Case 3-1 Donovan Valley Purchasing Consortium
On September 2, Bob Hamilton, manager district operations for the Lowe School District, was preparing for his meeting the next day with Rick Lewis, secretary treasurer for the district. Bob and Rick were getting ready for the Purchasing Steering Committee meeting scheduled for September 10, where the future of the Donovan Valley Purchasing Consortium (DVPC) would be discussed. Under the proposed arrangement, the informal operating structure of the DVPC would be replaced by a newly created central purchasing organization, and the current district-level purchasing departments would be eliminated.
Bob’s primary concern was establishing what course of action would be in the best interests of his district. While he recognized that centralizing purchasing operations presented certain opportunities to reduce costs, he remained concerned whether joining a formal consortium represented the best approach for the Lowe School District. He was well aware that Rick Lewis was expecting a well-reasoned argument for or against the proposal.
Provincial Educational System
The public school system provided education to residents from kindergarten to grade 12. Responsibility for managing the public education system in Canada was shared between the provincial and local governments. The province set funding levels and established the curriculum guidelines. The province-wide education system was separated into 54 school districts, each with an elected school board and full-time staff to oversee day-to-day operations.
Funding levels were set on a per-student basis and it was up to the local district to allocate its annual budget based on the priorities established. Over recent years, the level of funding provided by the province to the school districts had not increased. Instead, school districts were expected to identify and implement cost-reduction opportunities.
Provincial officials viewed consolidation of district operations as a primary method of reducing costs through economies of scale. John Bowman, superintendent of the Morgan Ridge School District observed:
Five years ago, the Ministry of Education eliminated about 15 districts through consolidations. They were about to repeat the process two years later, but the districts proposed working together to meet provincial cost-reduction targets. I would rather do things on our terms, so we got together with the other three districts in the valley and formed an Executive Steering Committee, which is made up of the senior staff and the elected school board chairman from each district. We investigated several areas for potential cooperation, and eventually focused on purchasing, information technology, and human resources. We have recently established a separate steering committee for each of these areas to gather information and provide recommendations to the Executive Steering Committee regarding our future direction.
Donovan Valley was located in the western region of the province. Anderson, Lowe, Martin, and Morgan Ridge were the principal urban centers in the valley.
Exhibit 1 provides summary data on district operations, including purchasing.
|Number of students||21,166||19,800||7,775||16,881|
|Number of schools||50||48||19||34|
|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|
|EXHIBIT 1 District Operations
Table Summary: Column 1 lists various types of General Information and Purchasing Activity data; other columns show the four school districts. Rows 2 (General Information) and 6 (Purchasing Activity) are empty except for column 1.
Anderson School District
Wendy Graham, manager, purchasing and warehouse services, was quite proud of her accomplishments: “Since first coming to Anderson seven years ago, I have been able to raise the profile of the purchasing group. My group is now involved in areas such capital construction projects, legal and audit services, and employee benefits. The objective of the purchasing department is to play a key role in the supply chain for the areas of education and operations and to identify opportunities and contribute to the strategic success of the organization.”
Wendy was also responsible for the district warehouse, which carried two types of commodities: general supplies (e.g., office supplies, paper, and cleaning supplies) and maintenance, repair, and operations (MRO) supplies for use in school building maintenance and bus repairs. Wendy commented on the district warehouse: “We just set up the warehouse last year. It took me three years to convince senior management and the board that we needed the warehouse to control our MRO stock. Previously, we had things scattered throughout the district, with no controls in place.”
Lowe School District
The operating philosophy at Lowe was complete decentralization, where the school principal had total control of the school budget. Although district schools had the authority to bypass purchasing and negotiate independent agreements with suppliers, most schools preferred to take advantage of the service and expertise in the purchasing department.
Purchasing viewed its role as a consultant that provided expertise and service to end users. Although the purchasing department was involved in most supply decisions, it was excluded from purchases involving capital construction, utilities, specialized consulting contracts, employee benefits, travel and legal services.
Bob Hamilton was responsible for district operations, which included district maintenance and purchasing. Bob had been the district purchasing manager before assuming his current position.
Martin School District
The purchasing department at Martin consisted of Neil Brodie, purchasing agent, plus a member of the clerical staff, who split her time between purchasing and accounts payable. The Martin purchasing staff was not involved in purchases for capital construction, utilities, specialized consulting contracts, employee benefits, travel, or legal services. Neil felt that an opportunity existed for purchasing to play a more active role in district operations: “My biggest problem is that the operations staff bypass purchasing and run out and buy what they want when they want it. I don’t find out about a lot of our purchases until the invoice comes in. Furthermore, I am using an old ERP system that should have been replaced five years ago, and it is difficult for me to get accurate data.”
Morgan Ridge School District
The Morgan Ridge School District had a staff of three buyers in addition to Wayne Schneider, supervisor, purchasing and transportation services. The purchasing group at Morgan Ridge was responsible for education and administrative supplies, equipment, and services. Purchasing was not involved in capital construction, utilities, specialized consulting contracts, employee benefits, travel, or legal services. Morgan Ridge was the only district in the consortium that outsourced its student transportation services. Wayne estimated that approximately 50 percent of his time was spent on managing activities associated with transportation.
Donovan Valley Purchasing Consortium
The DVPC started two years prior, shortly after the formation of the Executive Steering Committee, and consisted of the senior purchasing managers from the four school districts. It was originally created to act as a forum to review potential areas for cooperation in purchasing, including opportunities to negotiate joint contracts for purchased goods and services as a means of reducing costs or improving service and quality. Regular meetings were held each month. Bob Hamilton acted as the chairman of the DVPC during the first year, then turned this responsibility over to Wayne Schneider, who was the current chairman.
