THE COMPETITIONMYTH
- Advantages Of Serial Unit Numbering System
- Advantages Of Serial Tendering Method
- Competitive Tendering
- Advantages of Negotiated Tendering. The contractor may also introduce specialist subcontractors to the table, each of whom may have a particular contribution. Specialists as lift engineers, kitchen specialists, door and window fabricators, ironworkers, landscape gardeners.
- Actually there are several types of tender including open tender, selective tender, negotiated tender, serial tender and term tendering. 2.2.1 Open tender. Open tendering is the main tendering procedures employed by both the government and private sector.
Why Competitive Tendering Fails to Deliver
author's email - [email protected]
Abstract.
Competitive tendering (bidding) is a widely used procurementmethod. The idea behind competitive tendering is that it forcessuppliers to compete and consequently the purchaser will gainbetter 'value for money'. This paper challenges that belief andshows why competitive tendering is rarely an efficient andeffective procurement method.
Introduction.
This paper will explain why the result of competitive tenderingis often inferior, poor quality product or service. It will:
1. List the perceived advantages of competitive tendering.
2. Outline the disadvantages of competitive tendering.
Serial tendering is one way of achieving this. All public sector clients are being encouraged to make use of serial procedures where these are appropriate. Five experimental serial programmes have been organised within my own Department. The contract notice states where to obtain tender documents and the last date when tenders will be accepted. Open tender is open to public & all the interested firms can apply for the contract. Advantages of open tendering. No favourism (everyone can apply for the tender) High competition in pricing ( client will take good prize).
3. Discuss who is generally blamed when competitive tenderingproduces bad results.
4. Propose a better procurement model.
Selective tender. The purpose of the elective tendering are to improve the quality of the bids received, to ensure that contractors with the necessary experience and competence are given the opportunity to submit the necessary bids, due to urgency work involved, for specific reasons of the employer, e.g. Security reasons in government projects, Etc.
5. Discuss potential barriers to implementation of the improvedprocurement model.
Dr Deming wrote important sections on customer supplierrelationships. This paper aims to build on that work.
Most relevant is Dr Deming's comment in The New Economics that states'The idea of several suppliers for any one item, competing witheach other for lower prices (as advocated by some authors), makesgood talk, but as a practical matter it is only talk, even underlong term contracts. It destroys any possibility of a goodrelationship between customer and supplier. The losses would be oneof those unknowable figures'.
Competitive tendering(what is it?)
Competitive tendering involves a purchasing organizationadvertising business and requesting tenders to supply thatbusiness. In some countries the tendering process is called'bidding'. Competitive tendering can be broken into two maintypes:
1. Open competitive tendering is where the invitation to tenderis publicly available for all interested suppliers to respond. Thismethod is most commonly used in government organizations.
2. Closed competitive tendering is where the invitation totender is issued to a predetermined, or restricted number ofsuppliers.
In some countries the use of competitive tendering is mandatoryfor government agencies. For example, most Australian Governmentagencies are required to go to tender if they intend to makepurchases over eighty thousand Australian dollars(1). Someexceptions apply. Tenders are generally advertised via an on-linewebsite called Aus-tender.
The advantages ofcompetitive tendering.
Competitive tendering is often considered to have the followingbenefits:
1. It promotes competition between suppliers, resulting in best'value for money' for purchasers and users. This point will beextensively challenged in this paper.
2. It 'offers a kind of transparency that helps mitigatefavoritism and corruption'(2).
3. In the case of open tendering, it gives all suppliers theopportunity to win the business that is advertised.
The author acknowledges that points 2 and 3 above are notablebenefits of competitive tendering. These benefits need to beconsidered and weighed against the factors raised later is thispaper.
The disadvantages ofCompetitive Tendering.
Competitive tendering has many disadvantages. Because there aredifferent types of competitive tendering, not all the disadvantagesoutlined below will apply in every situation. Factors such aswhether open or closed competitive tendering is used; or whethercompetitive tendering is being used by a private or governmentorganization will determine if these disadvantages apply. Thedisadvantages include:
1.Leading suppliers may nottender.
Most Australian government procurement guidelines only allowsuppliers who actually tender to be considered for a procurementdecision. If the leading supplier or suppliers do not tender, thepurchaser can only consider bids from suppliers who do tender. Ifleading suppliers are not considered, the purchaser may end upbuying inferior product or service.
There are several reasons leading suppliers may not submit abid. These include:
1. The expense of the tendering process. Some complex tenderscan involve huge costs that are not reimbursed to the bidder.
