To the University Community
The University, in consultation with the Health System, has completed a broad analysis of procurement activities across campus. The review, done in conjunction with the implementation of the new financial system, assessed how effectively and efficiently the University was purchasing goods and services and if there were opportunities to achieve cost savings without negatively impacting choice and quality. To assist in this effort, the University engaged Coopers & Lybrand to work with a group of procurement specialists and faculty to ensure a thorough review of Penn's procurement practices.
The study found substantial opportunities to achieve savings in the $640 million of goods and services purchased annually. Through negotiating volume contracts, Universitywide discounts, reducing the numbers of vendors within specific commodities, and combining pur chasing activities with the Health System, Penn can achieve significant cost savings in its procurement activities. The study further recommended that the University set goals for individual procurement offices and develop a comprehensive data base to track future procurement activity and costs throughout the University.
The study also reinforces many of the things we were already doingProCard, Online Access to vendor catalogues, commodity nego tiations, but indicates we still have major opportunities that we have not yet harvested. The central Purchasing Office has taken steps to make Penn's procurement process more efficient. However, if Penn is to achieve the savings envisioned in the following report, each member of the campus community must play an active role in ensuring this project's success.
Given that the restructuring of our procurement activities can make an enormous contribution to our $50 million administrative cost savings target, without a substantial displacement of employees, we urge the Penn community to make a whole-hearted commitment to making this effort a resounding success.
Executive Vice President
Plan implementation has been an ongoing process over the last three years resulting in changes that have already had a material effect on the procurement process. Significant additional changes will occur with implementation of the Purchasing component of our new financial system on July 1, 1996. It would be appropriate to characterize the entire effort as a three-phase program that has been in effect since February, 1993. Those three phases can be identified as:
The team considered all aspects of the procurement process, developed a model of the ideal procurement process for Penn, validated the concept with key constituencies, and finalized the reengineered design.
The concept defined dependencies to be addressed and benefits to be realized. Breakthrough ideas were explored and validated.
A summary outline of the model was presented to various members of the community for their response. Reaction to those presentations was favorable and virtually no changes in the design were made as a result of the feedback from the presentations.
Implementation of FinMIS is scheduled for July 1, with a simultaneous transfer of responsibility for low dollar value purchase transaction processing to school and center business offices.
Effective July 1, Penn Purchasing will become Penn Acquisition Services. It will be staffed by a team of procurement professionals whose primary responsibilities will be contract negotiation, value analysis, cost reduction, product and service improvement, identifying and integrating new technologies, supplier management, promoting minority and community business, standards establishment, and enhanced customer interaction. The new Acquisition Services organization will be a smaller, professionally-based organization and one that will focus its efforts on high return, value added activities.
The departmental restructuring plan has been developed in consultation with Human Resources. It will establish a professional organization that manages procurement activity and information, and delivers high quality procurement services to the campus community. New job descriptions have been completed for all staff positions. The skill sets needed in the new environment have been incorporated into the new job descriptions.
Six positions have been discontinued as a result of the various incremental process improvements made to date as part of the reengineering of Penn Purchasing. These position discontinuations were accomplished with no decrease in departmental response time nor reduction in service levels. In fact, in several areas there have been increases in response time, improvements in service, and reductions in the cost of products and services. To date, all position discontinuations have been accomplished through attrition. Upon implementation of Penn Acquisition Services on July 1, 1996, an additional five positions will be discontinued. Combined savings will total $237,000 in salaries and benefits.
Some interim improvements that simplify the procurement process and lower costs of acquisition have already been adopted. The ProCard has eliminated paper transactions and the costly process associated with issuing a purchase order. This program ensures that the University is not incurring as much administrative expense to buy a $30 paper punch as $5,000 of office furniture. Use of the card has produced an estimated $320,000 to date in process cost savings University-wide.
Some of the savings to date have been reinvested into a review of procurement practices at Penn in order to find additional opportunities for reducing the cost of purchased goods and services. That review, recently completed by Coopers and Lybrand, suggests many opportunities for Penn to leverage its significant purchasing power.
On average, the University spends 58 cents of each revenue dollar on goods and services. This offers the University significant opportunity to seek and obtain more value for the dollars spent.
The key to our success will be the development of a creative collaboration within the University and with our suppliers. The aim is to reduce the total cost, not just the price, of each product and service we buy. This will require the formation of a number of partnerships to reduce costs year after year. In exchange for helping key suppliers market, manufacture, and deliver more efficiently, and thereby hold down prices, the University can secure a share of the savings.
