Thursday, 14 October 2010

The other coloured report

I referred to the Browne report yesterday, time to turn to the Green one.

Some of the examples of price differences across government departments are horrific, of course. And there can really be little excuse for the way in which some departments have been persuaded to part with our money. It’s hardly a good advertisement for some private sector companies either that they’re prepared to take advantage of the incompetence of their customers to charge excessive prices.

But some aspects of Green’s recommendations do give cause for concern.

The suggestion that there should be more central purchasing so as to achieve bulk discounts might well produce some savings in terms of public expenditure in the short term, but what is its overall economic effect? It is likely that government would be supplied by a smaller number of larger companies rather than a larger number of smaller ones, which would be less able to supply the quantities required. Guess where they’re likely to be located? And pressure on prices means corresponding pressure on costs, usually labour costs.

The suggestion that government should simply extract more credit from its suppliers by delaying payment is also something that would make smaller companies less willing to do business with government – and again increase pressures on costs.

Both are things which large companies do as routine, of course. And both are potentially damaging to the business prospects of their suppliers. I’m aware of one large company which routinely looks at the accounts of its suppliers and demands price reductions if they regard the overall profit margin as being too high. Note – not the profit margin on the business done specifically with that large customer, but for the supplier overall, effectively demanding that the profit made on dealings with other customers is shared with the largest single customer.

It’s like supermarkets and the price of milk - large buyers can distort the market in their favour – is that really what we want of government?

We need to take a more balanced and holistic view of government procurement than to simply assume that forcing prices down is always the best answer.

4 comments:

Anonymous said...

I agree John ... and then there's the long (and tedious and time consuming) venture of going out to tender and being stuck to it for 3 years. There are savings of course, but as someone who works in the sector i do sometimes see that it's cheaper, quicker and easier to adapt to unforseen circumstances when you can have different suppliers who are more local. Sometimes they're cheaper sometimes not but there are other savings. I'm thinking more in the field of food and design here rather than maybe bulk-buying mobile phones.

There was the situation where because of WAG's tendering process the photocopying tender went to a company outside the local area of that WAG's office. This lead to that company closing. So WAG were promoting local services with one part of their remit but undermining is with another arm.

Macsen

John Dixon said...

Your comment about right hands and left hands at WAG is spot-on. The Economic Development department are trying to encourage small companies to do more business with the public sector; but the local government department are trying to force local authorities into ever larger consortia for purchasing purposes which has the precise opposite effect. Joined up thinking is a way off yet, I fear.

SiƓnnyn said...

There is also the time dimension to this.

A long, long time ago I was a teacher at school which was subject to strict central purchasing policy.

I needed pencils for a class that consisted of pupils that could not be expected to supply their own. I was told that I would have to go through the county - and the price. Three week lead time! I walked to the local post-office the same day, bought the pencils with my own money - at a quarter of the price the county was quoting, and available for the lesson the next day.

now If I say the LEA was RTC, then I'm sure that others will draw the same conclusions as I did about the effectiveness of central purchasing.

I know it doesn't have to be like that, but it often is!

Later on I was involved in choosing a software system worth several million dollars for a continental bank. Their purchasing for the project was being negotiated by a large consultancy based in London. Their Director of Procurement was handling the negotiation on the price. He was insisting on a 10% 'facilitation' fee for himself. I was not heartbroken when he was caught.

Spirit of BME said...

There are two thing Mr Green forgets .
1. He made his fortune from importing tat from China ,no consideration was given on the carbon factor when evaluating his cost base. (or the conditions of the workers).
2. One important evaluation in procurement is Time, Life, Cost (TLC),again local suppliers win hands down.This is not a consideration in the rag trade as the life of the item once it has left the rack is very short.
Boy Green is right in that when companies deal with government or any blue chip company ,they are looked at as a cash cow for suppliers and clear message is given to the market place to lay off some tenders . I have been through this and have asked potential suppliers why they failed to quote, their answer was- fear of retaliation,so a unofficial ring operates.
Suppliers also load the prices to recover their bad debts with other smaller customers, so that if some of these bad debts do eventually get settled then they win again. I estimated that there is anything up to 23% that can be put onto a price.Hence the $100 light bulb that the US Military found in one contract