Strategic Sourcing and Industrialisation insights with Prof Douglas Boateng
The dilemma for c-suite executives, public sector officials and policy makers in a developing economy
When it comes to public sector sourcing, the use of competitive tendering is generally the preferred sourcing option. Yet, there are times when alternatives to competitive tendering are required. Two such alternatives are single sourcing and sole sourcing. In Ghana, these two methods are partially catered for under Act 663 (S.40, S41) and in the amended Public Procurement Act 914 (S.40).
So, what is competitive tendering?
Competitive tendering involves a sourcing organisation soliciting open bids via a public notice (online platforms or via media) for organisations to express their interest in supplying a need. There are two main forms of this type of tendering. Open competitive tendering occurs when a public or private sector organisation invites companies to respond to a need via public notice. Closed competitive tendering or restricted tendering occurs when an invitation to bid is issued to a predetermined or restricted number of suppliers.
Competitive tendering promotes an invisible form of competition between service providers which results in the procurer gaining value for money through process transparency for both the buyer and seller. If the process is truly followed through it negates corruptive practices and helps to avoid the potential to favour a specific supplier(s).
Despite some positive attributes, this sourcing technique also has some drawbacks. The process can be relatively be expensive and slow with some unintended cost consequences for the procurers of goods or services. Collusion and price-fixing by suppliers can result in un-competitive pricing. This type of sourcing discourages open communication between procurers and sellers and in developing economies it may inhibit the empowerment of locals.
It can also stifle value chain innovation as value proposition is mainly based on tender information and the procurer may not legally be allowed to furnish further information to the bidding service provider. A lack of flexibility in relation to potential price and contractual adjustments can also result in the use of inferior products to help achieve margins.
The first alternative to competitive tendering is single sourcing.
Single sourcing occurs when an organisation consciously selects a single supplier from multiple options to meet a need. In most cases the single sourced supplier has a proven track record, comparatively offers the lowest possible cost without compromising product quality and functional requirement specifications.
They will often already have proven themselves in terms of customer service quality, are capable of providing a fit for purpose product, and present an opportunity for potential technical transfer and skills development. In a developing economy context, the supplier can have the potential to contribute to local empowerment, job creation and economic development.
When it comes to single sourcing, public sector organisations have options. If the organisation has done its research thoroughly before deciding to single source, it is relatively easy to choose the best alternative supplier without necessarily changing the product requirements.
Today, it is an accepted worldwide fact that public sector organisations should not be overpaying for single sourced products since they (as the customer) have a relatively strong negotiating power advantage over the selected single sourced supplier. There is thus certainly no justification, even in a crisis situation, for the sometimes blatant overpricing associated with a single sourced need.
To date, many public sector organisations with the right functional custodians have managed – over a relatively short space of time – to reduce single sourced product value chain costs by as much as 23% – making it sometimes even more beneficial than competitive tendering. In most cases the unit price for a vertical specific single sourced product (excluding logistical and other related tariff costs) has not exceeded six 6% of the officially listed price.
Single sourcing is often the acquisition method of choice in emergency situations, when it comes to industrial mobilisation and development, value for money acquisition, strengthening and capacitating internal capabilities, revisiting functional and product requirement specifications, and so forth. In addition, it has proven to be an effective tool for, among other things, demand consolidation and management and transversal relationships.
With the right value adding professional in charge of procurement the benefits associated with single sourcing can be huge. It has an immediate and long-term impact on local businesses, job creation, public and private sector spending, industry and society as a whole.
For governments some of the biggest proven benefits are cash flow optimisation, the potential to create win-win collaborative relationships with a specific supplier, minimisation of over-pricing as well as achievement of real and significant quantifiable value for money benefits. With single sourcing win-win relationship terms can either be short-, medium- or long-term and can easily be exited.
Single sourced related procedural workloads tend to be comparatively very low as communications, performance monitoring and evaluation is limited to a solitary supplier. There are also opportunities for transversal contracting, collaborative product requirements, specification development and joint needs based costing.
Despite the benefits, single sourcing is not without its risks.
Firstly, if organisations do not have the internal capabilities to detail the requirements specifications, continuously update associated price indices and manage and monitor the supplier relationship terms, prices may unexpectedly and significantly increase. Secondly, in periods of tight supply, the buyer may be placed at a disadvantage as they will not be able to ask other suppliers to accept orders. Thirdly, other suppliers may lose interest in trying to compete for the business if they see that a singular sourcing situation is likely to persist.
Key to public sector organisations harnessing the enormous benefits associated with single sourcing is to have the right procurement professional in charge to constantly and thoroughly do the fact finding to understand the organisational needs, critically co-examine and define their functional requirements specifications and constantly research and update their multiple supplier product price benchmark indexes.
To sum up, the application of single sourcing in the public sector can be enormously beneficial, but has to be co-determined and carefully managed by a qualified and strategically minded procurement professional.
The second alternative to competitive tendering is sole sourcing. Unlike single sourcing, institutions undertake sole sourcing when there is only one known supplier that is capable of satisfying a need.
With sole sourcing, supply alternatives are non-existent at the time of need unless an organisation radically changes its requirements. Sole sourcing relationships are also mainly long-term driven. Globally, sole sourcing is rarely used in emergency situations as the cost implications in most cases far outweigh the benefits.
Due to the uniqueness of the product or service required, sole sourcing gives the supplier major negotiating power advantage over the customer. This means that there is often very little room for potential price discounts, job creation and industrial development.
There have nonetheless been instances where sole sourcing has led to the creation of industries and long-term jobs in developing economies. However, these are very few and largely dependent on among other things local and regional demand for the product, local technical skills, location of raw material sources, institutional governance structures and incentives from government.
Through product and functional requirements specification it is imperative that public sector organisations minimise the use of sole sourcing as there is very limited room for negotiations and value for money acquisitions.
In a nutshell the application of sole sourcing in the public sector can be very costly even if co-determined and carefully managed by a qualified and strategically-minded procurement professional.
Single and sole sourcing can offer benefits which can sometimes far exceed the advantages associated with competitive tendering. However, to show compliance with the principles governing public procurement, it is imperative that state-run organisations justify their use of either single or sole sourcing as a method of acquisition.
The validation must indicate in detail the circumstances leading up to the decision and selection of either a single sourced supplier or a sole sourced supplier, any product and supplier alternatives considered, the rationale for selecting the supplier and how it was determined that the price was fair and reasonable.
To ensure that each of these strategic sourcing alternatives are transparent and follow the correct processes, procurement professionals and decision makers involved in overseeing public sector acquisitions need to be aware of the very specific differences between the options and design their requirements specifications accordingly.
Douglas Boateng, Africa’s first ever appointed Professor Extraordinaire for supply and value chain management (SBL UNISA), is an International Professional certified Chartered Director and an adjunct academic. Independently recognised as one of the vertical specific global strategic thinkers on industrialization, supply and value chain governance and development, he continues to play leading academic and industrial roles in sectorial reforms both in Africa, and around the world.
He has received independent recognitions and numerous lifetime achievement awards for his extraordinary contribution to the academic and industrial advancement of supply chain management from various international organisations including the Chartered Institute of Procurement and Supply, the Commonwealth Business Council and American multi-national Hewlett Packard (HP). For more information visit www.douglasboateng.com and www.panavest.com