With the introduction of FinMIS in July, the University will continue to reduce process costs and will be able to gather information on University-wide purchases of goods and services. This will enable us to combine fragmented purchases into single University-wide contracts. Volume purchasing will further reduce administrative expenses and provide negotiating information that has not previously been available.
The formation of partnerships with suppliers will enable continuous improvement in the acquisition process and the attendant costs. With better information the University can help suppliers manage inventories, reduce waste, and standardize components, steps that can translate into additional cost savings to the University.
In order for the University to deliver more volume in exchange for reduced costs, the University community will be asked to participate in generating increased buying power. This will require departments to change the ways in which they conduct purchasing activitiesand it will require Purchasing to work closely with customers to ensure that their needs are being met. The success of this enterprise depends upon all of us working collaboratively, sharing ideas, expertise, and a common goal.
With the infrastructure largely in place and ready for delivery on July 1, the University is poised to move to the next level of opportunity. Over the next several months, you will hear more about this effort. We will be working with our local buying units to prioritize areas for negotiation, developing teams of procurement and user expertise, and communicating how each of us can help ensure that maximum resources are directed to the University's academic purpose.
The following report is the result of a study of procurement practices at the University and in the Penn Health System, as announced in Almanac June 20, 1995, by Stephen Golding, Vice President for Finance, and John Wynne, now Senior Vice President and Chief Financial Officer of the Penn Health System.
Prepared for the University of Pennsylvania
The University and Health System spend $640 million annually in goods and services. We focused our analysis on a set of high profile commodities that may be representative of the potential savings available to the University. Under the guidance of an advisory group comprised of faculty and administrators from the University and the Health System, the sample selected for our analysis represented annual expenditures of approximately $120 million.
Out of the commodity sample analyzed, we quantified potential savings for eight commodities representing annual expenditures of $36 million. Our analysis of these eight commodities in the sample set identifies potential savings in excess of $5 million annually. A summary of those savings is listed below:
Commodity Findings and Recommendations
Commodity Low Estimate High Estimate of Savings of Savings
Publications $1,500,000 $3,000,000
Airlines $300,000 $600,000
Hotels $250,000 $500,000
Car Rentals $45,000 $50,000
Temporary Services $0 $535,000
Copiers $0 $204,000
Audio Visual Equipment $81,000 $120,000
Copier Paper $35,000 $141,000
TOTAL $2,211,000 $5,150,000
In order to realize these savings, Penn must make some fundamental changes to its buying practice, particularly in the Schools, changes that are consistent with the reengineering efforts currently underway. Specifically, the University must:
Given that the savings identified in this analysis represent only a small portion of the overall buying of the University, Penn must not lose sight of the much larger opportunity that exists in the remaining commodities and items that make up the $640 million. Penn spends approximately $400 million annually ($640 million less expenditures for utilities, insurance, major construction, etc.) on the purchase of more routine supplies and services, including highly specialized science equipment.
If the University's buying practices for these remaining commodities are similar to the ones analyzed in this study, we believe that overall savings of $15 to $20 million are possible. Although Penn Purchasing has made inroads in negotiating volume discounts for individual commodities, they have not had the resources or the institutional commitment required to achieve significant savings across a wide range of commodities. In order to realize these savings, Penn must initiate a multiyear Universitywide effort to collect better procurement information, strengthen the incentives and degree of accountability for institutional procurement goals held by its buying centers, and dramatically change the procurement practices of both the buying centers and individual members of the University community.
To achieve its goal of generating cost savings through improved buying practices, Penn must understand the current practices in place in all of its purchasing units, including those in the Health System. In addition, Penn must identify opportunities to better leverage its purchasing power to reduce the costs of goods and services purchased. To assist in this effort, we were asked to review the purchasing practices of the University. The primary objectives of the study were:
This report summarizes our analysis, identifies a set of specific cost savings opportunities, and presents recommended approaches for achieving these savings.
Overview of Penn Purchasing Activity
The Purchasing Department at the University of Pennsylvania is the central procurement authority for the institution. University procurement policy permits the Purchasing Director to delegate procurement authority to other organizations. Other University organizations have been delegated procurement authority in order to provide them with the flexibility to be more responsive to their specific needs including:
Currently, the combined purchasing volume managed by those organizations is approximately $450 million. The remainder of Penn's purchasing activity is managed directly by its customers (faculty and staff) and paid for through University check requests (CForms). Purchases through Cforms annually represent slightly less than $200 million and include payments for such major commodities as utilities, insurance, legal and professional services, and payment for items not purchased through purchase order issuance.
Throughout the project, we were advised by a group of Penn faculty and staff who represented its buying centers and select academic departments and other University staff. These University employees assisted in identifying high priority opportunities for savings, reviewing best practices, and assessing the relationship between Penn's buying centers.
