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Guidance Bulletin – Part One

Cygnet Consultancy Ltd

Part one of a buyer's guide

Five problems that could cost you Millions of $s

Cygnet Consultancy Ltd www.cygnetconsultancy.com ©Copyright 2012 25 North Wall, Cricklade, Swindon SN6 6DU Tel +44(1)1793 752485 Fax +44(1)1793 687350


Guidance Bulletin – Part One Born into a farming family with heritage stretching back over generations has made me passionate about outstanding results, hard work and commitment. My farming experience was an excellent grounding for when I moved into an industrial environment. I then had over thirty years at the highest level trouble-shooting and problem-solving covering both processes and people issues and are pleased to have built up a reputation for getting the job done and getting it done in the most effective way. At the turn of this century I changed direction and formed companies designed to bring procurement into the 21st century. My teams advanced software development and unique experience enabled us to unlock complex problems, to simplify operational process and achieve some of the most cost effective solutions in the UK. By creating unrivalled cost effective solutions to procurement and operational problems I had the opportunity of working with many of the world's most prestigious organizations across industry sectors. My raison d’être for buyer’s guides is to supply self help and support process that will benefit you now and in to the future. The guides have been compiled from actual experiences and the details are real. This document is designed to help all buyers so I would be grateful if you would copy and circularize i t to all interested parties. Please use the contents to help you in the development of your purchasing needs and be mindful that the examples are scalable and will benefit all in procurement. I trust that you will find my guides interesting and that I can have the opportunity of helping you in the future. Kindest regards

Charles Eddolls CEO Cygnet Consultancy Ltd

Cygnet Consultancy Ltd www.cygnetconsultancy.com ©Copyright 2012 25 North Wall, Cricklade, Swindon SN6 6DU Tel +44(1)1793 752485 Fax +44(1)1793 687350


Guidance Bulletin – Part One To help those working in procurement. When you take a position in procurement employers expect you to rapidly have knowledge that is normally acquired over years. With this in mind I am transferring to you detail of my experiences that can only help you to better understand the peculiarities of procurement in business. The document is designed to help new and existing buyers and shows examples of procurement processes that have saved my clients $ millions. Item One - Contracted Professionals All of my clients pay fees for banking, insurance or professional services. As a result the following is of interest to all of them as it highlights that no matter how specialist the supply the services can be tendered and reverse auctioned to produce a “best value” result. I was approached by Tube Lines Ltd and asked to help them to reduce their costs. The company was owned by Amey plc a UK based publicly quoted group and Bechtel group the largest construction and engineering company in the United States. Tube Lines was contracted to maintain and rebuild three major underground lines in London, these being the Jubilee, Northern and Piccadilly Lines. The company had in place contracts with numerous firms, contracts that covered work on major building and maintenance projects. They asked for our help to see if we could successfully put together a competition for their requirements of project managers, building surveyors, architects, risk and value, civil and structural and mechanical engineers. We confirmed that we could do as requested and structured a conventional e-tender followed by an electronic reverse auction all of which were undertaken in processes that were fully compliant with UK and European procurement rules. We included existing suppliers and additional professional firms that we had introduced. The result was that we saved the company more than $5 million and Andrew Geffryes, their head of corporate procurement, commented:

Cygnet Consultancy Ltd www.cygnetconsultancy.com ©Copyright 2012 25 North Wall, Cricklade, Swindon SN6 6DU Tel +44(1)1793 752485 Fax +44(1)1793 687350


Guidance Bulletin – Part One Item One - Contracted Professionals - Contd

“As Tube Lines had no direct previous experience we looked for a reliable and trusted partner to lead us in the use of reverse auctions. The initial trials proved very successful, this led to us extending our use and to run a series of reverse auctions in both the traditional commodity type areas as well as more specialist ones, achieving saving up to 42%.” What should we learn from this example? • All professional services can be successfully competed • We need to investigate which firms can meet our needs and include them in our competitions • We can compete specialist supply needs no matter how complex • Even world leaders benefit from innovative suggestions Item Two - Logistics Most buyers are reliant upon some form of transport and in this example I highlight how competitive the market can be especially when a competition is structured to the meet suppliers needs. This organization had a myriad of contracts with haulage and removal companies with individual terms to cover collections of large and small items (furniture, household goods etc.) and to deliver them to destinations in the UK and World Wide. This service covered the needs of thousands of employees and family’s that regularly moved from place to place. The contracts covered hundreds of collection and delivery points and numerous types of transportation. Each movement had a specific contract price and there were so many individual contract prices that it was difficult to manage the contract and costs were out of control.

