How the government can save billions with group purchasing
• GPOs could cut R15bn in state expenditure with benefits such as growth of supply chains
In January President Cyril Ramaphosa said on radio: “We do not have the money ... that’s the simple truth that has to be put out there.” SA’s “fiscal crunch” is due to high debt-servicing costs, costly bailouts for state-owned entities and rising public sector wages, which have taken their toll on an economy plagued by stagnant growth and falling tax revenues. The government required additional stimulus in response to the Covid-19 pandemic, resulting in more debt to service.
To overcome the Covid-19 pandemic and spur rapid economic growth and development the government set out the economic reconstruction & recovery plan (ERRP), the priorities of which are developing local infrastructure, creating and supporting jobs, ensuring energy security and deepening local industrialisation within SA.
Private sector participation is vital to achieving the plan given the government’s fiscal constraint in driving development. A key mechanism, which it can leverage to drive localisation and economic growth through public-private partnerships, is the formation of group purchasing organisations. (GPOs).
These are dynamic partnerships between several companies or entities to establish joint supplier agreements. Strategically, GPOs contribute towards a sustainable supply chain and can be a vehicle for economic recovery. This is especially true within the public sector.
Public sector GPOs allow institutions such as municipalities, hospitals and schools to co-ordinate their procurement activities and combine their inputs and supplies. Thus, GPOs enable multiple organisations to leverage their collective purchasing power, resulting in cost reduction through aggregated volume purchases.
GPOs can be a crucial mechanism to localise critical supply chains in the public sector through targeted selection and co-ordination of local suppliers. In this way GPOs identify essential commodity products manufactured locally, which have high quality and are cost-competitive relative to imported products.
GPOs can help the government identify key imported products for local production by creating a portfolio of suppliers and assessing their capabilities. Where capabilities are limited, the government can develop targeted supplier development initiatives to drive local production and thus enable import substitution.
Investment in GPOs can help the public sector build sustainable, resilient supply chains, enable sound governance and promote advanced procurement policies.
DRIVE EXCELLENCE
Events like the recent Smart Procurement World Sustainability Summit have cast a spotlight on global supply chains and how they are being managed to ensure sustainability.
Sustainability in this context refers to the environmental and socioeconomic sustainability of individual institutions and regional communities.
Relatively remote regions like Sub-Saharan Africa have the potential to benefit considerably from GPOs and drive excellence in procurement. GPOs have been shown to reduce costs substantially through an initial reduction of 10%-30%, with a 2%-3% year-on-year reduction thereafter.
Establishing GPOs could yield immense savings on government spending. For instance, government spending on goods and services in 2019 in the health sector was recorded at R67bn by StatsSA.
With GPOs in place, R7bn to R20bn in government savings could be realised initially, with an additional R1bn to R2bn in year-on-year savings thereafter. By 2030 the potential cumulative government savings within health could be R15bn to R40bn, considerably reducing the financial strain on government’s finances.
From a local content development perspective GPOs can help co-ordinate local and regional purchasing activities to drive procurement from local suppliers and develop local value chains. Furthermore, coordinated purchasing activities from local or regional vendors reduce supply chain lead times compared to international procurement from supply centres in Asia and Europe, thus reducing supply chain risks and enabling a resilient supply chain.
Local suppliers stand to benefit immensely from GPOs through the scale of the collective, long-term contracts. Through these long-term contracts local suppliers are guaranteed off-take agreements, which creates certainty for their businesses. This certainty allows smaller producers to plan for the longer term, enabling them to secure funding to expand their facilities.
Long-term contracts also ensure job certainty and job preservation for local suppliers. Therefore GPOs have compounding effects on the local economy, further driving local supplier development efforts and enabling a long-term, sustainable supply chain.
In the SA context GPOs could be a catalyst to enhance synergies between the mining and manufacturing sectors.
Co-ordinated buying by these two sectors can unlock value in the ecosystem to benefit both parties, thus aiding economic recovery.
GPOs can help bring these two sectors closer to achieving targets and goals set out in the Mining Charter to promote the use of local content through inclusive procurement, supplier and enterprise development.
STANDARDISATION
SA’s public sector can also leverage GPOs to drive consistency and uniformity in how goods are procured by government departments. This standardisation helps government departments engage the market and involve suppliers throughout the procurement process to help identify the department’s needs, detail product specifications, evaluate potential product options and negotiate supplier and service level agreements.
Through this consistency the supplier selection period is shortened, benefiting both the public sector in terms of timeous supply of goods and services and the supplier in terms of selection and conclusion of their contracts.
Most importantly, GPOs can help strengthen the relationship between the public and private sectors to collaboratively develop local supply chains and drive economic growth in line with the priorities and goals set out in the ERRP.
The first step for governments looking to establish GPOs is understanding the priority value chains to localise. In SA we have identified petroleum products (including chemicals, rubber, and plastics) and metals (including metal products, machinery, and equipment) as high-impact subsectors with high growth potential.
Governments can strategically leverage GPOs in regional value chains such as Sub-Saharan Africa, to drive economic growth and co-ordinate purchasing strategies aligned with national development goals. Governments can play a crucial role in incentivising the creation of GPOs to maximise local vendor procurement.
Globally, we have seen how the rise of GPOs is facilitating the push towards sustainable procurement and, ultimately, a fully circular economy. GPOs in strategic value chains in Africa would have a positive halo effect and are a priority lever for aiding economic recovery in SA.