Finally, we conducted a brief external research effort to identify practices that could potentially be adapted and implemented at Penn to help the University establish both the infrastructure and the support required to change its buying practices.
The University of Pennsylvania and its Health System spends approximately $640 million annually in the purchase of a wide range of goods and services. Included in these purchases are some highly specialized commodities such as utilities and insurance. To date, Penn has already launched separate initiatives to examine its energy consumption and insurance costs and as such these commodities were left outside of the scope of this analysis. (See Almanac/Compass articles for description of reengineering programs being undertaken in energy ( Almanac December 12, 1995) and insurance Almanac November 7, 1995.)
Similarly, the University spent approximately $100 million on major construction and renovation projects last fiscal year. There are many factors which influence the cost of a construction project including construction standards, the project management approach chosen and the competitive bidding process used to select the contractor. The scope of this project was limited to reviewing the procurement practices used to select construction vendors and did not assess the costeffectiveness of the University's construction standards or project management. It is our understanding that Facilities Management has undertaken separate efforts to assess these aspects of construction costs.
The University of Pennsylvania spends approximately $400 million annually ($640 million less expenditures for utilities, insurance, major construction, etc.) on the purchase of more routine supplies and services (including highly specialized science equipment.) These $400 million of annual purchases are what we consider commodities that have potential for cost savings.
We identified 14 commodities for which the University and Health System spent approximately $120 million as holding potential opportunities for immediate savings and that the savings for these commodities could be quantified within the timeframe and scope of this analysis. Out of the remaining 14, we quantified savings opportunities for 8 commodities representing $36 million in annual purchases. Our analysis of the 14 commodities can be broken down as follows:
We believe that the savings opportunities identified for these commodities are representative of a larger savings potential for the rest of Penn's purchases. As Penn continues to analyze its buying practices and obtains improved management information from the purchasing system implementation, it will be able to identify similar savings opportunities for the remainder of its purchases.
Our specific findings and recommendations for each commodity are presented in the following section.
Group 1: Commodities We Analyzed and Identified Quantifiable Cost Savings
Approximately $13 million was spent in FY 95 on publications services at Penn. These services were purchased through several channels. The University and Health System buy printing services from over 120 different vendors. In contrast, industry best practices suggest that using the services of a printing expert to procure printing services and reducing the number of suppliers of printing services yields significant cost savings.
Due to the significant savings that could result from using a preferred printing professional to procure this commodity, we recommend that the University and Health System direct all significant printing purchases through a preferred printbuying group. Penn should consider instituting a policy that would require any areas with a print job of $1,000 or more to get a bid from the preferred printbuying group. Based on current University and Health System spending levels, we estimate that Penn could reduce its annual cost of publications by $1.5 to $3 million annually. By encouraging more work to go through a preferred printbuying group, the institution can consolidate its volume to facilitate better prices, enable Penn to more effectively track vendor performance, and facilitate the collection of more accurate data in this commodity area. The savings identified above will only be possible if the University is able to consolidate its procurement of printing in this manner.
We recommend that Penn eliminate the procurement surcharge from University Publications and replace it with a centrally funded budget or a new incentive based pricing structure in which University Publications is paid out of the savings they generate. The change in pricing should be coupled with a communication effort that demonstrates University Publications' commitment to service, including the establishment of a customer review board to evaluate the quality of their work.
The University and its Health System currently spend approximately $24 million on travel and entertainment activities annually. Approximately $15 million represent expenditures for airline tickets, hotel rooms, car rentals, train tickets, and meals. Although the University has a negotiated agreement with American Express Travel Services, the majority of travel services (approximately 60%) are purchased through other agencies or directly from providers. This practice is preventing Penn (or American Express on Penn's behalf) from negotiating volume discounts with airlines, car rental companies, and hotels. The ability to successfully conduct such negotiations hinges largely on the ability of the institution to guarantee a substantial portion of its travel business to a single vendor. By utilizing such a large number of agencies, Penn is not capitalizing on Amex's information tracking capability which could track and report Penn's expenditure patterns to support volume discount negotiations. Importantly, Penn is not capitalizing on the large travel volume it generates in order to maximize the level of service it receives from its contracted travel agency.
In order for the University and the Health System to receive superior service and the lowest possible fares and rates, we recommend that all travel arrangements be processed through one travel agency. We understand the decentralized nature of Penn and the inherent difficulty of mandating the use of one travel agency to its faculty and staff. However, the University and the Health System stand to gain substantially by using a single travel agency. The University and Health System at least make a substantial effort to present a compelling case to all schools and departments showing them the service and cost benefits of using one travel agency. Below is a breakdown of potential savings:
C. Temporary Services
The three major consumers of temporary services at Penn are Penn Purchasing, HUP, and the Department of Medicine. Expenditures for temporary help in FY 95 represented $4 million which was divided among ten different vendors. Only one vendor appears to be used for temporary medical staff, the remaining seven vendors provide general administrative support. Penn Purchasing has recently reduced its vendor base from five contracted vendors to one.