Cygnet Consultancy Ltd www.cygnetconsultancy.com ©Copyright 2012 25 North Wall, Cricklade, Swindon SN6 6DU Tel +44(1)1793 752485 Fax +44(1)1793 687350


Guidance Bulletin – Part One Item Two – Logistics - Contd Their contractors were seeking contract extensions and higher charges because they claimed that they were loosing money. Because of the amount of work involved in completing the supply the client believed that the only way forward was to agree to the suppliers’ demands and to place extensions on existing contracts at prices that met the contractors’ expectations. They believe this was the best option because? 1. They were convinced that their contractors were losing money 2. Staff shortages made it difficult for them to tender the needs 3. Their costs were held centrally and no savings were credited back to their department I suggested that we devoted the resources needed on a (no savings no fee) gain share, agreement to compete these contracts. Internally we brain stormed the contract needs and following the clients agreement we decided to create theoretical central hubs in various countries and to tender area charges from depot to hub, hub to hub, and hub to destinations. The new contracts were simpler and by competing the needs in a way that suited the suppliers we created multi million $ annual savings. What does this tell us? • Try new ideas when you are seeking to save money • Outsource specialist parts of the project when you are short staffed • Always question the veracity of claims by suppliers • Know your suppliers costs • Ascertain how suppliers would like to see contracts structured

Cygnet Consultancy Ltd www.cygnetconsultancy.com ©Copyright 2012 25 North Wall, Cricklade, Swindon SN6 6DU Tel +44(1)1793 752485 Fax +44(1)1793 687350


Guidance Bulletin – Part One Item Two – Logistics - Contd Following our competition the chief protagonist, who had alleged he was losing money, was happy to take part in the tender and reverse auction and to retain contracts with a 15% cost reduction. Following this experience I thought it would help you if I highlighted myths that are proffered by suppliers and can cause problems such as: Item Three - The Fallacies The Big is Beautiful and the Economy of Scale Fallacy Everyone knows that the bigger the contract, the cheaper the unit price! This is ridiculous and I have disproved these fallacies on many occasions. In this section I am going to show as an example a large fuel / oil supply contract: We were asked to tender and auction a $150million road fuel and gas oil tender being a UK wide heating and diesel oil requirement that had previously involved only the major oil companies. Contracts had been placed to the lowest bidders following a conventional paper tender process. I advised that the contracts needed to be fundamentally restructured to cover for full load deliveries to high usage sites, as this was the main interest of the major oil companies and separate competitions for the local small load deliveries with SME's included in all e-tenders and auctions. Massive savings (millions of dollars) were made in both supply types with the oil refiners winning the full load deliveries and the small fuel suppliers winning all of the local small load deliveries. Whilst I believe it is sensible to aggregate spends prior to selecting how to compete a supply, I am also convinced that it is not sensible to offer the total requirement as a single contract as this can restrict competition resulting in mediocre savings being achieved.

Cygnet Consultancy Ltd www.cygnetconsultancy.com ©Copyright 2012 25 North Wall, Cricklade, Swindon SN6 6DU Tel +44(1)1793 752485 Fax +44(1)1793 687350


Guidance Bulletin – Part One Item Three - The Fallacies – Contd The market share fallacy International suppliers are always able to offer the lowest prices! International suppliers are capable of offering the lowest price but seldom do. They have trading relationships and are often only interested in contracts on a direct basis. My experience is that when you encourage independents to compete they will step up to the plate and you will receive benefits. Manufacturers always offer better prices than distributors! This is also incorrect as many secondary distributors can and do regularly undercut manufacturers with products and services (some of which are identical to the manufactures products) which are equally as good as and on many occasions better than the established suppliers. What we learn from the above is that it is essential to understand your markets and to structure your procurement competitions in a way that is attractive to potential suppliers no matter how large or small they are. Item Four - Savings on Branded Products We all seek to buy the best products available at the most competitive prices so branding is of interest to all of us. In this example I highlight the need to be aware of the movers and shakers in the supply market. I was asked by the European procurement director of a leading International food company if I would get my team to compete a current contract to see how well his buyers had been performing. His company had buyers all over the world and produced tenders for their supplies and services. They also had an in house reverse auctions team which was used when the buyers felt that an auction was appropriate. Our instruction was to mirror one of their historic competitions and to compete their supply of branded pasta. We introduced and pre qualified suppliers and set up an e-tender followed by our reverse auction

Cygnet Consultancy Ltd www.cygnetconsultancy.com ŠCopyright 2012 25 North Wall, Cricklade, Swindon SN6 6DU Tel +44(1)1793 752485 Fax +44(1)1793 687350


