Wouldn’t it be great if you could buy everything you need from just one supplier? Only one contract to manage, only one invoice to pay a month, only one relationship to manage, only one performance to monitor … the nirvana of procurement.
As it turns out, this type of procurement is starting to happen. The technology and distribution behemoth Amazon.com Inc.™ appears to be gearing up for just this type of business with government agencies. The Prince William School District in Virginia and 1,500 other U.S. public-sector organizations have signed up to buy 10 categories of office supplies through Amazon-based companies. Only Amazon met the criteria of being able to supply all 10. This involves literally billions of dollars in commitments and is likely the start of the conversation: “What else can we buy from this A-to-Z supplier?” As a colleague said, “Amazon doesn’t want to control the market, it wants to be the market.”
Is this consolidation of governmental business from a single provider a U.S. phenomenon? It doesn’t appear to be. In the UK, a similar strategy has been initiated by the Yorkshire Purchasing Organisation. Contracts include the proverbial A to Z, from office supplies to medical equipment in a five-year deal by aggregating (bundling) demand to “drive the cost of goods down.” The estimated value is £600M ($1.014B CDN) through an Amazon-based partner. It is highly probable that this buying trend will migrate to Canada. After all, U.S.-based group-purchasing organizations are now present in the Canadian market.
This is really an extension of the tactic of bundling goods into larger and larger volumes to get the absolute lowest cost. Canadian public procurement officials have been pursuing this model for years. And whether it is cause or effect, oligopolistic markets evolve, in which a handful of suppliers control the quality, price and supply of a good or service, resulting in limited competition. Oligopolies exist today in food, pharmaceuticals, airlines, transportation, toys, fuel, couriers, concrete – and yes, office supplies.
Provincial shared services agreements and cooperative buying groups follow a similar agenda. To paraphrase, they buy as much as possible, from as few as possible, for as many as possible, for as low cost as possible. The net result is that initial contract savings seem to wow the purchaser. But only the bigger suppliers can meet the demand-side expectations. This pushes out the small- and medium-sized enterprises (SMEs). When SMEs go out of business, it is not the responsibility of the government buying groups; it’s not in their mandate to be concerned with the outcomes of a zero-sum game. It’s just what happens in the market. The next time the purchaser (buying group) goes out to the market, only one or two suppliers may able to submit a bid for the volume of bundled goods and/or services, aimed at the lowest cost. At this point, how would the purchaser assess the value for money? It is hard enough to negotiate in an oligopoly. In a monopoly, it is a futile exercise. This can result in limited levels of competition, and limited bargaining power for the purchaser in the long-term. Social costs are external to the sourcing strategies, but they are borne by the same taxpayer.
Woodward’s and Eaton’s were the canaries in the retail market when Walmart and other U.S. big box companies came to Canada 25 years ago. Walmart et al. drove out the larger Canadian retailers and continued to steamroll over the SMEs. There was some hand-wringing by politicians and protest groups, but no real pushback. After all, the end seemed to justify the means: cheaper is better. The obsession with the lowest cost of goods is a trait of the consumer, and perhaps the public sector. Both sides have their own rationale.
Consumers buy whatever is legally available within a market and focus on their own interests. For government buyers, there is an expectation that they will make decisions based on value for money for the public good. Given that society benefits from various healthcare and social services, which are paid for by the taxpayers, public-sector policies need to consider more than the lowest cost. It is fairly intuitive to see that if we all buy from a non-Canadian supplier, a redistribution of revenues will favour a foreign-owned, low-cost entity. We may draw the line at the working conditions or human rights violations. We could argue that this is all a part of the free trade system.
A rather innocuous-seeming procurement tool is the purchasing card (P-Card). It was intended to reduce the administrative costs for buying low-value goods. Enter Amazon. Based on conversations with procurement professionals in the public sector, it is seeing staff and managers searching the Amazon site for deals. Their only measure of value is their budget. If it costs less to buy an item from Amazon, they are doing a good job. Their time isn’t included in the search. Shipping may be. Duties may be. It’s what gets charged to their P-Card that matters.
Which causes us to reflect on local sourcing opportunities and trade agreements. In discussions with procurement colleagues in the Lower Mainland of B.C., there could be $300M per year in spending through P-Card programs within this public sector – conservatively. Under the trade agreements, we can’t have local preference for suppliers, but when we think of the P-Card flexibility, there are options. Referring to the Lower Mainland values, if only 10 percent of the P-Card buying was redirected to local suppliers, it could redistribute $3M to locally owned and operated businesses annually. It wouldn’t contravene trade agreement obligations, and to an SME sector, $3M is a meaningful amount of money. Public-sector organizations may need to look at their P-Card guidelines and ensure that local sourcing is the first option, and foreign-online is not. Multiply the example dollars by the rest of the Canadian market, and it becomes a significant dollar value. And it would require a conscious change in spending practices.
In terms of the market, these are still early days for mass online ordering by government operations, but the buying patterns and trends are starting to show. Government has at least two pockets to balance: the spend pocket and the revenue pocket. If these get out of balance, we lean toward deficits. The potential material savings have not yet been measured against the long-term social costs, but it is time now to ensure that our government sourcing strategies are cognizant of the implications of A-to-Z suppliers.
Readers are cautioned not to rely upon this article as legal advice nor as an exhaustive discussion of the topic or case. For any particular legal problem, seek advice directly from your lawyer or in-house counsel. All dates, contact information and website addresses were current at the time of original publication.
Larry Berglund | SCMP | MBA | FSCMA
Larry has been in the supply chain management field as an author, manager, business trainer, academia, and consultant for many years. Larry has worked in both the private and public sectors. Recently he has been co-facilitating NECI eSeminars, classroom sessions, and online modules. His new book, Good Planets are Hard to Buy is now available on Amazon.
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