Procurement is a challenging task at the best of times, but when procurement managers ask staff to conduct Lot Design (breaking demand into atomic units that can be contracted with individual firms) in a manner that retains most economic value, they don’t realise what an impossible job this is. Only the suppliers have the accurate knowledge about their cost structures that can unlock this conundrum.Alan Holland, CEO of Keelvar, explores why it is best to keep the lots very granular, so that potential suppliers can aggregate and bundle the goods and services being procured in a way that maximises efficiency from their perspective. The net effect is the purchaser also benefits from this arrangement given it invariably results in a more competitive outcome.
Let suppliers play to their strengths
Suppliers have varying strengths and weakness across a buyers demand profile. They have individual preferences about certain aspects of the good or service being procured, that can fit well together and offer cost synergies that are not clear to the buyer. Suppliers would also like to express exactly where their strengths lie, in terms of an efficient provision of goods or services.Lot design partitions a subset of the good or service being procured, because it forces suppliers to supply all or none of each lot. It usually destroys value because some suppliers may like to secure a subset of that lot as the following example illustrates.
Inviting bids on single lots only can be inefficient
In settings where bids are invited on individual lots only, and where firms are not invited to submit package bids, they cannot express everything they would like to say about dependencies between items.
To design a smarter competition - so that Lot Design no longer harms value, package bidding (eliciting bids on bundles of lots) must be permitted. If the purchaser keeps contracts (or line items) granular, then simply allowing market participants to communicate their preferred combinations unlocks fantastic value. This drives competitiveness because more suppliers are free to describe exactly the manner in which they would prefer to conduct business with the purchaser so that waste and inefficiency is removed.
Keelvar’s solution facilitates this richer bid gathering so that information related to cost efficiencies are collected. The reason buyers are not doing this already is that the winner determination problem can become impossibly complex when many package bids are received from numerous suppliers. Keelvar’s procurement software has cracked this nut and in doing so it facilitates SME inclusion as smaller suppliers can participate in confidence!
Image Source: ( Flickr - Parksy )