Framework agreements in Chile: Leveraging the State purchasing power Felipe Goya - RPM South Asia

Framework agreements are a tool to simplify procurement and leverage the purchasing power Useful when standardized commodities will be purchased many times

Framework Agreements in Chile

Goods and services are centrally tendered and the outcome of the tender (the awarded goods and services) are put into an electronic catalogue. Afterward, buyers can access the catalogue and buy from it without any further procedure.

Agency 1Agency nAgency 2ChileCompra Purchase Order $98 Framework Agreement Award for 100 Award for 110 Award for 95 Award for 98

It is like an option where the buyer has the right to buy and if he buys the seller has the obligation to sell What is the price of this option? Call option

Example Case 1: Framework agreement price’s $100 and Market Price $150, I use the option so I buy from the FA $ 100 $ 150 $ 50 Case 2: Framework agreement price’s $100 and Market Price $50, I don’t use the option so I buy from the market. This example explains the complexity of the dynamic that this tool could create

Operations

Nowadays USD 1.5 BB different products different vendors 60 different Framework Agreements 30% of the system’s purchasing orders

Framework agreements accepts prices modification, products replacement, commercial offers, etc… but following the rules defined in the tender Close to products are replaced every month. Thousands of prices are modified per month. Plus handling e products Lesson learned: Operations are key

Vendors are responsible for their product datasheet information and propose any price modification or product mix adjustment Central Procurement agency approves or rejects CRM + embedded workflows OK Posted

Handling this information is difficult. When it is provided by the OEM OK, but it is almost never the case. Lesson learned

Category managers Contracting officer 1 Contract Manager 2 Category Manager 1 Category Manager 2 Category managers must know their categories by hart. Including a deep understanding of the relevant market. TenderManageAssesTender ManageAssesTender

Lessons learned

Prices are not always the cheapest of the market, additionally they require active management to remain competitive. Because buying is easy and riskless buyers will not care about the price (up to a limit)

Adverse selection: The price is optimum for the State, but if the most advanced buyers purchase from the market, prices will increase. Every one or not !!! Buyer computers: $ 120 Buyer computers: $ 100 FA Price $ 102 New FA price $ 120

Transaction cost. Vendors face a larger transaction cost when dealing with government than with consumers (logistics, payments, etc..) this should be minimized otherwise is more efficient to buy from the shop next door !!!

The value of the option This cost should somehow be on the price

The problem of volume uncertainty: Entry prices are for an undefined volume. Additionally in many areas, the State is no so big. How much does the State weight into the vendors wallet?

A solution: Above some thresholds, short tenders inside the framework agreement. It defines the volume

Conclusion: Prices must be managed, but is not so difficult, 1% of the vendors of the overall public procurement system are receiving 30% of the purchasing orders.

Framework agreements in Chile: Leveraging the State purchasing power Felipe Goya - RPM South Asia