In order to achieve additional discounts, the University and the Health System must consolidate their temporary services business and sole source it. The potential discounts that would be offered to Penn in exchange for greater volume translates into approximately $285,000 in savings for the University and Health System.
Since the University and the Health System spent approximately $4 million on temporary services last year, their combined volume would qualify them for a 10% (about $400,000) discount.
Based on the potential savings opportunity, the University and the Health System should combine their buying power and negotiate a contract with a single supplier for temporary services, which would reduce annual spending for temporary employees by $285,000 to $400,000 given current buying levels. By funneling 8590% of the temporary services business through one vendor, Penn will automatically save several hundred thousand dollars without altering their usage volume. The results of our analysis indicate that there is a potential for one vendor to meet the majority of Penn's temporary service needs at a reduced cost. Therefore, we recommend that the University and Health System negotiate a joint contract for temporary employment services as soon as their current commitments expire.
D. Office Equipment
The category "office equipment" covers a large number of products that the University and Health System purchase during any given year. The areas of copiers and audio visual equipment were selected as the target commodities due to the total dollars they represent to Penn. The combined expenditures for these areas accounted for approximately $4.3 million of Penn's total purchasing dollars in FY 95.
The University and the Health System can save $204,000 in the purchase/rental of copiers if they select two primary vendors and standardize the types of machines available for purchase across Penn. This approach could possibly limit the available variety of copiers across the University, the choice of two vendors should provide the Penn community with a sufficient range of options to meet their operating requirements and generate a significant cost savings potential. The potential benefit warrants the formation of a crossfunctional commodity team to continue the analysis of current vendors' offerings to confirm the feasibility of two suppliers. One of the team's tasks should be to develop clear machine definitions, descriptions, and functions so that departments are not buying more expensive machines with features they do not need. In this way, the team will have simplified the purchasing process for the departments while saving Penn money. The team will also need to assess how competitive Xerox and Ricoh's prices are for machines with comparable copy speeds and features.
Penn could save $80,000 to $120,000 if it funneled its audio visual purchases through fewer vendors. We suggest that the University and the Health System assemble a crossfunctional commodity team to explore the possibility of reducing the vendor base to three preferred vendors. By working to reduce the vendor base, an audio visual commodity team would not only save Penn time and money but improve the service provided to its end customers, which would provide further incentive for faculty and staff to participate in the preferred buying agreements.
Group 2: Areas of Significant Opportunity Identified but Not Quantified
E. Lab Supplies
The University and the Health System spent approximately $18 million last year on lab supplies and chemicals with more than 115 different vendors. Of those vendors, about 15 have contracts with Penn and four of them are duplicative (Fisher and Baxter both have separate contracts with Penn Purchasing and HUP). Quantifying the size of potential savings for this commodity is complex. Due to the technical nature of lab supplies, these products do not lend themselves to a clean "appletoapple" comparison. Further, the current information systems at Penn do not capture the necessary data, with regard to this commodity area, to conduct a meaningful price analysis.
In addition to our efforts to understand and improve Penn's lab supply procurement, Penn Purchasing has recently renewed its interest in pursuing thirdparty supplier relationships with vendors in an effort to reduce the vendor base and eliminate excess paperwork. The initiative has potential and Penn Purchasing and the Health System should work together to identify which vendors can be used as thirdparty suppliers to meet both of their needs.
Penn should consider using a lab supplies commodity team to negotiate agreements that will benefit both the University and the Health System. This team should consist of representatives from all of the major areas at the University and the Health System that buy and use lab supplies. The crossfunctional nature of the team will ensure that all points of view are represented in buying decisions. The charge of the commodity team will be to negotiate the best price and level of service in addition to reducing the vendor base. In order for the commodity team to successfully negotiate lower prices, it must first devise a method to collect current expenditure information.
While data limitations make it difficult to estimate the total potential savings available for this commodity, a recent initiative between the Department of Medicine and HUP provides an illustration of the potential for savings. HUP and the Department of Medicine have been working together for several months to improve coordination in the purchasing of lab supplies. As a result, the Department of Medicine has been able to save 3040% on various supplies by capitalizing on HUP's buying power and relationships with vendors and by eliminating redundancies in its vendor base.