When a product or service was identified as a potential candidate for a joint contract, one of the four members of the DVPC assumed responsibility for assessing the potential benefits of collaboration. The lead consortium member responsible was required to get agreement from all parties on standards and the contract terms and conditions. The lead consortium member would then issue the requests for proposal or bids, select the supplier, and negotiate the final contract. The other three districts would then work off of the lead district’s contract, at the price and terms negotiated.
While Bob felt his involvement with the DVPC had been useful in exchanging information and keeping up with developments at the other districts, he found the process of negotiating joint contracts had been difficult at times: “It seems to take forever to negotiate a joint contract. By the time it gets reviewed at each district by the users, and then we run through several drafts of the tender wording among the four of us, it can take a year. Inevitably, one of the members decides not to participate for one reason or another, which adds to the frustration of the process.”
Five items had been identified for joint purchases: propane, physical education supplies, garbage disposal, hazardous materials disposal, and some software. Joint purchasing contracts for these commodities were in place, representing a total annual value of approximately $1.45 million. Exhibit 2 provides a summary of these purchases for each district. Bob estimated savings on these five contracts were about 10 percent.
|Number of items purchased*||5||4||2||3|
|Total annual value||21,166||19,800||7,775||16,881|
|EXHIBIT 2 Summary of Cooperative Purchases
Table Summary: Summary
* 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.
EVALUATING A FORMAL CONSORTIUM
The Purchasing Steering Committee was created in March with the mandate to evaluate the feasibility of establishing a formal centralized purchasing consortium for the four school districts. Under this concept, district-level purchasing departments would be eliminated, and their responsibilities would be handled by a new centralized purchasing consortium. Each district had two members on the Purchasing Steering Committee. Bob Hamilton and Rick Lewis were appointed to the committee to act as Lowe’s representative.
In order to assist with the evaluation process, the Purchasing Steering Committee hired a consultant in May to assess the feasibility of creating a centralized purchasing consortium and to make recommendations regarding the future of the DVPC. The consultant spent three months analyzing the operations of the four districts in order to evaluate the potential benefits that a centralized consortium would provide. The findings were presented to a meeting of the Purchasing Steering Committee in mid-August. The consultant’s report made seven key recommendations:
- A centralized purchasing consortium should be established to provide purchasing services to the four school districts.
- The purchasing services organization would consist of a general manager, six purchasing specialists, a customer services representative, and six support staff.
- The budget for the purchasing consortium would remain unchanged from the combined purchasing department budgets of approximately $1.4 million for the four districts.
- Spending limits would continue to be controlled by the individual districts by establishing appropriate procedures for spending authorizations for staff.
- The consortium would be responsible for handling accounts payable.
- The districts would support an eight-month transition phase during which the consortium offices would be set up, staff would be hired, management information systems set up, procedures developed and approved, and training conducted for district staff.
- The consortium would be a separate organization, accountable to a board consisting of the secretary treasurers from the four districts.
The consultant provided an analysis of the forecasted costs and benefits of the plan. Forecasted cost savings were 5 percent in the first two years of operation, declining to 3 percent in the third year, 2 percent in the fourth year, and 1 percent in the fifth year. The consultant’s cost savings estimates were based on a survey of actual savings achieved at four other consortiums in the province that had been established during the past two years.
In order to set up the consortium, the consultant estimated start-up costs of $1.5 million for leasehold improvements, equipment, software, computers, etc. The transition phase was expected to cost an additional $1.2 million in salaries and benefits.
District reaction to the report had been mixed. In conversations with other districts, Bob felt that management at Martin strongly supported the concept proposed in the consultant’s report, while management at Anderson were less supportive. Management at the Anderson district felt the consultant’s recommendations were too aggressive, and they wanted to split the new purchasing organization between the Lowe and Anderson district offices. Morgan Ridge appeared to be “sitting on the fence” at this point, still evaluating the implications for its district operations.
Bob and other senior managers at Lowe had some reservations about joining the proposed consortium as well. The purchasing organization at Lowe was providing good service to the schools and operations staff. Furthermore, Bob felt Lowe’s prices were, on average, slightly lower than those paid by the other districts for comparable items. Another concern was the different operational philosophies among the districts. Lowe was the only district to use a decentralized philosophy, and he knew that both the school board and district management would not want to make any compromises that would affect this management approach.
The September 10 meeting of the Purchasing Steering Committee would be critical in determining the future of the district purchasing operations and would be the final meeting dedicated to this issue. As Bob prepared for his meeting with Rick, he reminded himself that although the opportunity for cost reductions had been the primary attraction for the centralized consortium concept, other factors had to be taken into consideration when making his decision, such as service levels provided by the purchasing group to the districts.
To do nothing provided a completely different set of problems. This was the first major joint initiative among the districts, and to have it fail might send a signal that the other cooperative ventures being contemplated would also be unlikely to succeed. The province clearly wanted to see tangible progress in cost reductions through voluntary consolidations, and geography placed limitations on the available options. Bob felt that to continue operating under the current arrangement would fail to produce the tangible benefits expected by the Ministry, and forced consolidations might follow unless appropriate action was forthcoming.
Bob felt that the Purchasing Steering Committee would either have to agree in principle to proceed with a credible plan at the September 10 meeting, or the entire matter would have to be dropped. Either way, Bob wanted a decision. Staff morale was suffering because of the uncertainty surrounding this matter, and he wanted to let the members of his purchasing organization know what was happening.