Why supply chain resilience is a key factor in procurement
- During the past decade of austerity, local authorities have found themselves under intense pressure to find savings, including when procuring services
- Good procurement is about much more than just reducing costs, however
- We discuss why supply chain resilience is a key consideration for councils when procuring
The General Election campaign saw all the main political parties promise significant investment in public services, although as some commentators have pointed out, the Conservative manifesto actually made few firm commitments on spending.
It remains to be seen what the Conservatives’ election victory will mean for local authorities, who have spent the past decade getting by with ever-dwindling levels of central government funding. What is clear, however, is that councils have grown accustomed to having to make every pound work harder, and this includes getting the maximum value when tendering for services.
Good procurement isn’t just about the up-front cost of a service, however. There are a wealth of other factors councils must consider in procurement, for example:
- Compliance – could a contract be subject to a legal challenge?
- Social value – will the community benefit, and how?
- Viability – what happens if a provider fails? What would be the impact on the authority, its service users and the wider community?
How well do you understand your suppliers?
Supply chain resilience is a key consideration in procurement. Local authorities should be prepared to ask searching questions of their preferred suppliers, not just about the quality of their previous work, but also about their financial solvency, the contingencies they have in place in case of a labour shortage or supply chain disruption, and their insurance arrangements (including limits of indemnity).
We have previously discussed how a supplier’s approach to insurance provision and risk management can be a good indicator of their underlying stability.
But local authorities should also be aware that their own approach to procurement could have an impact on the resilience of their supply chain.
For example, we have previously discussed concerns that when procuring services from charities, a number of local authorities are pricing contracts so cheaply that some charities are being forced to subsidise service delivery, which is putting them in a difficult financial position.
If a provider fails – be it a charity or a private sector business – and there is nobody else to step in, what impact could this have on service users and the wider community?
Consider the Total Cost of Risk when procuring
Given the constant financial strain they are under, local authorities can sometimes find it difficult to give sufficient weighting during procurement to non-price factors, such as the quality, suitability and viability of services offered by potential suppliers.
Rod Penman, Head of Public Services, Zurich Municipal, says considering the Total Cost of Risk may help organisations avoid focussing too heavily on price at the expense of other, equally important considerations.
The Total Cost of Risk includes not only all of the insurable risks an organisation could face, but all of the non-insurable risks too, such as reputational damage and supply chain failure. Considering the Total Cost of Risk means systematically weighing up (and costing) all the potential risks and rewards of a project or investment.
“Understanding the Total Cost of Risk will lead to outcome-focused procurement, rather than a process-led exercise,” says Rod. “This can help organisations to avoid arriving at a result they don’t actually want, but which the process has forced them into.”
How Zurich can help local authorities to manage risk in procurement
We want to support local authorities to better understand and manage the risks they could face when procuring services. We can offer guidance on the key questions to ask potential suppliers when tendering.
We have also published a number of articles on various topics associated with procurement (see Further Reading).