Brian Farrington Ltd

First Impressions Count

rgambell — Thu, 03 May 2012 09:31:44 +0000

We are frankly astonished at the responses we get from companies at times when we want to spend money with them. We are currently helping a client with the sourcing of their engineering fabrications. This is a multi-million pound contract.

Our initial desk research identified a number of potential suppliers that we decided to contact to establish whether they would be worth pursuing prior to undertaking any detailed due diligence.

The initial telephone call was made to all companies. Here are the responses from three of them:

Company No 1

When asked “Can you put me through to your Sales Department?” we were challenged “Why?” as if our request was unreasonable.

Company No 2

Exactly the approach was taken with our second potential supplier who responded with “Do you have any drawings?” in a tone that suggested if we did not possess the desired documents then there is no point talking to them.

Company No 3

The third response restored our faith in mankind! “Yes we do, and if you could explain a little more about what you are looking for I will make sure I find exactly the right person and they will call you back”. This they did within 10 minutes.

You can guess which of these companies have already been rejected.

In times of recession most companies would be glad of potential customers contacting them. First impressions count and really matter. How many Companies regularly test how their potential customers are treated by posing as one of those seeking to spend money with them. Clearly not enough are doing this.

For the employees we engaged with in the first two companies, we have two alternative suggestions. Firstly is a book by Dale Carnegie- it is called “How to Win Friends and Influence People”. If that does not appeal we would suggest one of the many excellent books on writing CVs as they are clearly going to need them when the business goes bankrupt through lack of sales!

Exchange Rates and the effect of Inflation

rgambell — Thu, 03 May 2012 05:59:22 +0000

I was asked very recently by a client how much saving they could expect from the renegotiation of an offer by their incumbent outsourced provider of specialist IT services to extend their contract. The Service Provider proposed a 10% increase. The Client was UK based and the Service provider domiciled in India.

However I needed more information. As you might expect many things went through my mind. Amongst other things these related to cost drivers; balance of power; contractual provisions; efficiency improvements; value and period of extension; exchange rates and inflation rates in the respective countries.

After I had responded, I thought the relationship between the latter two; exchange rates and inflation rates, warranted an article.

The warnings on any investment proposal-will state “the value of your investment can go down as well as up”. The same principle applies to a purchase in any currency.

When you make a spot purchase, importing from a country with a different currency it is relatively easy to fix the cost and know how much it will be in your own currency. Buy the same thing at a different time and the price may have risen or fallen.

This led me to consider the effect of inflation on exchange rates.

If we consider the last five years and you tried to guess which countries were relatively stable during this period from an inflation perspective you probably would not be surprised to find Japan or Switzerland amongst the most stable. In fact these were slightly deflationary with Japan approximately 1% lower over the period and Switzerland just less than 0.2% lower. This compares to the Eurozone and USA with 10% inflation and the UK at 18% over the same period. Unfortunately for Venezuela they come in at a whopping 300%.

But this does not take into account the exchange rate movement over the period.

If we now look at the stable prices of Japan and adjust for the effect of the exchange rate, the trend has been negative for the importers from the USA, the Eurozone and UK. If we take the worst case of a purchase made at the points in time when the exchange rates were at their highest and lowest during the five year period, the absolute inflation would be for Japanese based imports to:

Eurozone +72%

UK + 111%

USA + 62%

However, these are absolute figures and to calculate the real cost inflation you must factor in the importing nation’s inflation. This would reduce the increases to 56% (Eurozone), 79% (UK)and 46% (USA). Japan does not look so enticing now!

If your head is numb with these numbers then spare a thought for the buyer which has to factor in the volatility of commodity prices with the uncertainty of the future demand for long term contracts.

And what figure did I eventually tell the client that he might expect from the negotiation? Well sorry, that’s between us!

Need any help with currency or inflation matters in your procurement please call me Ray Gambell on 01744 20698 or email me r.gambell@brianfarrington.com

Manipulation of procurement controls

rgambell — Wed, 02 May 2012 14:21:55 +0000

It is difficult to exaggerate the risks created by those who manipulate procurement controls. It is ‘unfortunate’ that the manipulation is not uncovered by audit personnel, nor are senior managers and directors always maintaining enough vigilance. So – how does the manipulation operate in practice?