The commodity team approach is designed to carry these efforts to the rest of Penn by incorporating the lab supply needs of the entire University and the Health System to fully leverage Penn's substantial buying power.
Overall, according to information from Penn Purchasing, the University and the Health System spent approximately $34.7 million on computer hardware, software, service, and peripherals in FY 95.
Penn should initiate a joint effort with the Health System and the Computer Connection to investigate the possibility of combining organizations in order to leverage the buying power of the University. This strategy has the potential to generate substantial cost savings.
As part of this project, we conducted a high level review of how the University procures construction services.
The University should develop the appropriate mechanism to oversee the procurement of construction services, maximize the equity and fairness of the process, hold the decision makers accountable for their actions, and seek the best value of services for the University. In such a model, the Vice President for Facilities Management would be responsible for adhering to guidelines developed jointly with the Vice President for Finance.
The model should recognize that it is unrealistic to expect that Penn is obligated to consider every contractor that wishes to participate in the bidding process. The qualified contractor list must be held to a manageable size that ensures competitiveness and fairness.
Therefore, Penn should:
Finally, the University should develop specific mechanisms for monitoring the process for compliance with the agreed upon bidding practices and set a timeline to review the performance of the construction services procurement process. Appropriate controls must be implemented to monitor this function.
Group 3: Commodities For Which We Performed A High Level Review
H. Other Opportunities
While there is an opportunity with uniform purchases to further reduce the vendor base and to establish additional contracts, the actual savings opportunity is difficult to quantify at this time because of the variety of uniforms that Penn purchases (e.g., dining, lab, housekeeping, facilities, police, etc.). Penn should continue to evaluate potential suppliers to determine how many of these different kinds of uniforms they can supply.
The University should focus on immediately implementing changes in commodities A through G identified above, in order to realize the $2.5 to $5 million in potential annual savings. In addition to those commodities, Penn should further investigate the opportunities listed in section H above, plus opportunities in medical supplies, housekeeping and maintenance supplies, pharmaceuticals, scientific equipment, computer supplies and peripherals, computer software, chemicals, catering, and office supplies, among others.
Parallel to this analysis, Penn initiated a review of its procurement practices for guard services and onsite storerooms. The Purchasing Department has collected initial expenditure figures for these two areas and has suggested that significant cost saving opportunities exist. Although we did not analyze these particular areas, we recommend that this analysis be continued in order to collect all current expenditure information, quantify potential savings, and recommend a plan of action. Penn's initial findings include:
Penn should continue to assess this area to identify any opportunities for cost reduction. As part of its assessment, the University might want to consider several alternatives such as:
1. Buying Centers
The University should continue to preserve its decentralized approach to procurement transactions by continuing the operations of its authorized buying centers around the campus. The inherent advantages of this approach include:
However, in order to preserve the University's buying power while maintaining a somewhat decentralized approach to buying, Penn needs to strengthen the incentives and degree of accountability for institutional procurement goals held by its authorized buying centers. At present, there is no formal process for setting cost savings goals for the authorized buying centers within the EVP center at the University, nor are there joint goals and incentives for collaboration between the University and the Health System.
As a result, Penn is allowing its vendors to in effect "divide and conquer" the institution. During the course of the analysis we found evidence of vendors charging different prices for the same item to the University and the Health System. Additionally, it was reported to us that some vendors would treat the University as a marginal customer and provide it with inadequate service levels even though the Health System was one of this vendor's major customers. Finally, there is no formally defined role either for Penn Purchasing or another unit within the University to monitor the performance of the units to whom it has delegated buying authority.
In order to strengthen the effectiveness of its decentralized buying model, we recommend that Penn institute the following practices:
2. Role of Penn Purchasing
In order for the University to be able to effectively implement and monitor the increased number of commodity agreements called for in our recommendations, the role of Penn Purchasing will need to continue to move from transaction processing to one of negotiation and vendor management. It is our understanding that the University has begun this process through the implementation of the Financial system, the introduction of procurement credit cards, and the reengineering of the purchasing process. As these policy and technology changes begin to reduce the volume of purchasing transactions which it processes, Penn Purchasing should be refocused on the following responsibilities:
3. Purchasing Advisory Committee and Commodity Teams
In addition to augmenting the skill sets of its Purchasing department, we recommend that Penn form commodity teams to support the selection and monitoring of its vendor partners. Furthermore, the University needs to create a Purchasing Advisory Committee charged with overseeing the efforts of all commodity teams. This committee will also assist in prioritizing the efforts of the commodity teams.
