What Is Value in Procurement? — A University Lecturer’s View (Part 2b)

Continuing Value in Procurement, an exclusive mini-series from Dr Jo Meehan, senior lecturer in strategic purchasing at the University of Liverpool Management School. You can read Part 2a here.

Value through volume

Clearly, much of the success of procurement consortia was related to leveraged volumes, but not exclusively. When buying manufactured goods, higher volumes can provide economies of scale, particularly if production costs make up a large percentage of fixed costs and the supplier is willing to pass these savings on.

Value, though, is more than price. In social housing, the ability to deliver social value and provide supply chain stability offers a more sustainable value proposition. Under the Decent Homes programme, procurement consortia used aggregation strategically, particularly when buying services. Joint work, planning with suppliers at regional levels, smoothed the peaks and troughs of market supply and demand. As a result, pricing was stabilised, administrative costs were streamlined, local labour and employment was secured, commercial contracts were managed and broader outcomes for local businesses and communities were achieved.

Aggregation can create a baseline for pricing but doesn’t necessarily provide the impetus for sustainable value creation. Reductionist approaches, whereby we push for year-on-year savings are unsustainable and run the risk of discouraging innovation, driving unethical practices, pressuring workers’ wages and terms and conditions, and over time they can exclude smaller companies and social enterprises from the supply market.

The rise of knowledge

Aggregation of spend assumes a primacy of volume. Strategic procurement, in comparison, prioritises commercial and economic knowledge, contract management, intelligent data, social capital and supply chain influence. In these areas it seems like size is important. Larger organisations, like consortia, have more procurement resource and have a higher absorptive capacity – that is, their ability to identify, assimilate, transform and apply knowledge. With this knowledge, they are in a stronger position to influence their supply chain around the broader value agenda.

Recent academic research however, reveals it is procurement maturity, not just size, that matters. To create and capture value, procurement needs to move beyond a focus on regulatory compliance and process. Pre-market engagement, underpinned by commercial and economic intelligence, can be used to develop markets and social value to unpick the true costs (in all forms) of our actions and decisions. Active management of contracts increases learning on our effectiveness and supplier motivations, all of which can influence proactive cost control and value delivery within housing associations and a wide range of other public and private organisations.

As we move into a world of big data, big procurement by consortia looks set to capitalise on knowledge collaboration. One organisation focusing on this is Procurement for Housing (PfH) which works with over 900 social landlords.

I undertook some research with PfH and Affinity Sutton (one of the largest social housing providers in England) looking at how many housing associations are using procurement to deliver commercial intelligence rather than the more traditional tasks of cost control or sourcing.

Results showed that just a third of organisations surveyed felt they were sufficiently resourced to push past their conventional roles and realise procurement’s full potential.

Results also indicated that there is substantial scope and appetite for greater collaboration across the sector, particularly around sharing information and learning to boost the expertise and capability of buying teams.

It is procurement consortia that must drive this knowledge collaboration. They represent numerous housing associations and communities and they deal with myriad suppliers, regulatory bodies, trade associations and other stakeholder groups. This brokerage position provides access to a rich pool of knowledge, ideas and opportunities that will lead to more strategic procurement.

 

Dr Jo Meehan will be speaking about procurement in the social housing sector at PfH Live in Manchester on 29th June.

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