1. Awarding contracts at below authorisation level and subsequently raising change orders

2. Permitting contracts to ‘grow’, e.g. consultancy and audit contracts, in one situation

3. Avoiding competition and going to an incumbent supplier, thereby flouting competition strategies

4. Not applying a contractor rotation policy

5. Procurement being by-passed and verbal contracts being agreed

6. Price increases being agreed without either cost exposure or negotiation effort.

To what extent do these practices exist? Our conclusion is – a lot! Is it possible to account for its occurrence?

Unfortunately, many auditors have never been trained in procurement. Some procurement staff, and others, are well versed in failing to co-operate with audits and investigations, actively blocking access to key documents. Downright poor practice is another contributor, such as not retaining the losing tender documents, failing to record tender evaluation meeting discussions and claiming confidentiality.

We are aware of a situation where an employee of a construction contractor sat on a client’s tender award panel that awarded a multi-million £ contract to one of his company’s subcontractors.

You will recognise that these practices border or fulfil fraudulent activity. The question that needs asking is – when was this subject of manipulation last checked in your organisation?

“One-off” procurements

rgambell — Wed, 04 Apr 2012 09:13:14 +0000

We have been researching procurement expenditure on a wide range of “one-off” procurements. These typically challenge the knowledge and skills of procurement specialists simply because on “one-offs” there is little or no experience against which to benchmark. Imagine you were asked to tender the removal of large quantities of scrap where the contractor would sell the scrap metal in international markets. This would warrant due diligence being conducted on the key personnel and the contractor. More should have been done in the real life example. Within 6 months the contractor was in default of the contract. It is also relevant to note that the insurance requirement was for ‘valid insurance’ but it neither stated the risks to be covered or the coverage limits. There were 3 bidders all of whom failed to meet the Financial Viability criterion at which point the process should have been stopped but it wasn’t. Not a happy experience!

Continuing in a similar vein, imagine you were asked to procure a helicopter and the early discussions included consideration of a helicopter that would fly under IFR – Instrument Flight Rules as opposed to VFR – Visual Flight Rules (the latter is a much more constrained operational capability. The auditor observes “no transcripts exist of the various discussions.” We always stress the importance of an immaculate audit trail. The estimated final cost of the helicopter is a 37% increase on the project cost. This percentage will probably not surprise our readers but “one-off” purchases have an unfortunate habit of exceeding budgets. In the helicopter purchase the budget figure substantially missed, finder’s fee; consultant costs; Inspection & License fee; management fee; air freight, insurance and import fees, other costs and contingencies. The helicopter was purchased from a sole source, no competitive bids were held. Not a happy experience!

Brian Farrington Limited have risk metrics specifically designed for “one-off” purchases. Interested? Please contact us for further information

PROCURISK™ is the first, comprehensive procurement and supply chain web-based application

sashcroft — Mon, 02 Apr 2012 15:13:32 +0000

Our Premise: Corporate risk
management is an essential business activity. Risk mitigation strategies lie at the heart of Corporate Governance. What is the contribution to these mitigation strategies from the Procurement & Supply Chain Management function? It is rare to find robust methodologies in place that will, in a structured way, identify the potential risks.

Proposition: Procurisk™, a web-based application, facilitates a structured assessment of Procurement &
Supply Chain Risks. The outcome enables any organisation to focus attention on those facets of risk requiring action. We have defined specific areas of Procurement and Supply Chain risks, each carefully designed Metrics against which to evaluate current practice. Contractual Risk is an example of a key area. There are organisations who have not reviewed their contractual terms and conditions for many years. There are others who trade on the supplier’s terms, or worse, trade without formal written contracts in place. Price Management Risk is another area and, for example, risk exists when the basis of contract prices are not understood because the supplier’s cost drivers were neither requested nor negotiated. Some contracts have automatic year-on-year escalation where the price is linked to an index, such as the Retail Price Index.
Intellectual Capital Risk is an area rarely evaluated. The risks presented by not developing human capital and failing to motivate the procurement and supply chain team will weaken the long-term strategy of developing relationships with strategic suppliers to encourage innovation and positive change that maintains the buying organisation at the cutting edge of performance.