Commodity teams have been employed successfully by corporations as effective mechanisms for defining requirements for vendor agreements and building consensus among various customer groups for the selected vendor. The responsibilities of a commodity team are to solicit input from customers regarding their requirements for a negotiated agreement, evaluating vendor proposals, recommending a preferred vendor, and participating in communications with the University community. In order for a commodity team approach to be effective, it must include the following:
The roles within an individual commodity team typically include:
Changes to Procurement Practices
Most of the potential cost savings and service gains available to Penn through better commodity management are dependent upon its ability to deliver all or most of its buying volume within commodity categories to a preferred vendor. In order to achieve this, Penn may have to consider mandating certain buying practices among faculty and staff. For instance, in order to achieve the savings available from better prices for travel expenditures, the University's travel business will need to be purchased through a single travel agent. Most corporations achieve this by mandating the use of the preferred vendor, applying penalties such as withholding reimbursement if nonpreferred vendors are used without justification. Similarly, Penn's ability to reduce the cost of items such as office equipment would require it to standardize much of the equipment it purchases. Clearly, mandating participation should only be attempted in cases where there is a compelling economic justification and the University and vendor are prepared to meet the service requirements of the majority of Penn's customers.
In areas where mandating use of a preferred vendor is not advisable, Penn should seek to provide strong incentives for customers to purchase from preferred vendors. These incentives should come in the form of better prices and service from a preferred vendor and easier ordering mechanisms, such as online catalogs. By tracking participation of schools and departments in primary vendor programs, Penn should be able to report to a Dean or Vice President both the cost savings generated for their schools by their participation in these agreements and, conversely, the additional cost they bore by not participating. In all cases, lack of use of a primary vendor should be investigated first as a potential failure to meet the customer's needs rather than a lack of cooperation on the part of staff.
In summary, realizing the financial and service benefits of managed purchasing will require substantial changes in the buying practices of the entire University community, changes that are consistent with the overall direction of administrative restructuring at Penn. It will require greater cooperation.
The implementation of the Purchasing system, provides the University with an opportunity to improve the ability of its infrastructure to support the implementation of more effective commodity management. Specifically, the system can provide Penn with the information to support more effective vendor negotiations, track vendor performance and customer participation in already established agreements. Further, implementation of the system can provide process improvements that will make it easier to buy from the University's preferred vendors.
As Penn begins to use the Financial/Purchasing system, it is important that it begin to track a variety of information, including:
Further, it is important that Penn track this information for all of its different alternative buying paths including credit cards, check requests, and purchase orders. Finally, as the implementation of the Purchasing system decentralizes much of the responsibility for the data entry of purchase requests and orders, it will be critical for Penn to maintain strict data standards. Specifically, staff must consistently describe their orders with sufficient information (price, catalog number, item description) so that management information can be produced to support vendor negotiations and management.
It is important to understand that the estimated savings identified will not be realized by the completion date but instead they will start to accrue from that date forward. The time to realize the total projected savings will vary by commodity and depends heavily on the results of each negotiation. Several of the commodities identified will require the use of a commodity team to prepare and support the negotiation effort. Although each commodity team will modify its activities to best suit its commodity, primary activities to be considered are:
In addition to moving forward with implementing these changes, Penn should start a parallel effort which investigates the much larger opportunity that exists in the $330 million of purchases that were not included in this analysis.
The University should begin to formally assess the skill sets of the current staff within the Purchasing department to identify training and/or hiring needs. This assessment should be done in light of the anticipated impact of the Financial system implementation on the staffing requirements for Penn Purchasing. The goal should be to have developed a comprehensive staff training and redeployment plan by the end of the current year, so that new staff required to support commodity management can begin work by the beginning of the next year.
Finally, Penn must move forward in analyzing its procurement practices for the remaining commodities. Many universities and corporations have gone through efforts to substantially improve their procurement practices which have brought dramatic improvements. The sample used covered $120 million out of the $640 million total spent annually by the University. When factoring out expenditures for utilities, insurance, and major construction there remains $330 million of procurement activity that has not been analyzed. Judging from what others have been able to achieve, and the results of this initial analysis, we believe that Penn has the potential to realize at least 5% in savings which is equivalent to $16.5 million. By adding this to the $5 million identified in our sample, the University stands to save over $20 million annually as a result of this multiyear improvement effort.
In addition to implementing the recommendations listed in our report, Penn must develop a plan for analyzing the remaining commodity areas. Given the limitations of the current information system, Penn must assess the amount of information currently available on the remaining commodity areas and use that information to set the timeline for the remaining analysis. In some cases, it will be necessary for the system to be implemented and enough transactions processed to have the necessary commodity data prior to proceeding. However, Penn should not wait until the Financial system implementation is complete to start analyzing those commodity areas where data does exist.