Guidance Bulletin – Part One Item Four - Savings on Branded Products - Contd We saved his company 36% which rolled out world wide represented millions of dollars of savings. What should we learn from this example? Although our client employed highly skilled staff and had previously tendered their pasta supplies they had only used suppliers known to them but they did not keep pace with the market. Their tenders did not include the largest pasta manufacturer in the world a company that we introduced and that won the competition. So we must realise that supply lines are dynamic and that over time a small company can grow to be a market leader. We must keep our eye on the market and see which suppliers are growing and which are shrinking. Buying Vehicles I purchased a fleet of 600 vehicles for a client and my previous experience of buying corporate vehicles meant that I was aware of discounts that would be available to me. The client had specified the numbers, the manufacture and models to buy and had negotiated the best prices they believed were available. I took over the competition and negotiated with the manufacture’s sales department and their finance department and saved nearly $1 million in the process. I negotiated by telephone and both the parties involved were both aware that they were in competition with each other and that I would have to buy their products. This is an unusual example that highlights that the deals are there to be made. It is worth noting that currently some manufactures of cars and light commercial vehicles are giving discounts of over 50%. I suggest that you check the specialist Internet supply sites as manufactures will compete in price with “grey imports” which are often highly discounted.

Cygnet Consultancy Ltd www.cygnetconsultancy.com ©Copyright 2012 25 North Wall, Cricklade, Swindon SN6 6DU Tel +44(1)1793 752485 Fax +44(1)1793 687350


Guidance Bulletin – Part One Item Five- Leverage Buying I have partially covered this point in previous examples however I believe that understanding about leverage buying is so important that the topic needs a section of its own. Does leverage buying achieve lower cost and better value? There is a widely believed misconception that if you bulk up supply this will automatically encourage the lowest supply cost. I have witnessed contracts placed after such action producing high costs, substandard supply and ongoing operational problems. Before amalgamating procurement needs and restricting your supply opportunities it is wise to think carefully about the knock on effect of such action and to remember that it is best value and lowest cost that are the driving forces in modern procurement. I was asked to advise Group buyers on to their strategy concerning a $25+ million per year commodity purchase. Their problem was that they had been discredited as other members of their consortium could buy a substantial percentage on their needs (some $7.5 million of identical supplies) at lower prices than those previously achieved by the consortium. I explained that their buying policy had resulted in negative features and suggested that they made small changes and that they take note of the following. When they had historically structured their procurement competitions to maximize the size of their supply they had restricted participation by SMEs and only included large suppliers. They had not realised that SMEs keep the large companies honest as SMEs have to competitively battle with major suppliers on a daily basis and it is this action that keeps the supply prices in check. By combining procurement needs into a basket of supply to be delivered to a wide geographical area they had also encouraged suppliers to quote against a worst-case delivery scenario. Cygnet Consultancy Ltd www.cygnetconsultancy.com ŠCopyright 2012 25 North Wall, Cricklade, Swindon SN6 6DU Tel +44(1)1793 752485 Fax +44(1)1793 687350


Guidance Bulletin – Part One Item Five- Leverage Buying Contd By tendering for supplies in this way a dominant supplier had been encouraged, through their financial strength, to quote for supply regardless of their pre tender capabilities and subsequently to hastily put in place a suitable logistics infrastructure. This had historically resulted in a level of service that was poor and inappropriate to the buyer’s local needs. Shareholders in supply companies require their management to maximize their profitability and this encourages suppliers to enter the market at the highest levels of cost that they feel the market will stand. This was the situation for my client and as a result tendered prices were at similar prices for all competitors taking part regardless of their actual supply cost. Suppliers regularly undertake price matching and this is seen in many supermarkets that highlight their price in comparison to that of their competitors. The practice of price matching is extensive and happens within most supply chains and whilst it is not the same as the operation of a cartel, it does cause inflated supply costs. I advised that the buyers structure their tenders to ensure that their future competitions included small local suppliers being companies that look for smaller profits than the dominant suppliers. We ran their competition and the savings were extensive. Future opportunities My farming experience has taught me to seek the easiest solution to any problem and that is why I have been so successful. The overly complex nature of modern procurement has encouraged me to put together this series of guidance notes that promote best practice and commercial benefit. The details contained in future buyers guides are priceless in as much as they describe in detail the actual processes and highlight the pitfalls. Click on the following link for further information. www. xxxxx.com

Cygnet Consultancy Ltd www.cygnetconsultancy.com ŠCopyright 2012 25 North Wall, Cricklade, Swindon SN6 6DU Tel +44(1)1793 752485 Fax +44(1)1793 687350

The first of our series of guides  

This document is designed to help all buyers so I would be grateful if you would copy and circularize it to all interested parties. Please u...

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