Methodologies:
Procurisk™ offers our clients three alternative approaches for using our methodology. There is the BRONZE service whereby the client organisation can complete the Metrics online and receive their risk positioning status online.
There is the SILVER service whereby the client can have the services of a BFL consultant to sample the Metric responses to confirm that the client’s judgments are founded on sound logic. Finally, there is the GOLD service
whereby a client can have a consultant visit their site to lead the risk evaluation and be fully supported by the client’s specialists. In both the SILVER and GOLD service a positioning report will be issued to our client.

Business Benefits: There are many business benefits from using Procurisk™. These include a higher profit through recognising where risks can be reduced; paying lower insurance costs; guaranteeing supply chain excellence and contract performance; managing intellectual property rights and dramatically enhancing the
negotiation of contract terms and conditions. The reputational benefit from being able to demonstrate effective procurement and supply chain risk management will be a business differentiator when tendering for new contracts.

Conclusion Procurement & Supply Chain risks are unavoidable. That is a fact. The risks need to be identified, classified and mitigation strategies put in place. PROCURISK™ is the first, comprehensive modelling tool available to help you undertake a rigorous procurement and supply chain risk review.

Procurisk™, a web-based application, facilitates a structured assessment of Procurement & Supply Chain Risks.

For details, Stephen Ashcroft can be reached at 01744 20698 s.ashcroft@brianfarrington.com Twitter @Farrington1978

Procurisk™ role for Stephen Ashcroft

sashcroft — Mon, 02 Apr 2012 14:51:29 +0000

Brian Farrington Ltd, one of the World’s longest established procurement consultants has appointed Stephen Ashcroft as a Procurisk™ Specialist. Stephen, reporting to Dr Brian Farrington, Managing Director of Brian Farrington Ltd will lead the launch of the innovative web-based application, Procurisk™ which facilitates a structured assessment of Procurement & Supply Chain Risks. Stephen has experience as a Procurement Consultant with Brian Farrington Ltd for over 16 years working with leading international firms and government departments.

Stephen can be reached on 01744 20698 s.ashcroft@brianfarrington.com Twitter @Farrington1978

Liquidated Damages

rgambell — Fri, 24 Feb 2012 09:46:24 +0000

Liquidated Damages (LD’s) are a misunderstood and emotive concept for procurement specialists. A starting point for clarity is the fact that in English Law a penalty clause is illegal. An LD clause is penal if it provides for payment of money stipulated as ‘in terrorem’ of the offending party to force him to perform the contract. The fact that the payment is described in the contract as a ‘penalty’ or as ‘liquidated damages’ may be relevant but not decisive. The purpose of any damages is to place the claimant in the position in which it would have been had it not sustained the wrong. English courts have heard many cases where LD’s lie at their heart. Such a case was Pegler Limited v Wang (UK ) Ltd (TCC) [2000] IT. CLR617. The defendant supplier has admitted liability and the court had to assess damages. The Judge agreed that Wang’s conduct had been ‘appalling’, but stressed, ‘My task is to assess compensatory damages. It is not open to the claimants on this case to claim either aggravated or punitive damages. The purpose of compensatory damages is to compensate not punish. The question is not what Wang deserve to have to pay, but what Pegler can prove is its entitlement in compensation’. It is always informative to scrutinise actual LD provisions as drafted in a real contract. Brian Farrington Ltd (BFL) have experience, for example, of shipbuilding and ship repair contracts. It is not uncommon to see an LD clause for delay in delivery. It will be computed on a time basis (daily, weekly or monthly) e.g. £5000 per day of delays or based on a percentage of contract sum, e.g. 0.1% of the contract sum for each day of delay. There is often a cap on the amount payable, often 5% or 10%. LD clauses are negotiable, assuming the contracting strategy decrees that LD is an appropriate way forward. Readers in the UK should note that there is ‘custom and practice’ wherein a typical LD clause will have a deduction of 1% (0.5%) per week up to a maximum of 10% (or 5%) of the contract sum, or milestone if that is what LD’s are being applied to. The following points are worthy of consideration: 1. There is nothing in law that decrees 1% – BFL have negotiated 7% for highly specialised courier services where prompt distribution was ‘mission critical’. 2. There is nothing in law that decrees the period of time must be a week. In an aerospace support contract BFL have negotiated ‘one hour’, where safety critical parts supply could cause an AOG (Aircraft On Ground) situation. 3. There is nothing in law that decrees 10% must be the financial cap, although it can be recognised that in practice the supplier/contractor will want the cap as low as possible to limit their liability under the contract. 4. BFL do not believe in granting a ‘grace period’ before the LD provision kicks in. This acquiesces in delay. If a date has been agreed by both parties, then the date should be honoured. Returning to the consideration of a ‘penalty’, a sum will be construed as a penalty if: – it is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breech. Procurement should encourage a debate on what is the genuine pre-estimate of loss. It is that, that should determine the LD provision. – if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid, and – there is a presumption (but no more) that it is a penalty when a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but which are minor damages It can be noted that the test as to whether a clause constitutes an LD provision or a penalty was set out by Lord Dunedin in Dunlop Pneumatics Tyre Co Ltd v New Garage and Motor Co [19.5] AC79. There are legal grounds on which LD’s can be challenged, namely: – the provision is invalid or void for uncertainty – on a true construction of the provision, it is not applicable to the event that has occurred – the provision is a penalty – the material contractual machinery is operable or broken down – there is a condition precedent to the applicability of the LD provision e.g. a certificate of non-completion, that has not been satisfied We trust this information will help you re-appraise your organisation’s approach to LD’s. We must, of course, recognise that LD’s are one facet of Damages and that there are very wide contractual and business considerations to be taken into account Dr Brian Farrington Managing Director www.brianfarrington.com 01744 20698 ©Brian Farrington Ltd. 2012

