Procurement Value for Money

Value for money (VFM) is the optimum balance between the cost of a procurement (input) and the value achieved (output). The following discussion of VFM explores the principle and relates it to concepts which are included in other knowledge assets.

THE FIVE RIGHTS

Traditionally VFM in procurement has been defined by the concept of achieving the 5 Rights (price, quality, quantity, time, and place).

RIGHT PRICE
This is not necessarily the lowest price, because the price paid will depend on the requirements of the other four factors. Furthermore, whole life costs should be taken into consideration, whereby the costs of acquisition, operation, maintenance, and disposal are calculated rather than just the purchase price. For capital items such as medical equipment, the life cycle costs can be significantly higher than the purchase price.

RIGHT QUALITY
This is usually defined by means of a specification and has a significant impact on the price paid. It is important that the requirement is based on fitness for purpose rather than being over-specified. Clinical preference items often suffer in this respect. Procurement practitioners should have the confidence and ability to challenge the specification, form close relationships with stakeholders, and develop effective influencing skills.

RIGHT QUANTITY
Bulk-buying is a traditional approach to achieving lower prices, based on economies of scale. However, it often leads to surplus supply, stockholding costs, and wastage, therefore a more nuanced approach is required. Robust demand management will ensure that supply closely matches demand. Rationalisation and standardisation of requirements will also consolidate demand and reduce fragmentation.

RIGHT TIME
This factor is closely related to the right quantity. Rather than buy large quantities infrequently, current thinking emphasises just-in-time principles. Supplies of medical consumables should be planned in advance but delivered as required rather than just-in-case. This is more cost effective but requires steady demand and effective forecasting. The procurement of medical equipment, which do not have regular demand patterns, should utilise robust project management techniques.  

RIGHT PLACE
Medical supplies are often required in many different geographical locations, which can lead to complexity, inefficiency, and higher costs. The supply network needs to be carefully designed so that the locations of suppliers, intermediaries, and warehousing are closely aligned to the location of healthcare facilities in order to optimise cost and value.

THE FIVE RIGHTS PLUS

In order to achieve the 5 Rights, it is essential that we select the RIGHT SUPPLIER. This can be seen as the sixth right. In order to achieve the right supplier, effective appraisal, evaluation, selection, and management of suppliers should take place. 

Although these fundamental rights are very important, they do not fully capture the VFM requirements of a modern procurement function. VFM is also achieved through innovation, relationships, sustainability, risk management, and supply chain management.

INNOVATION
Performance-based specifications are a means to encourage innovation from suppliers. Rather than describing prescriptive requirements (inputs), they focus on developing key performance criteria (outputs). The supplier is then free to design a solution to meet those criteria. Not only do performance-based specifications encourage innovation, but they also generate competition among suppliers and reduce risk to the buyer.

RELATIONSHIPS
Procurement is not an individualistic activity. It requires close working with suppliers and internal stakeholders. There should be a focus on supplier relationship management, cross-functional working, and stakeholder management.

SUSTAINABILITY
The triple-bottom-line concept has replaced a singular focus on price. Not only should procurements achieve ECONOMIC objectives, but they also need to satisfy ENVIRONMENTAL and SOCIAL ones. This holistic approach ensures that sustainability is achieved.

RISK MANAGEMENT
Procurement managers are increasingly seen as risk managers. They are responsible for ensuring that supply risks are managed effectively. A robust risk management process should be implemented which facilitates the identification, analysis, evaluation and mitigation of risks, and the development of contingency plans. This should be a cross-functional activity led by the procurement manager.

SUPPLY CHAIN MANAGEMENT
Rather than just focus on the first-tier supplier, it is recognised that procurement professionals need to consider the whole supply chain in order to manage risks effectively. Supply chain visibility is required. Supply chains should be mapped to identify all the different stages in order to identify risks and inefficiencies. Decisions can then be made as to who is best placed to manage them: the buyer or the first-tier supplier.

VALUE DELIVERY

The role of procurement then is to reduce prices, costs, timescales, risks, and inefficiencies and to improve quality, innovation, relationships, sustainability, and supply chain management in order to add value. However, value needs to be delivered effectively through facilitators such as resources, processes, systems, procedures and commitment.

RESOURCES
People are an organisation’s key resource. Healthcare procurement professionals require a wide range of skills to deliver value: technical and business skills (hard skills) as well as people and leadership skills (soft skills). As procurement moves from a tactical to strategic role in the organisation, soft skills become more desirable.

PROCESSES
Healthcare procurement requires a robust process to be in place. This should be formalised and clearly defined. A typical procurement process includes the following stages: identify and define the need, develop contract terms, source the supply market, appraise and select suppliers, contract award, and contract performance management.

SYSTEMS
E-procurement systems automate the procurement process. They enable organisations to reduce costs, increase productivity, increase transaction speed, reduce errors, eliminate paperwork, and standardise buying activity. Supplier portals are established which allow approved suppliers to be registered, and secure communication and transactions to be achieved.

PROCEDURES
Healthcare procurement is predominantly a government-led activity. It should therefore conform to the public-sector principles of openness, transparency, competition, equal opportunities, consistency, and value for money. In order to achieve this, most African countries have legislation in place which stipulate standard procurement procedures for awarding contracts. Healthcare buyers must ensure that they are familiar with these procedures.

COMMITMENT
Having robust processes, systems, and procedures in place focuses on compliance. However, in order for procurement to fully deliver value for the organisation, it must also achieve commitment to best practice among the stakeholders.  This can be achieved through procurement marketing, stakeholder management, building a business case, and demonstrating strong leadership and influencing skills.