2. Suppliers may not believe that the tendering process isfair.
3. Suppliers may already be heavily committed to other customersand may not need the business that is being advertised by thepurchaser. The supplier may be so popular that he has a waitinglist.
2.Barriers to communication betweensupplier and customers.
When making significant purchases, frank and open communicationbetween potential supplier and customer is crucial. Competitivetendering is not conducive to open communication.
'Practitioners have recognized that competitive tenderingstifles valuable coordination between the procurer and potentialsupplier before the plans and specifications are finalized. To seethis, note that the primary information that the procurer receivesfrom suppliers in a competitive tender is their bid. A supplier hasno incentive to offer the procurer advice on how to improve theplans or avoid certain pitfalls. In fact, the supplier would havethe incentive to keep any findings of this kind to himself as theyoffer him a competitive advantage over his rivals in a competitivetendering process'(2).
However, when more effective procurement methods are used 'theprocurer and supplier typically spend a good deal of timediscussing the project before the work begins. During suchnegotiations the procurer can elicit the supplier's views aboutwhere the designs and specifications can be improved'.(2) Potentialproblems and pitfalls with the proposed work can also bediscussed. Download ukrainian keyboard for mac.
3.The cost-plus phenomena.
Competitive tendering often results in strictly worded contactsbetween supplier and procurer. Deviations to contractual terms canbe extremely expensive. This can create a situation that issometimes referred to as 'cost-plus'.
Dr Deming describes the situation in Out of the Crisis - 'There is abear-trap in the purchase of goods and services on the basis ofprice tag that people don't talk about.
To run the game of cost plus in industry a supplier offers a bidso low that he is almost sure to get the business. He gets it. Thecustomer discovers that an engineering change it vital. Thesupplier is extremely obliging, but discovers that this change willdouble the cost of the items.
Ccleaner pro for mac download. It is too late for the customer to try and make otherarrangements. Production is under way and must be continued withoutinterruption. The vendor comes out ahead'.
4. Use of cheaper, poorquality materials and/or labor.
A supplier forced to play the competitive tendering game maycome under pressure to keep costs down to ensure he gets asatisfactory profit margin. One way a supplier can lower costs isby using cheaper labor and/or materials. If the cheaper labor andmaterials are poor quality, the procurer will often end up withinferior, poor quality product or service.
5. Safetyshortcuts.
Another area where suppliers may be tempted to lower costs issafety standards.
The British film 'The Navigators' provides an example of asafety short cut taken as a result of competitive pressures. Tokeep costs down the tendering group reduces costs by cutting backon manning. In this case, the manning reduced is a safety criticalrole. The result is the death of a co-worker.
6. Competitive tenderingcan be extremely slow.
When government agencies use competitive tendering it can takeseveral years to choose a successful bidder. The result is thecustomer can wait incredibly long periods for product or servicethat may be required quickly. By comparison, the use of directsourcing procurement can take a fraction of that time.
7. A Supplier who winsthe tender, but is unable to meet the contractualrequirements.
A problem that compounds the problem of competitive tendering'slengthy time frame, is when a selected supplier is unable to meetthe requirement that he has contracted for. To the procurer'sfrustration, the lengthy competitive tendering process may have tobegin again.
8.The 300% mess around tax.
Sometimes private sector companies will go to tender simply todetermine if the price they are paying is a fair market price.Companies with a reputation for doing this are often the recipientsof what a colleague in the mining industry referred to as a '300%mess around tax'. Because the bidder knows the 'purchaser' is notgenuinely interested in making a purchase, he submits a heavilyinflated bid with a 300% loading added. In this type of situation,the supplier's time is being wasted.
9. Insufficient profitmargin to allow for investment in research and development, newtechnology or equipment.
Many companies have made important contributions to society byinvesting wisely in research, development and technology. In manycases, these advances were possible because the organization made ahealthy profit.
As previously mentioned, competitive tendering can force asupplier to accept a very slim profit margin. These low margins canresult in a supplier having little or no money to spend on researchand development, new technology and equipment. The result - societyloses out.
Who gets the blame whencompetitive tendering produces bad results?
When the results of competitive tendering are bad for thepurchaser, a scapegoat is often found. Someone will claim that the'Statement of requirements' were written poorly. The 'Statement ofRequirements' is the document that defines the product or servicethat is being put to tender. The claimant may argue that criticalinformation was omitted or that the requirements were poorlyworded.
This scapegoating generally shows a misunderstanding of severalcrucial points.
