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Quantitative Methods in Procurement

Keith Gagnon presented on developing and deploying metrics for procurement at the VAGP Spring Conference in March 2012. He recommended identifying key performance indicators important to the procurement unit such as total spend, spend by department and commodity, number of transactions and vendors, and savings through cost avoidance. Metrics could include procurement cycle time, delivery time, buyer productivity, protest and compliance rates, customer satisfaction, supplier performance, and economic impact. Calculating cost avoidance involves estimating potential costs and comparing them to actual costs to determine savings from procurement activities.

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Pradeep Kumar
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683 views15 pages

Quantitative Methods in Procurement

Keith Gagnon presented on developing and deploying metrics for procurement at the VAGP Spring Conference in March 2012. He recommended identifying key performance indicators important to the procurement unit such as total spend, spend by department and commodity, number of transactions and vendors, and savings through cost avoidance. Metrics could include procurement cycle time, delivery time, buyer productivity, protest and compliance rates, customer satisfaction, supplier performance, and economic impact. Calculating cost avoidance involves estimating potential costs and comparing them to actual costs to determine savings from procurement activities.

Uploaded by

Pradeep Kumar
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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VAGP Spring Conference , March 2012 Presented by Keith Gagnon, MBA, CPPO, VCO Director of Procurement Virginia Community

College System

Develop/deploy

metrics Use same metrics over time Look for trends in the metrics Identify Key Performance Indicators (KPI) important to your procurement unit

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

Savings (Cost Avoidance) Leveraged Spend Ratio

How much you spent vs. how much you might have spent on a purchase More to come on this one 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)

( )

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)

Protest Rate
% of protested transactions

Compliance Rate
% of compliant transactions (Procurement Regulations) Through audit results

Internal Customer Satisfaction


Surveys, etc.

Supplier Performance
Delivery (% on time) Quality Service Through surveys

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

Lets call it cost avoidance Why??? Scenario

Savings can be taken back and added into another budget area Savings is bookable

How do we calculate cost avoidance?

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?!?!

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)

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 wasnt a good one? Or, what if the budget was only $90,000? $15,000 What about inflation?

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
$25,000 Again, what about the different quantities?

$10,000 Would this method ever show negative?

$30,000 What if many of these orders were for small quantities?

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 Support your argument with reason, statistics, trends, etc.
Use high, low, mid

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 Cost analysis (component cost, cost elements)
Timeliness

Keith Gagnon Director of Procurement Virginia Community College System 804.819.4698 [email protected] http://www.linkedin.com/pub/keith-gagnon/1b/32b/b07

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