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Quantitative Methods in Procurement

Quantitative Methods in Procurement. VAGP Spring Conference , March 2012 Presented by Keith Gagnon, MBA, CPPO, VCO Director of Procurement Virginia Community College System. Measure Your Performance. Develop/deploy metrics Use same metrics over time Look for trends in the metrics

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Quantitative Methods in Procurement

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  1. Quantitative Methods in Procurement VAGP Spring Conference , March 2012 Presented by Keith Gagnon, MBA, CPPO, VCO Director of Procurement Virginia Community College System

  2. Measure Your Performance • Develop/deploy metrics • Use same metrics over time • Look for trends in the metrics • Identify Key Performance Indicators (KPI) important to your procurement unit

  3. VOLUME and Distribution KPIs • Total procurement expenditure (total spend) • Spend per department • Spend per commodity • Total number of procurement transactions • Total number of vendors • Average spend per vendors • Average spend per transaction • Number of vendors accounting for 80% of spend

  4. Financial KPIs • Savings (Cost Avoidance) • How much you spent vs. how much you might have spent on a purchase • More to come on this one… • Leveraged Spend Ratio • Leverage spend ÷ total spend • Leveraged spend = purchases made using term contracts, cooperative contracts or other methods that achieve cost savings by economies of scale, administrative efficiency, etc. • Process cost per transaction • Procurement Return on Investment (ROI)

  5. EFFICIENCY KPIs • Procurement Cycle Time • Time from initial request until PO/Contract issued • Delivery Time • Time from order to delivery • Buyer Productivity • Number of purchases per buyer per month • Spend volume per buyer per month (year, week)

  6. EFFECTIVENESS KPIs • Protest Rate • % of protested transactions • Compliance Rate • % of compliant transactions (Procurement Regulations) • Through audit results

  7. EFFECTIVENESS KPIs • Internal Customer Satisfaction • Surveys, etc. • Supplier Performance • Delivery (% on time) • Quality • Service • Through surveys

  8. SOCIAL RESPONSIBILITY KPIs • SWaM Percentage • As percent of total spend • Green Procurement • Number of green products substituted for traditional products • Economic Impact • Total spend with local vendors • Percent of spent with local vendors

  9. Back to Savings • Let’s call it “cost avoidance” • Why??? • “Savings” can be taken back and added into another budget area • Savings is “bookable” • Scenario • I gave my son $25 to get himself a hat. • He came back from the store and said, “I got a great deal. The hat I wanted is regularly $40, and I got it on sale for $20. I saved you 20 bucks!” • I said “Good job, now give me back what you saved.” • He handed me $5?!?! • How do we calculate cost avoidance?

  10. Cost Avoidance Activity Scenario: You award a contract through an IFB for 1,000 widgets at a cost of $100 per widget ($100,000 total) • Budget for purchase was $135,000 • Last year you paid $115,000 for 1,000 widgets • Average bid price was $110 per widget • eVA data shows $130 average price per widget for all eVA widget orders in past 12 months • You paid $125 per widget for a spot purchase of 10 widgets in between contracts How much have you saved? (You have 5 minutes)

  11. Before we get an answer…

  12. Back to our scenario –what is the answer? 1,000 widgets at a cost of $100 per widget ($100,000 total) • Budget for purchase was $135,000 • $35,000 • What if budget calculation wasn’t a good one? Or, what if the budget was only $90,000? • Last year you paid $115,000 for 1,000 widgets • $15,000 • What about inflation? • Average bid price was $110 per widget • $10,000 • Would this method ever show negative? • eVA data shows $130 average price per widget for all eVA widget orders in past 12 months • $30,000 • What if many of these orders were for small quantities? • You paid $125 per widget for a spot purchase of 10 widgets in between contracts • $25,000 • Again, what about the different quantities?

  13. So what’s the answer • Probably somewhere between $10,000 and $35,000 • Suggestions: • Use some method, maybe even more than one, to estimate cost avoidance • Express a range for calculated cost avoidance • Use high, low, mid • Support your argument with reason, statistics, trends, etc.

  14. Fair and reasonable price • How do I determine if a price is Fair and Reasonable? • Competitive procurement -presumed • Comparison to previous price paid • Comparison to price for similar goods/services • Market basket data • Timeliness • Cost analysis (component cost, cost elements)

  15. Keith Gagnon Director of Procurement Virginia Community College System 804.819.4698 kgagnon@vccs.edu http://www.linkedin.com/pub/keith-gagnon/1b/32b/b07 Questions and discussion

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