agreement would be more appropriate than a contract and how the call offs and management of same will be conducted.
Having considered the above you should be able to identify the position of your commodity/service as either Leverage, Strategic, Routine or Bottleneck. The Strategic Positioning Action Plan provides guidance as to the procurement approach you should adopt in each of these circumstances.
The suggested approaches are designed to provide the commodity/service with a starting point. They must be further defined in the context of the specific commodity/service and opportunities identified using the Best Value Triangle.
Best Value principles underpin the operation of public service organisations and are a key component of the public service reform agenda in Scotland. It is a central, enduring foundation for continuous improvement across the public sector.
Key elements are as follows:
- To make arrangements to secure continuous improvement in performance whilst maintaining an appropriate balance between quality and cost; and in making those arrangements and securing that balance
- To have regard to economy, efficiency, effectiveness, the equal opportunities requirements, and to contribute to the achievement of sustainable development
There are many characteristics to Best Value that public service organisations are expected to demonstrate and some relating to procurement are as follows:
- Purchase Demand Management
- Reduce consumption
- Consolidate spend
- Improve specification
- Supply Base Management
- Restructure relationships
- Increase competition
- Restructure supply base
- Total Cost Management
- Optimise total supply chain costs
- Reduce total life cycle / ownership costs
- Reduce / eliminate transactions
- Sustainable Procurement
- Maximise sustainable opportunities
- Consider fair working practices where appropriate
- The requirements of the of the Climate Change Act where appropriate
Given the Government’s commitment to ensuring that small and medium sized businesses have fair access to public sector contracts in Scotland it is important that SME inclusion is encouraged, especially as SMEs may have characteristics that give them competitive advantages over larger organisations. These can include:
Better levels of service - relative to large bidders, your business will represent a much larger proportion of an SME’s turnover and they may value you more as a customer. You may receive a better and often more personal service;
Lower overheads – small bidder’ running costs will usually be lower than those associated with larger organisations;
Innovative business solutions - potential for taking a new approach to requirements, e.g. the early exploitation of new technology, or providing products or services in new/underdeveloped markets;
Greater flexibility – their size lends them to being able to tailor solutions more effectively, e.g. short management chains and approval routes;
Specialism – many are set up to cater for niche markets which may better match requirements;
Increased competitiveness in the longer term - rather than limiting competition to a few large bidders who may be familiar with each other’s mode of operation, inclusion of smaller bidders may lead to an increase in competition.
Compliance Issues and Strategies
As part of the Commodity/Service Strategy you should consider how you will ensure compliance to the contract. Compliance requires involvement from all parties concerned throughout the Procurement Journey. Governance arrangements, management and budget holder behaviours within local organisations will be key.
The Components of a Compliance Strategy document should encourage optimum uptake of a new contract. Members of the UIG should champion the contract and commitment for users should be obtained for the proposed strategy options.
Commodity/Service Strategy Options
There will be a number of delivery options which are applicable to any commodityservice. These will vary with the type, size and complexity of the requirement but are likely to fall within the range of options indicated. In all cases, you should consider a 'Do Nothing' option as a benchmark.
The Commodity/Service Strategy should include a summary of options that clearly details the benefits, costs and risks associated with each option and demonstrates compliance with any legal obligations. This should enable the objective selection of the Commodity/Service Strategy to be pursued in the short, medium and long term.
Information on estimating benefits within a commodity/service area can be obtained from sources such as benchmarking, market testing, market trends, past discounts and past experience. Identification and assessment of “softer” benefits, such as the overall economic support of Community Benefits that could be achieved through the procurement process, or other sustainability measures such as carbon use reduction must be undertaken at this stage.
Costs to implement sourcing strategies include contract switching costs, supplier switching costs, manpower investment, communications and roll out and cost of going to tender.
The Options Appraisal summarises the various delivery options considering the benefits and risks of each before selecting an option for recommendation.
The recommended option must satisfactorily meet the requirements, be affordable, viable and agreed with the UIG.
Division of Contracts into Lots
Procurement Officers should consider the appropriateness of awarding contracts in the form of separate lots. Division into lots is a possible way of increasing SME participation.
Where a Procurement Officer chooses not to award a contract in the form of lots, they must indicate the main reasons for not doing so in the relevant Procurement Documents, or in the procurement exercise written report. Potential reasons for not subdividing contracts into lots may be:
- that it would risk restricting competition,
- it would make the execution of the contract excessively technically difficult or expensive, or
- the need to coordinate the different contractors for the lots could seriously risk undermining the proper execution of the contract.
Procurement Officers must also state in the relevant Procurement Documents, whether tenders may be submitted for one, for several or for all of the lots. In addition, where more than one lot may be awarded to the same tenderer, contracts may be awarded that combine several or all lots provided that this has been specified and the groups of lots that may be combined have been indicated. If adopting such an approach, Procurement Officers must think carefully about how the relevant evaluation matrices will be able to account for all scenarios.
Procurement Officers can limit the number of lots that any one supplier can win, provided that the maximum number per tenderer is stated in the relevant Procurement Documents. The objective and non-discriminatory criteria an Organisation intends to apply for determining which lots will be awarded must also be listed in the relevant Procurement Documents where the application of the award criteria would result in one bidder being awarded more lots than the maximum number.
Contract Implementation/Contract and Supplier Management
There are separate stops on the Procurement Journey on Contract Implementation and Contract and Supplier Management (C&SM) however your approach must be considered during this 'Develop Commodity/Service Strategy' phase. Consideration must be given to how the proposed options will operate throughout the life of the requirement. For example, if you decide to utilise an existing contract or framework agreement the contract implementation and management aspects of the arrangement will be covered in the framework terms and conditions and must be complied with in full.
You must think about how the new goods or services will be introduced into the organisation or requirements migrated from your existing arrangements to the new arrangements. You should also consider your transition or exit strategy for when this new contract or framework agreement comes to an end. Once fully operational you will want to manage and develop the contract and supplier(s) to ensure the desired outcomes are delivered now and in the future. Consideration must be given to the resource requirements to implement and manage the contract or framework agreement as a designated contract manager must be identified. Additional guidance can be found in the Planning & Governance station.
The contract and supplier management requirements should be detailed in the contract or framework agreement terms and conditions to ensure both parties are clear on the contractual obligations. The contract should then be managed in accordance with these terms and conditions.
The level of contract and supplier management required depends on the risk, value and complexity of the contract. You will find guidance to help assess the potential level management of C&SM required in the Contract and Supplier Management / Planning and Governance station.
Generally, "Routine" contracts will require a lower level of management than "Leverage" and "Bottleneck" (medium level), and "Strategic" which will require the highest level.
There may also be opportunities for the buying organisation to make its own internal processes more efficient. Some of the key areas to consider during procurement process are:
- Use of PCS-Tender
- The transactional procurement process: requisitioning, authorising, raising and sending purchase orders, goods receipting and invoicing and payment
Comprehensive guidance can be found in the Planning & Governance station.