Case 3-1 Donovan Valley Purchasing Consortium On September 2, Bob Hamilton, manager district opera- so we got together with the other three districts in the tions for the Lowe School District, was preparing for his valley and formed an Executive Steering Committee, meeting the next day with Rick Lewis, secretary trea- which is made up of the senior staff and the elected surer for the district. Bob and Rick were getting ready school board chairman from each district. We investi- for the Purchasing Steering Committee meeting sched- gated several areas for potential cooperation, and eventu- uled for September 10, where the future of the Donovan ally focused on purchasing, information technology, and Valley Purchasing Consortium (DVPC) would be dis- human resources. We have recently established a separate cussed. Under the proposed arrangement, the informal steering committee for each of these areas to gather infor- operating structure of the DVPC would be replaced by mation and provide recommendations to the Executive a newly created central purchasing organization, and the Steering Committee regarding our future direction. current district-level purchasing departments would be eliminated. Bob's primary concern was establishing what course DONOVAN VALLEY of action would be in the best interests of his district. Donovan Valley was located in the western region of the While he recognized that centralizing purchasing opera- province. Anderson, Lowe, Martin, and Morgan Ridge were tions presented certain opportunities to reduce costs, he the principal urban centers in the valley. Exhibit I provides remained concerned whether joining a formal consor- summary data on district operations, including purchasing. tium represented the best approach for the Lowe School District. He was well aware that Rick Lewis was expect- Anderson School District ing a well-reasoned argument for or against the proposal. Wendy Graham, manager, purchasing and warehouse services, was quite proud of her accomplishments: PROVINCIAL EDUCATIONAL SYSTEM "Since first coming to Anderson seven years ago, I have The public school system provided education to residents been able to raise the profile of the purchasing group. from kindergarten to grade 12. Responsibility for manag- My group is now involved in areas such capital construct ing the public education system in Canada was shared tion projects, legal and audit services, and employee between the provincial and local governments. The prov- benefits. The objective of the purchasing department is to ince set funding levels and established the curriculum play a key role in the supply chain for the areas of educa- guidelines. The province-wide education system was sep- tion and operations and to identify opportunities and con- arated into 54 school districts, each with an elected school tribute to the strategic success of the organization." board and full-time staff to oversee day-to-day operations. Wendy was also responsible for the district warehouse. Funding levels were set on a per-student basis and it was which carried two types of commodities: general supplies up to the local district to allocate its annual budget based (e.g., office supplies, paper, and cleaning supplies) and on the priorities established. Over recent years, the level maintenance, repair, and operations (MRO) supplies for of funding provided by the province to the school districts use in school building maintenance and bus repairs. Wendy had not increased. Instead, school districts were expected to commented on the district warehouse: "We just set up the identify and implement cost-reduction opportunities. warehouse last year. It took me three years to convince Provincial officials viewed consolidation of district senior management and the board that we needed the ware- operations as a primary method of reducing costs through house to control our MRO stock. Previously, we had things economies of scale. John Bowman, superintendent of the scattered throughout the district, with no controls in place." Morgan Ridge School District observed: Lowe School District Five years ago, the Ministry of Education eliminated The operating philosophy at Lowe was complete decen- about 15 districts through consolidations. They were tralization, where the school principal had total control about to repeat the process two years later, but the dis- of the school budget. Although district schools had the tricts proposed working together to meet provincial cost- authority to bypass purchasing and negotiate indepen reduction targets. I would rather do things on our terms, dent agreements with suppliers, most schools preferred Purchasing and Supply Management74 Purchasing and Supply Management EXHIBIT 1 District Operations Anderson Lowe Martin Morgan Ridge General Information: Number of students 21,166 19,800 7,775 16,881 Number of schools 50 48 19 34 Operating budget $207,900,000 $195,110,000 $75,710,000 $164,180,000 Purchasing Activity: Departmental budget $354,961 $523,472 $ 109,710 $427,304 Staff 1.5 4.5 Value of annual purchases $36,697,487 $27,867,563 $11,366,902 $21,278,445 Number of POS 9,350 8,234 3,330 6,307 Number active suppliers 2,750 2,730 1,170 1,920 to take advantage of the service and expertise in the pur- and administrative supplies, equipment, and services. chasing department. Purchasing was not involved in capital construction, utili- Purchasing viewed its role as a consultant that pro- ties, specialized consulting contracts, employee benefits, vided expertise and service to end users. Although the travel, or legal services. Morgan Ridge was the only dis- purchasing department was involved in most supply deci- trict in the consortium that outsourced its student trans- sions, it was excluded from purchases involving capital portation services. Wayne estimated that approximately construction, utilities, specialized consulting contracts, 50 percent of his time was spent on managing activities employee benefits, travel and legal services. associated with transportation. Bob Hamilton was responsible for district operations, which included district maintenance and purchasing. Bob Donovan Valley Purchasing Consortium had been the district purchasing manager before assuming The DVPC started two years prior, shortly after the forma- his current position. tion of the Executive Steering Committee, and consisted of Martin School District the senior purchasing managers from the four school dis- tricts. It was originally created to act as a forum to review The purchasing department at Martin consisted of Neil potential areas for cooperation