The University's plan of action begins below.
As part of their work, C&L has identified a select number of other organizations that were able to reduce their costs of goods and services from 5% to 15% by establishing a structured program that focused efforts on cost reduction and procurement efficiency and effectiveness.
C&L recommends that Penn institute a similar structured effort incorporating the commodity team approach as an integral part of Penn's procurement program. Team members would include high-volume departmental buyers, individuals with specific commodity usage expertise, and procurement professionals.
It will be necessary to modify the current decentralized approach to procurement in a way that will enable the University to take advantage of its considerable purchasing power by combining like requirements on contract negotiations and purchases.
A. Formation of a Procurement Steering Committee
A standing committee will work with Purchasing to ensure program implementation and success. A primary role of the committee will be to establish a commonalty of purpose among the various campus purchasing organizations. One key representative from each of the following major procurement areas will serve as committee members:
Four additional committee members will be selected from a crosssection of schools and centers. They will serve for a specified term and be replaced by new members on a rotating basis. They will provide advice and assistance to the Committee in the following areas:
The Executive Vice President, Vice President for Finance, and Senior Vice President and Chief Financial Officer for the Health System will be ex-officio members.
The functions of the Steering Committee will be to:
Steering Committee work must be considered a primary function of all committee members.
B. Other Issues
C&L has recommended expansion of Procurement Credit Card usage throughout the institution. Credit card applicability in all procurement areas should be evaluated by the Steering Committee and action taken wherever usage of the credit card as a point of purchase ordering tool is desirable. A report describing an effective means of achieving optimal credit card usage will be completed by the Steering Committee and submitted to the Executive Sponsors by September 1, 1996.
Work is under way to evaluate technologies that can or will have an impact on University procurement/disbursement. The advisability and integration of these technologies (ProCard, World Wide Web, EFT, EDI, etc.) will be more fully developed by the Steering Committee. This will lay the groundwork for continuing an aggressive but well-crafted campaign to assure integration with current system investments.
B: The Steering Committee must instruct all Penn Procurement Centers and all Commodity Teams to make clear to outside suppliers the existence of a new institutionwide program that will enhance Penn's ability to meet total volume targets on negotiated contracts.
Contract negotiations covering requirements in several commodity areas have been recently completed by Penn Purchasing. Those new contracts will yield cost savings totaling more than $1.6 million during FY 97 in the following commodity areas:
Commodity FY 97 Savings
Construction/Renovation projects: $319,200
Furniture: $ 75,000
Research Supplies: $555,000
Office Supplies: $325,000
Facilities/Physical Plant: $252,000
Misc. Products & Services: $ 30,000
Guard Services: $ 60,000
These cost savings represent only those contract areas where negotiations have already been completed, and do not represent total savings on all contract negotiations that will provide lower costs to the University in FY 97. Many additional FY 97 contract negotiations will be completed over the next several months.
B. High Priority Savings Opportunities
The specific commodity savings opportunities cited by C&L have been carefully reviewed to determine what can be achieved within the framework of existing resources.
This review has resulted in a plan that calls for immediate work to begin in five areas:
A commodity team will be formed of representatives from Publications Services, Penn Purchasing, and major user organizations. This should be a high priority project with a starting date of July 1, 1996, and a targeted completion date of November 30, 1996.
A commodity team will be formed to review cost savings opportunities in this commodity area. Team members will include representative from the Travel Program office, Penn Purchasing, and major user organizations. This should also be a high priority project with a starting date of July 1, 1996, and a targeted completion date of December 31, 1996.
A commodity team will be formed to review opportunities in this commodity area. Computer purchases are made through Penn Purchasing, HUP Purchasing, and the Computer Connection. This project can be handled by staff members from those three organizations, working cooperatively with ISC, to determine how best to proceed. Work should begin July 1, with a targeted completion date of September 30, 1996.
This project can be initiated without the need for a commodity team. Since copier paper is purchased by Penn Purchasing and HUP Purchasing, this project can be completed by staff members from those two organizations working cooperatively to determine how best to proceed. Work should begin immediately with a targeted completion date of June 30, 1996.
A commodity team consisting of representatives from all Penn's major vehicle user organizations was formed by Penn Purchasing in November 1995. The team has identified their requirements, and an RFP has been drafted. This work will continue with a targeted completion date of June 30, 1996.
Additional work will be scheduled to begin during FY 97 in the following four areas:
A team will be formed to determine the potential for combining requirements of the University and the Health System. Because of prior work in this commodity area, this project will not require a full commodity team assessment nor a lengthy investigation. Representatives of both purchasing areas will work with representatives from the Human Resources areas to establish requirements, draft an RFP, and conduct competitive bidding. This project will be scheduled to begin July 1, 1996, with a targeted completion date of November 30, 1996.
