Category management will transform government’s buying behavior

March 21, 2016 David Shields

Bloomberg Government regularly publishes insights, opinion and best practices from our community of senior leaders and decision-makers. This column is written by former Managing Director of the U.K. Government Procurement Service, David Shields. He is the Managing Director for Procurement Transformation and Category Management at ASI Government. 

The program to transform the federal marketplace and implement category management government-wide already has brought changes in the way government interacts with companies.

For example, the Office of Federal Procurement in 2014 launched an online national dialogue with industry designed to gather input on improving how agencies interact with their suppliers.  Last year, it led to a new contractor and bidder feedback process called Acquisition 360, including a “Rate the Agency” survey.

The General Services Administration has reduced the time it takes a company to get registered on GSA’s government-wide contracts. GSA also has pledged to reduce burdens on companies selling commercial items valued at $150,000 or less.

In the United Kingdom, we’re 11 years into a procurement transformation using category management, so I have a good idea of how much uncertainty companies selling to government feel when facing a category management regime.

Merely by enacting the view that government should “buy as one,” rather than dozens of disparate and separate entities, OFPP, GSA and the U.S. Chief Information Officer are setting off a sea change in government buying.

Most companies are not accustomed to being measured on the totality of their business across government. Where before, companies treated each government department as an individual customer, under category management, the government as a whole becomes the client.

Opportunity or Threat

This has consequences for government suppliers. It creates opportunities for companies to show off how effectively they collect and analyze federal client data and how closely they manage their own supply chains to drive improved outcomes, efficiency and savings to pass on to customers. However, it also threatens to expose inefficiency, poor supply chain management, poor performance and lack of data analysis.

One of the first things we did in the U.K. to enable government to buy as one was to determine how much we were spending with which companies, on which contracts, in which departments and on what so we could begin to get our spending under management, aggregate it, and leverage it for improved outcomes, better prices, terms, conditions, quality and performance.

Until 2010, when we were able to calculate that central agencies including local governments and the National Health Service bought goods and services totaling $220 billion British pounds, estimates of government spending had been unreliable and misleading.

We found out the true number by uploading accounts payable data from every department into a central, commercial-off-the-shelf ecommerce system, correcting and cleaning it and augmenting it with other data feeds and on-line tools. This gave us a holistic view of supplier performance, financial strengths, number of contracts and compliance with specific government policies.

Pointed Questions

Having that data meant we could start asking our suppliers a host of pointed questions about what we actually were paying for, why and whether we were being appropriately charged within categories of common expenditure.

Managing categories of spending helped us develop intelligence about everything from price differentials and profit margins to supply chains and logistics in different goods and services markets.

For example, we drilled into the information technology hardware subcategory, where OFPP Administrator Anne Rung has noted a 300 percent differential in prices different U.S. agencies paid for the same laptop. Our analytics and intel let us dig into similar differentials in the U.K. and enabled us to establish a broader strategic approach to this market. We found that some of our biggest hardware providers didn’t even analyze their own data on total government sales.

In the case of computers, we were buying through hundreds of suppliers and in excess of 20 large resellers and systems integrators and we were paying huge price differentials agency to agency and in comparison with commercial buyers. We needed to understand why.

The answers were surprising, at first.

We had assumed, for example, that our suppliers were getting their stock from the original equipment manufacturers. Instead, we found some were buying from other resellers or wholesalers, adding an additional mark-up for shipping and handling and additional profit to the prices we were charged. Further, we found the resellers weren’t aggregating their purchases to get lower prices or negotiating volume rebates.

But then we realized that these practices weren’t so surprising, since we weren’t incentivizing the companies to aggregate government orders, reduce the number of transactions with us or seek efficiency savings in their own supply chains. Once we understood this, we changed our behavior and the way contracts were constructed.

For example, we sought to negotiate prices with OEMs based on government volume and have resellers agree to charge us accordingly for those brands. We negotiated prices for standard specifications using the most optimal supply route—piggybacking on the distribution deals struck by OEMs.

Charting Performance

Category management enabled us to find out whether our contractors were producing, distributing and selling efficiently. We established some simple standard metrics and enhanced them by adopting suppliers’ performance metrics and methods, simply asking them for information from their own systems. Most complied because we weren’t creating a new reporting burden, but rather harvesting the standard information they collect.

This enabled us to chart performance month by month and write improvement expectations into contracts. Instead of reporting on contract compliance, we began getting specific quality reports.

From office supply firms, for example, we could see the number of orders filled on time and at the right quantity, the number of returns, average value of an order, ordering patterns from departments and specific offices and all our invoices. From call centers we learned the number of calls answered within the specified time, customer satisfaction levels, and even the rate of hang-ups before representatives finished their scripted answers.

Having and using this kind of information led us to change our contracts. It likely will in the United States as well. For example, we began to include more flexibility, enabling us to change service level agreements and build in continuous improvements in quality and pricing. We also made provision of performance information a contractual requirement.

Effective commercial management of government suppliers brings transparent commercial management of the whole supply chain including managing performance, risk, government policy and value.

Suppliers that are driving great value with strong analytics and close control of their supply chains should do well in a category management environment. If they can demonstrate they are delivering better value than government can get elsewhere, then they likely will prosper.

But greater scrutiny and transparency also can turn up evidence of any inefficiency, waste, supply chain weakness and poor management and performance. So now is the time for government suppliers to review their systems, contracts, performance records and suppliers and clean house if necessary.

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