Dr Deming stated in TheNew Economics that 'Any supplier worthy of considerationpossesses specialised knowledge about his products - more than thecustomer can hope to have, even though the customer will be theuser of the supplier's product'. As it is the purchaser who writesthe 'Statement of requirements' (often without the input ofpotential suppliers); it shouldn't be a surprise that theserequirements are not written as well as they could be. Aspreviously mentioned, crucial communication between supplier andpurchaser is already stifled or prevented as part of thecompetitive tendering process.
Furthermore, Dr Deming pointed out in Out of the Crisis, that from hisexperience '94 percent of the problems come from the system, ratherthan the worker'. Blaming the person who writes the 'Statement ofRequirements' is a case of blaming the worker, instead of workingto improve the system.
A better procurementmodel.
The type of solution to competitive tendering will varydepending on several factors. These factors may include; the typeof industry, the complexity of the product, the price of thepurchase, whether the purchase is a one-off or a long-term supplyrelationship. The following key principles however, can apply tothe majority of procurement decisions.
· Thorough research of the purchasing requirement and/oralternatives.
· Open communication with current or potential suppliers.
· Purchasing decisions based on a strong relationship oftrust.
· Developing a long-term and healthy relationship with areputable supplier or suppliers.
· Paying the supplier a fair profit margin.
Despite some recent quality problems that have occurred in theUnited States, a supply system that is held in high regard is theToyota Production System.
Jeffrey Liker states in the Toyota Way that 'Even when Toyotabecame a global powerhouse, it maintained the early principal ofpartnership. It views new suppliers cautiously and gives only smallorders. They must prove their sincerity and commitment to Toyota'shigh performance standards for quality, cost and delivery. If theydemonstrate this for early orders, they will get increasinglylarger orders. Toyota will teach them the Toyota way and adopt theminto the family. Once inside, you are not booted out except for themost egregious behavior'. 'Simply switching supplier sourcesbecause another supplier is a few percentage points cheaper (acommon practice in the auto industry) would be unthinkable'.
Bringing about improvement in procurement methods will bedifferent depending on the type of organization. In private sectororganizations it may simply take a change in view from topmanagement. In the Public sector it would mean changing PublicSector procurement policy. Before this could happen, the governmentof the day would have to approve those policy changes.
Potential barriers to implementationof the improved procurement model.
The biggest barrier to implementing improved procurement methodsin government agencies is convincing the relevant decision makersthat it is acceptable to move from a system which is 'open toeverybody to tender' to a system which is not.
Advantages Of Serial Unit Numbering System
In government organizations, procurement methods are influencedby politicians. For a politician, transparency is incrediblyimportant. If a procurement process produces a poor result, apolitician can say 'the organization conducted a thorough andtransparent procurement process. All suppliers that tendered werecarefully considered.' Allowing every supplier the opportunity totender for a contract could be compared to a government job beingadvertised and all members of the public having the opportunity toapply for the job.
Convincing politicians to adopt a system with less transparencyand which does not allow all potential suppliers to tender will bechallenging. However, this is what must occur if improvedprocurement methods are to be implemented. The potentialbeneficiaries include users, purchasers, suppliers andtaxpayers.
Conclusion.
Competitive tendering rarely produces what is best for thecustomer. It is not efficient and is rarely effective. The exactamount of damage done by this procurement method is unknown andunknowable. To bring about improvement; organizations' requirementsfor effectiveness and efficiency will need to outweigh theirrequirements for their procurement business to be open andavailable to all suppliers.
This paper recommends abolishing competitive tendering. Wherepossible, long term, mutually beneficial relationships should bedeveloped with trusted and reputable suppliers. Selection of thesesuppliers should be based on thorough research. The selectedsuppliers should be paid a fair profit margin for the qualityproduct or service they provide.
Footnotes
(1)Commonwealth Procurement GuidelinesPage 26, Paragraph 8.4 (2008). Commonwealth of Australia.
(2)Tadelis, S. and Bajari, P. (2006).Incentives and Award Procedures: Competitive tendering vs.Negotiations in Procurement.
References
Deming, W,E. (1982). Outof the Crisis., MIT Press.
Advantages Of Serial Tendering Method
Deming, W.E. (1994). TheNew Economics for Industry, Government, Education, 2nd Ed.,Cambridge: M.I.T. Center for Advanced Engineering Study.
Liker, K. Jeffrey (2004). The Toyota Way, McGraw Hill.
Loach, K. (2001). Guinness book of world record pdf. TheNavigators (film).
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Competitive Tendering
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