A commodity team will be formed to determine how best to combine the office copier needs of the entire organization in order to lower copier acquisition costs. Penn and HUP Purchasing will work with a group of major users to define requirements. That will be followed by either formal competitive bidding or contract negotiation, with the selected methodology depending on agreement of team members. This project should be scheduled to begin on July 1, 1996 with a targeted completion date of December 31, 1996.
A second team will work concurrently to evaluate the effectiveness of central copy centers located in a number of schools and centers. Similar work recently completed by Penn Purchasing in cooperation with the Law School and SEAS has generated a one-year saving of $90,000 to $120,000 at SEAS, and a five-year saving of $140,000 at the Law School. This project should be scheduled to begin on July 1, 1996, with a targeted completion date of December 31, 1996.
A team will be formed to review cost savings opportunities in this commodity area. The University and the Health System should consider opportunities to combine similar requirements to maximize buying power and contracting potential. This will be a continuation of the work already underway in Penn Purchasing to determine the feasibility of using "Third Party Procurement" as a primary means of lowering costs and reducing vendor base. This project should begin July 1, 1996 with a targeted completion date of December 31, 1996.
This should be a two tier project with work being conducted by representatives of Penn and HUP Purchasing to determine the cost savings potential resulting from combining common product needs of both organizations, followed by negotiation of reduced contract pricing. This work should begin July 1, 1996, with a targeted completion date of December 31, 1996.
A commodity team should also be formed to investigate potential methods for reducing costs of all furniture acquisitions. This team should include representatives from major user organizations and Facilities Planning. This work should begin July 1, 1996, with a targeted completion date of December 31, 1996.
C. Additional Commodity Cost Savings Opportunities
Additional cost-saving opportunities, not included in the C&L report, need to be further analyzed and prioritized.
The timing of each of the additional commodity area investigations will depend on the amount and quality of information, the potential for savings, and the availability of resources needed to conduct each study. Schedules for each commodity analysis must be built around:
With the implementation of FinMIS on July 1, 1996, procurement data availability and collection will be significantly improved. However, historical data will have to be collected over a statistically significant period in order to be of optimum use. Further, there are no current plans to collect Health System procurement data in FinMIS. Data collection will continue to be a priority.
Additional resources will be dedicated to this program in order to accelerate overall program impact. Two major projects will be selected for assignment to outside providers on a contract basis. The outside contractors will serve as commodity team project leaders for those two commodity investigations and take the projects from initiation to completion. They will concentrate their efforts on work areas that include data analysis, user need assessment, RFP creation, prebid conference attendance, bid analysis, and contract negotiation. Results of this approach will be evaluated and further use of outside contractors determined based on results of the two initial projects.
Following is an overview of the major areas to be investigated as part of phase two:
A. Facilities (Total annual expenditures: $ 110 million)
Work already underway regarding analysis of the construction bidding process will be continued. HUP and Residential Maintenance should be included in the process to assure maximum results.
Work will be initiated to determine the likelihood of combining common requirements of multiple storerooms. Vendor capability to deliver materials on a "just in time" basis should be investigated as a potential means of downsizing and/or outsourcing.
B. Guard Services (Total annual expenditures: $2.5 million)
A team will be formed for the purpose of identifying specific requirements, defining specifications, introducing electronic means of surveillance wherever appropriate, and conducting competitive bidding to assure lowest possible cost of optimum services at all locations now serviced by guards. The commodity expert on the team will be the Director of Security. A procurement professional from Penn Purchasing, and a select group of team members from major usage areas will also participate on the team.
C. Food (Total annual expenditures: $8 million)
The analysis will include the potential for outsourcing all or part of this service function.
D. Office Supplies (Total annual expenditures: $5 million)
Scheduling to be determined.
E. Waste Disposal (Total annual expenditures: $1.7 million)
Scheduling to be determined.
F. Books (Total annual expenditures: $4 million)
Scheduling to be determined.
G. Audio Visual Equipment (Total annual expenditures: $2 million)
Scheduling to be determined.
H. Pest Control (Total annual expenditures: $240,000)
This project will be scheduled as an early agenda item for action by the Procurement Steering Committee. Despite the relatively small amount of dollar volume in this commodity area, this is an area that can produce another early success with relatively little work, due to the amount work that has already been completed.
The annual expenditures listed in each commodity area to be investigated as part of phase two represent the totals spent at the University but do not include amounts spent by the Health System for those same commodities. The total annual expenditures of the Health System are $199 million.
March 19, 1996
Volume 42 Number 24
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