Spend Matters welcomes this guest post from POD Procurement, a business consultancy that created the POD model.
In our 3-part series we will explore these 3 core areas of achieving procurement success:
- Centralized Procurement (Article 1): Aggregate the organization-wide demand for common goods and services through a centrally let contract to deliver maximum savings, without using a framework.
- Improve Contractual Flexibility (Article 2): Reduce business requirements post-contract award without contract renegotiation, without pre-agreed pricing models and without using a framework.
- Encourage and Reward Post-contract Supplier Innovation/Efficiency Gains (Article 3), enabling the supplier to add value post-contract award, whilst reducing the ongoing business costs without using a gain share model.
Centralized procurement or aggregated demand is based on the principle that multiple business units/departments all want the same goods/service/use the same supplier, and by placing a single contract in place the aggregated demand can deliver greater savings for all than when bought independently.
There are 3 main challenges to overcome when an organization decides to aggregate demand into a single contract.
- Savings: In order to be of interest to the individual local units, the aggregated savings available must be greater than what can be achieved locally.
- Contractual Liability: When a contract is let centrally, it is important that contractual liability is defined. When the contract is a success no one worries about the liability, but if the aggregated requirements drop post‑contract award, someone may be liable for making up the difference. Therefore, if the center is liable for the contract they may need to hold the entire budget or enforce the local units standing by their pre-contract commitment, this can cause animosity amongst budget holders and generate waste. If the local departments are liable for managing their pre-contract commitment then they need to be able to renegotiate their commitment post-contract award if their requirements reduce.
- Control: In a centrally let contract, the center (or nominated contract owner) negotiates the contract on behalf of the others. Part of the supplier negotiation is stating the aggregated commitment that will be purchased. Once the contract is awarded, the local units are unable to renegotiate their component of the contract if their requirements reduce, and if one unit needs to reduce its post-contract commitment, the center would be unlikely to renegotiate the contract for one unit as it will impact the other units participating.
Central Procurement with POD
Here are the steps to use POD within your organization in order to achieve successful centralised procurement without using a framework:
- Savings: The center negotiates the contract on behalf of the other units and uses the aggregated volume to commit to procure the full quantity. This guarantees greater savings than procuring individually.
- Contractual Liability: Though the center has let the contract, each business unit is responsible for its own component of the commitment. The center has no liability other than to act as the contact owner.
- Control: The center lets the contract on behalf of all, however if any of the individual units want to reduce their commitment post-contract award, they can. It does not need a contract-renegotiation so it removes risk, cost and waste to ensure the departments only pay for what they require, returning unused budget back to the business.
- If the full commitment was needed, the contract has delivered the procurement savings for all parties.
- If there was a reduction in post-contract commitment by any of the individual units, the individual unit concerned only pays for what they required and returns unused budget back to their business, no-contract re-negotiation required and the remaining units still achieve their full savings.
Individual departments retained control over their commitment and their budgets and can alter their commitment post-contract award if required in line with their business requirements. No waste has been created, no contractual commitment enforcement needed, no animosity between local units and the center with increased savings.