Where the profit goes - Supply Management

Where the profit goes

25 October 2010
John Moore, procurement manager, Buckinghamshire New UniversityWith Philip Green and other big guns blasting away at the high cost of paperclips, it’s open season again on public procurement. Although some blisteringly good deals exist in the public sector, we never hear of them because good deals don’t make good headlines. On the whole, however, suppliers do achieve higher profit margins selling to the public sector than to private companies. Why is this? Is it because buyers don’t drive a hard bargain, because they are amateurs, are hampered by regulations or have unclear and changing specifications?I believe it’s all of these things, but at its heart is the fact that the structure of public sector organisations inhibits effective procurement in a way that the private sector doesn’t. Private companies – from the owner down through the board of directors, the managing director, functional heads and employees – focus tightly and clearly on long-term profit. All decisions, including procurement, are taken according to their effect on the bottom line. In public sector organisations, which are owned by taxpayers – although you would hardly think so from the effect they exert – the focus is hardly ever on profit. Instead, a constantly changing mix of welfare provision, public protection and military capability is the priority, and the criteria for these frequently override economic considerations in decision making. The public, politicians and the media set ever-varying demands on the public sector because society itself is not an economic organisation. Add to this the public sector regulations and European directives, and public procurement is even further removed from the private sector profit motive. One of the implications of this dazzling diversity of decision-making criteria is that many procurement decisions are made at the functional level, rather than by procurement professionals. Tesco uses the aggregated spend of all its supermarkets to devastatingly efficient effect. One critic has likened public procurement to each Tesco supermarket buying its own products rather than consolidating total demand and buying centrally. There are perfectly good purchasing consortia already doing this in the public sector, but until their contracts become mandatory, as with Tesco’s, functional-level decisions will continue to produce single supermarket purchasing. Another implication of this is that buyers in the public sector become too easily seduced by the charms of the salesperson. Many suppliers are able to dominate the relationship, leading to higher prices and onerous conditions. Recognising and accepting these differences between the two sectors is surely a necessary precondition to closing the gap between the odious comparisons that are constantly being made. * John Moore is procurement manager at Buckinghamshire New University
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