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Current State (cont.)
TPL have 3 staff performing procurement services and the agency has their own processes, policies and system for purchasing. Key activities performed by the TPL Procurement Group include ensuring the competitive process is compliant with policy, ensuring proper documentation for non-competitive procurement, and administering the
purchasing card process. The total annual procurement spend is estimated at $44m – of this amount, annual operational spend is estimated at $20m and annual capital spend is estimated at $24m. Library collection procurement is performed by a different group in the TPL.
Based on information provided, TPA does not have any dedicated purchasing staff - RFP issuance and purchasing process and procedures are performed by business units. TPA has its own purchasing by-law and is not subject to the City’s thresholds. Based on interviews and information provided, the estimated annual operational procurement spend is $20m.
The total estimated spend consolidated across City divisions and in-scope agencies is approximately $1.6b. City divisions comprise the majority of this spend (69%), followed by Toronto Transit Commission (17%) and the Toronto Police Service (8%).
Findings and Opportunities
Observations and Issues
Identification of possible opportunities for shared services in purchasing and materials management typically involves an assessment of two core procurement processes (see figure below).
Classically, shared service opportunities exist in operational procurement and are geared at increasing process efficiency. Using shared service delivery models, such as centralization, organizations look to generate savings by achieving reductions in transactional costs. In the vast majority of cases, realizing these savings involves a significant degree of change, impacting people, systems and processes. Our assessment of the current state service delivery structure, input from stakeholders, past experience, and review of
Purchasing and Materials Management
leading practices suggest that implementing shared services models that centralize transactional activities across the City and agencies could incur significant implementation costs associated with aligning IT systems and procurement processes. As a result, we did not focus on identifying opportunities in this realm of procurement.
On the other hand, shared service opportunities in strategic sourcing are geared toward achieving better pricing for goods and services, resulting in cost savings and better management of organizational expenditures. Achieving these savings involves changes to the approach, mindset and focus of procurement resources. There are fewer system implications and smaller investments required to achieve savings in the strategic sourcing cycle compared to the operational procurement cycle. Further, our experience with similar clients shows that the savings potential and achievability is greater in the strategic sourcing cycle.
© 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
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Observations and Issues (cont.)
Analysis of the strategic sourcing cycle across the City and in-scope agencies suggests that procurement is predominantly tactical, with little formal emphasis on strategic sourcing and no evidence of category management*. Sourcing is contract- based rather than category based and volumes across agencies and divisions are not leveraged formally. Services provided by the PMMD to divisions are primarily reactive to requests for procurement and strategic sourcing is limited to
establishing blanket contracts. Although there is some joint procurement and sharing of contracts across divisions and agencies for a few select commodities, these arrangements are infrequent and mostly not formalized. Furthermore, formal, structured processes to consolidate common spend across divisions and agencies are lacking.
This observed gap presents a significant opportunity for the City and the in-scope agencies to drive savings by (1) consolidating common procurement spend across City divisions and agencies, (2) adopting a structured approach called “category management” to managing these common categories of consolidated procurement spend. As a result, this functional analysis focused on identifying and evaluating opportunities based on this capability gap in the strategic sourcing cycle. Focusing on this dimension of procurement is in line with industry leading practices and KPMG experience - KPMG’s recent global survey of procurement functions “The Power of Procurement” found a direct link between an ability to achieve greater cost savings and an overall maturity in category management, strategic sourcing and supplier relationship management. Those organizations that reported either ‘excellence’ or ‘leading’ maturity in these areas tended to deliver a higher percentage of savings than their less mature peers.
A range of model options to deliver these two requirements were considered. The general feeling amongst key
stakeholders was that a procurement consortium was a feasible solution. Consortia are structured with staff from existing organizations and therefore any work related to a consortium is additional to the staff’s regular scope of activities. This implies that consortium priorities are not always the highest among participating organizations, typically resulting in delays and slow response times. Decisions are usually made by a committee of participants from diverse organizations and can often be challenging and time consuming. Furthermore, because all (or most) organizations must agree on the categories in scope, typically the less complex and lower value categories are managed, therefore limiting the potential savings opportunities. While a consortium could be implemented with a relatively low degree of resistance, such a model will not deliver significant cost savings to the City. Instead, to attain sustainable cost savings and make better purchasing decisions, we recommend implementing a shared service procurement model, employing category management and strategic sourcing approaches. Unlike a consortium, a shared service unit has the benefit of clear lines of governance and responsibility, while being focused, responsive, and agile. In the next section, we describe this model.
Findings and Opportunities
Purchasing and Materials Management
* Category management
is defined as “organizing the resources of the procurement team in such a way as to focus
externally onto the supply markets of an organization (as against having a focus on the internal customers or on internal Procurement departmental functions) in order to fully leverage purchasing decisions” (The Chartered Institute of Purchasing and Supply).