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 take place. The technology and distribution behemoth Amazon.com Inc.™ may be gearing up for just this type of business from government agencies. The Prince William School District in Virginia, USA plus 1500 other US 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) categories. This involves literally billions of dollars in commitments. And likely the start of the conversation on what else can we buy from this A-Z supplier? As a colleague stated, 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 US 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-Z” from office supplies to medical equipment in a 5-year deal by aggregating (bundling) demand to “drive the cost of goods down.” The estimated value is £600M ($976M CDN) through an Amazon-based partner. It is highly probable this buying trend will take place in Canada. This could arise through the entry of US-based group purchasing organizations.
This is really an extension of the tactic of bundling goods into larger and larger volumes in order to get the ϋber lowest cost. Canadian public procurement officials have been pursuing this model for years. Witness the many oligopolistic markets which are in place today. Food, pharmaceuticals, airlines, transportation, toys, fuel, couriers, concrete and yes, office supplies. A handful of suppliers control the quality, price and supply, which is the definition of an oligopolistic market resulting in limited competition.
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. Net result – initial contract savings seem to wow the Owner. Only the bigger suppliers can meet the demand side expectations. This pushes out the small, medium enterprises. When SMEs go out of business this 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 Owner (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 Owner assess the value for money? An oligopoly is hard enough to negotiate in – a monopoly is a futile exercise. This can result in limited levels of competition and limited bargaining power for the Owner in the long-term. Social costs are external to the sourcing strategies but are borne by the same taxpayer.
Woodwards and Eatons were the canaries in the retail market when Wal-Mart and other US Big Box companies came to Canada 25 years ago. Wal-Mart et al drove out the larger Canadian retailers and continued to steam roll over the SMEs. Some hand wringing by politicians took place and protest groups but no real push back. 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 health care and social services, which are paid for by the taxpayers, public sector policies need to consider more than the lowest out-of-pocket-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 all a part of the free trade system.
A rather innocuous appearing procurement tool is the 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, they are 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 BC, conservatively there could be $300M per year in spending through P-card programs within this public sector. We can’t have local preference for suppliers under the trade agreements but when we think of the P-card flexibility, there are options. Referring to the Lower Mainland values, if only 10% of the P-card buying was redirected at local suppliers, this could redistribute $30M to locally owned and operated businesses. It doesn’t negate trade agreement obligations. To an SME sector, $30M 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. It does require a conscious change in spending practices.
In terms of the market, these are still early days for mass online ordering by government operations. However, the buying patterns and trends are starting to show. The potential material savings have not been measured against the long-term social costs. Government has at least two pockets to balance – the spend pocket and the revenue pocket. If these get out of balance, we lean towards deficits. The time is now to ensure our government sourcing strategies are cognizant of the A-Z supplier implications.
Sources:
1.https://www.governing.com/topics/mgmt/gov-amazon-government-procurement-lc.html
2.https://www.telegraph.co.uk/business/2018/07/29/amazon-start-supplying-public-sector-600m-yorkshire-deal/amp/
October 2019