Pre-Qualification Questionnaire

bfarrington — Wed, 22 Feb 2012 13:57:03 +0000

Our research has shown widespread criticism of PQQ processes from those who are on the receiving end of voluminous documents issued by the public sector. PQQ’s are, of course, issued by the private sector but, typically, are less demanding in the detail. Too many public sector PQQ processes amount to little more than a ‘tick box’ exercise, despite elaborate scoring mechanisms designed to demonstrate robustness. Our critique here is intended to probe efficiency, relevance and enhance the value of some PQQ processes.

The PQQ process has a straighforward intent, namely to shortlist those organisations who will be invited to tender. Hence, by definition, some organisations will FAIL to proceed, despite having spent hours genuinely attempting to answer questions, including those of an obtuse nature. It would be a huge step forward if those who design PQQ’s could agree that all the information sought actually has a purpose. Does it have a purpose in real life? In order to make this subject live we are selecting facets of a PQQ issued by a large UK Central Government Department.

Company Registration Number. Why is this required? Would it be too cynical to believe that no-one will check the registration with Companies House to ascertain if the number is valid? Or, is it the case that a tick box can be completed? What do you think?

VAT registration number.Why is this required? Our cynicism continues. Is the evaluator now going to check with HM Revenue & Customs that the company is registered for VAT and that the number is genuine? By the way, if later it is shown that they ‘made up’ the VAT number and are charging 20% (the current VAT rate) then serious matters prevail. Is the VAT number another tick box?

Health & Safety. This section of the PQQ has seven questions – all to be answered YES or NO. The introduction begins ‘In order to make the processes simpler, you are asked not to provide supporting documents for questions in Section _. Please note that the Authority will ask to see these documents should you pass through to the Invitation to Tender stage.’ What are the implications of this statement? What does ‘make the process simpler’ actually mean? Perhaps it relieves the evaluation team from reading documents! One of the questions is ‘Does your organisation have a risk assessment process?’ This is a very important matter and if the YES box is ticked, where, precisely, has that got anyone? Incidentally, the advice to evaluators actually says. ‘Questions 1-6 must be answered YES.’ It doesn’t say what happens if a question is answered NO.