in purchasing, including Brodie, purchasing agent, plus a member of the clerical opportunities to negotiate joint contracts for purchased staff, who split her time between purchasing and accounts goods and services as a means of reducing costs or improv- payable. The Martin purchasing staff was not involved in ing service and quality. Regular meetings were held each purchases for capital construction, utilities, specialized month. Bob Hamilton acted as the chairman of the DVPC consulting contracts, employee benefits, travel, or legal during the first year, then turned this responsibility over to services. Neil felt that an opportunity existed for purchas- Wayne Schneider, who was the current chairman. ing to play a more active role in district operations: "My When a product or service was identified as a potential biggest problem is that the operations staff bypass pur- candidate for a joint contract, one of the four members chasing and run out and buy what they want when they of the DVPC assumed responsibility for assessing the want it. I don't find out about a lot of our purchases until potential benefits of collaboration. The lead consortium the invoice comes in. Furthermore, I am using an old ERP member responsible was required to get agreement from system that should have been replaced five years ago, and all parties on standards and the contract terms and con- it is difficult for me to get accurate data." ditions. The lead consortium member would then issue Morgan Ridge School District the requests for proposal or bids, select the supplier, and negotiate the final contract. The other three districts The Morgan Ridge School District had a staff of three would then work off of the lead district's contract, at the buyers in addition to Wayne Schneider, supervisor, pur- price and terms negotiated. chasing and transportation services. The purchasing While Bob felt his involvement with the DVPC had group at Morgan Ridge was responsible for education been useful in exchanging information and keeping up with Purchasing and Supply ManagementChapter 3 Supply Organization 75 developments at the other districts, he found the process 2. The purchasing services organization would consist of of negotiating joint contracts had been difficult at times: a general manager, six purchasing specialists, a cus- "It seems to take forever to negotiate a joint contract. tomer services representative, and six support staff. By the time it gets reviewed at each district by the users, 3. The budget for the purchasing consortium would and then we run through several drafts of the tender word- remain unchanged from the combined purchasing ing among the four of us, it can take a year. Inevitably, one department budgets of approximately $1.4 million of the members decides not to participate for one reason or for the four districts. another, which adds to the frustration of the process." Spending limits would continue to be controlled by Five items had been identified for joint purchases: the individual districts by establishing appropriate propane, physical education supplies, garbage disposal, procedures for spending authorizations for staff. hazardous materials disposal, and some software. Joint purchasing contracts for these commodities were in 5. The consortium would be responsible for handling place, representing a total annual value of approximately accounts payable. $1.45 million. Exhibit 2 provides a summary of these pur- 6. The districts would support an eight-month transition chases for each district. Bob estimated savings on these phase during which the consortium offices would be five contracts were about 10 percent. set up, staff would be hired, management information systems set up, procedures developed and approved, EVALUATING A FORMAL and training conducted for district staff. CONSORTIUM 7. The consortium would be a separate organization, accountable to a board consisting of the secretary The Purchasing Steering Committee was created in March treasurers from the four districts. with the mandate to evaluate the feasibility of establishing a formal centralized purchasing consortium for the four The consultant provided an analysis of the forecasted school districts. Under this concept, district-level purchasing costs and benefits of the plan. Forecasted cost savings departments would be eliminated, and their responsibilities were 5 percent in the first two years of operation, decline would be handled by a new centralized purchasing consor- ing to 3 percent in the third year, 2 percent in the fourth ium. Each district had two members on the Purchasing year, and 1 percent in the fifth year. The consultant's cost Steering Committee. Bob Hamilton and Rick Lewis were savings estimates were based on a survey of actual sav- appointed to the committee to act as Lowe's representative. ings achieved at four other consortiums in the province In order to assist with the evaluation process, the that had been established during the past two years. Purchasing Steering Committee hired a consultant in May In order to set up the consortium, the consultant esti- to assess the feasibility of creating a centralized purchas- mated start-up costs of $1.5 million for leasehold improve- ing consortium and to make recommendations regarding ments, equipment, software, computers, etc. The transition the future of the DVPC. The consultant spent three months phase was expected to cost an additional $1.2 million analyzing the operations of the four districts in order to in salaries and benefits. evaluate the potential benefits that a centralized consortium would provide. The findings were presented to a meeting DISTRICT REACTION of the Purchasing Steering Committee in mid-August. The consultant's report made seven key recommendations: District reaction to the report had been mixed. In conver- sations with other districts, Bob felt that management at 1. A centralized purchasing consortium should be Martin strongly supported the concept proposed in the established to provide purchasing services to the four consultant's report, while management at Anderson were school districts. less supportive. Management at the Anderson district felt EXHIBIT 2 Summary of Cooperative Purchases Anderson Lowe Martin Morgan Ridge Number of items purchased* 5 4 2 3 Total annual value $600,000 $580,000 $140,000 $130,000 *Joint purchasing contracts had been negotiated for the following items: propane, physical education supplies, garbage disposal, hazardous materials disposal, and certain software. The districts were not obligated to participate in these contracts