Financial Information. Question 1 in this section requires the provision of a ‘statement of accounts or extracts there from (sic) relating to your business provided that the publication of the statement is required under the law of the State in which you are established.’ There is, in consequence, a million dollar question. What happens to the information provided, given the parlous financial position of many organisations. It is possible that the financial statements provided are at least 10 months out of date. Rarely does the public sector ask for an interim set of accounts to bring the information more up to date. We suggest that the evaluation of finances at the PQQ phase is often flawed.

Assuming you are still with us and are now questionning the PQQ process you may ask what can we learn from the law? We recommend that you start with AMARYLLIS LIMITED and HM TREASURY (sued as OGCbuyingsolutions) [2009] EWHC 1666(TCC). This case relates to a claim for circa £11m. At para. 9. it reads:

“This is a claim based on alleged breaches of Regulation 4(3) of the Public Contracts Regulations 2006. The particular procurement process involved the supply and installation of furniture for a variety of Government departments. The claimant maintains that the Defendant failed to deal with its first stage tender (referred to below as the PQQ, the pre-qualification questionnaire) in an equal, transparent, and non-discriminatory way. There are four essential strands to this argument. First, the Claimant complains about the decision to allocate no marks at all to Section F of the PQQ, dealing with previous experience and comparable contracts, particularly in circumstances where the PQQ indicated that all Sections would be marked. This is an area where the Claimant believes that it would have scored highly. Secondly, the Claimant complains that the Defendant evaluated the PQQ responses without informing the tenderers of the relative improtance it ascribed to each question/topic. Thirdly, there are complaints about the Department’s evaluation of the environmental management sections of the PQQ, Finally, the Claimant complains that it was awarded zero marks for Section A of the PQQ, on the sole basis that it was a supplier of furniture rather than the manufacturer of the furniture itself. The essential complaint here is that the Defendant had an unstated – and unfair – preference for manufacturers rather than suppliers.

We commend this case for reading and study. It is an eye opener. To our public sector colleagues we say Caveat Emptor!

Let us now return to the substantive point of this briefing note. Who scrutinises your PQQ process? Who conducts due diligence on the responses to ascertain their ‘quality’ and accuracy? Do we have a PQQ process that has descended into a mechanistic tick box mentality? A PQQ process should be designed to give respondents an equitable opportunity to warrant receiving an invitation to tender. That is what must be achieved.

Volunteers required for Beta Testing

rgambell — Mon, 06 Feb 2012 10:47:45 +0000

We are always providing new ways to make advances in the Procurement profession. In this regard we have created and are currently testing a new computer based service developed jointly with a leading University. Its inital focus is supporting Contractual Management.

If you would like to be part of a small group to test the service and be ahead of your peers and competitors, please give me, Ray Gambell, a call to discuss. I can be contacted on 01744 20698.

We can’t give too many details away at present, whilst the Lawyers are processing the IPR protection, but we know of nothing like it worldwide. We are looking for key Contract Managers who would be willing to spend no more than half a day at our offices at Rainford Hall to explore the software from the users perspective.

Purchasing and Supply Chain Management – Eighth Edition

rgambell — Mon, 06 Feb 2012 09:09:55 +0000

We have just received our advanced copy of ”The Book” The publication of Purchasing & Supply Chain Management, Eighth Edition marks the 28th anniversary since the first edition was published and seven years since the Seventh Edition made it to the bookshops. It has undergone an extensive overhaul with each Chapter being reviewed and all new case studies. In total 712 pages. The official release is on 8th March 2012 but it can be pre-ordered from Amazon.co.uk. and Amazon.ca for those who want to be the first to get it.

Another way to be at the front of the queue, is for readers of our newsletter, who will get the chance enter a competition to win a signed copy. If you would like to enter the competition but don’t yet receive the newsletter, send me an email at r.gambell@brianfarrington.com and I will add you to our circulation list. The February Newsletter gives the details of how to enter. There is no cost or obligation and you can unsubscibe at any time.

Previous editions have been translated into Chinese, Russian and Polish, and Pearson, the book’s publisher, has recently announced that they plan to issue it in India, Bangladesh, Bhutan, Pakistan, Nepal, Sri Lanka and the Maldives. I have volunteered to undertake a one month promotional tour to the Maldives but I am still waiting to hear if the advertising budget will stretch that far!

Purchasing and Supply Chain Management - 8th Edition