MARKET RESEARCH, ANALYSIS AND

ENGAGEMENT
LECTURE STREAMS

o Introduction to Procurement in the public and private

sectors
o Needs Assessment and Spend Analysis
o Market Research and Market Engagement
o Types of competition in the markets and analysis of
suppliers’ preferences
o Steps in Procurement Strategy Preparation, Setting
Procurement Objectives and Selection of the optimal
procurement strategy
Introduction to Procurement in the
public and private sectors
What is procurement?

oProcurement is a management function of any government or private

or third sector entity and
oProcurement refers to the function of effective planning and
execution of the operations related to the contractual acquisition of
“external inputs” needed to sustain the service delivery mandates or
the production operations of the concerned organization.
o“External inputs” refer to the entity’s acquisition needs of Goods,
Works and Services.
Public Procurement
oPublic Procurement is generally defined as the “acquisition by
contract” of “Goods”, “Works” and “Services” by a “public entity”
using “public funds”.
oSince “public procurement” is a highly regulated area of government
business, the terms used in the definition in red above need to be
precisely defined in the procurement legislation and/or relevant
financial regulations.
o“acquisition by contract” includes purchase, hire/lease or any
combination thereof.
oThere will be some shades of differences in the definition of above
terms from one country to another.
Definitions
o“Public entity” or “Procuring Entity” (PE) is an entity described or
defined in the procurement law and that is obligated to comply with
the provisions of the said law.
oExamples of such entities are typically central ministries and entities
under their jurisdiction, municipalities, public utilities and public
sector companies with majority ownership or management control by
government.
o“Public funds” are typically defined by the national financial laws and
regulations and include grants, loans, gifts received by “public
entities” in addition to their own-generated funds.
Definitions

oIn this training program the Multi-Lateral Banks (MDBs) definition will
be adopted for Goods, Works and Services as follows:
ü“Goods” means commodities, raw material, machinery, equipment,
vehicles, Plant, and related services such as transportation, insurance,
installation, commissioning, training, and initial maintenance;
ü“Works” means construction, repair, rehabilitation, demolition,
restoration, maintenance of civil work structures, and related services
such as transportation, insurance, installation, commissioning, and
training;
Definitions
ü“Services” are subdivided by the MDBs into:
“Consultancy Services” refers to a range of services that are of an
advisory or professional nature and which are provided by Consultants.
These Services typically involve providing expert or strategic advice e.g.,
management consultants, policy consultants or communications
consultants. Advisory and project related Consulting Services include,
for example: feasibility studies, project management, engineering
services, finance and accounting services, training and development
“Non-Consulting Services” means Services which are not Consulting
Services. Non-consulting Services are normally bid and contracted on
the basis of performance of measurable outputs, and for which
performance standards can be clearly identified and consistently
applied. Examples include: drilling, aerial photography, satellite imagery,
mapping, catering, cleaning, security and similar operations.
Strategic Importance of Public Procurement

• Critical for national development and constitutes a large proportion of the

Gross Domestic Product (20-30% in developing countries) and a
substantially greater percentage of the government budget.
• Critical for Development of the national market and its competitiveness
• A useful instrument to promote equitable and Inclusive national economic
growth
• Important to support the realization of other national sustainable
development objectives
oIncreasingly public procurement is seen as an indicator of good governance
in any country.
Strategic Importance of Private Procurement

oCritical to the competitiveness of private firms in an increasingly

competitive global market through reduction of the cost of external
inputs needed for its manufacturing of production without adversely
compromising the quality of such inputs.
EARLY PUBLIC PROCUREMENT LEGISLATION
Foreign Suppliers

Suppliers

IO N
AT
ISL
LEG
PROTECT LOCAL ECONOMY AND
TREAT LOCAL SUPPLIERS EQUALLY

Foreign Suppliers
INTERNATIONAL IMPACT AFTER WW II

GATT • 1979: 22 partners agreed a special

(General Agreement on Tariffs Government Procurement Agreement
and Trade) (GPA) to facilitate access to each others’
public procurement markets

WTO
(World Trade Organization) • An expanded GPA signed in 1994 and
come into effect on 1 January 1996 under
World Trade Organization (currently
more than 40 countries)
INTERNATIONAL IMPACT AFTER WW II- cont.
Coupled with the GATT initiatives, there were
a number of regional integration schemes:

• Specific directives on procurement

enacted by the EC (EU)
European Union
(EU)

European Free • Legislation similar

Trade Area to that in EC introduced in 1960s
(EFTA) and 1970s

North American
Free Trade Area
• Created by the United States,
(NAFTA) Canada and Mexico in 1992

(The above Trade Agreements

include rules on government
procurement)
INTERNATIONAL IMPACT AFTER WW II- cont.

World Bank • Guidelines for Procurement

Procurement (successive versions since 1964, latest
version 2016) prescribe a form of
international public procurement policy
developed over the last 70 years

United Nations
• A Model Law on Procurement of Goods,
Commission
Construction and Services (1994)
on International
• The Model Law is used as a basis in
Trade Law (UNCITRAL)
developing new procurement legislation
worldwide.
Evolution of public procurement legislation

o In the early 1900’s public procurement legislation was intended initially to

reserve the public procurement market to national firms.
o The increasing complexity and diversity of government’s procurement needs in
the last 120 years meant that the private sector was increasingly becoming the
key supplier to the government (until then governments historically produced the
bulk of their procurement needs in-house through the various ministries and
organizations).
o This was accompanied by increasing competition by private firms eager to
capture government procurement business. Hence, national public procurement
laws needed to give equal and non-discriminatory access to national firms and
increasingly remedies for aggrieved bidders to challenge default by the public
entities in conducting the procurement process.
Evolution of public procurement legislation-Cont’d

o Following the Second World War, rules for opening up international trade were
introduced starting with GATT in 1947.
o In parallel the Treaty of Rome 1957 established the principle of the 4 freedoms
(movement of goods, services, persons and capital) within the member European
countries.
o In 1964 the WB introduced its first edition of the Procurement Guidelines
stipulating ICB (International Competitive Bidding) as the default method in
procurement for the projects it was financing.
o In 1971 the EC introduced its first version of the Public Procurement Directives.
PUBLIC PROCUREMENT POLICY OBJECTIVES

POLICY
OBJECTIVES
Economy
Efficiency
Economy does not necessarily
mean cheapest price
Together the above stand for value for money
which is summarized in 5 Rights:
• the RIGHT Quantity
• of the RIGHT Quality
• at the RIGHT Price
• for the RIGHT Time & Place
• from the RIGHT Source
COMPLEMENTARY POLICY OBJECTIVES

Non-discrimination
Transparency
Accountability
Promotion of domestic industry
and employment
Special objectives:
• National Security
• Sustainable Development
(environment, employment, social
equity etc.)
 Optimal Combination/balance of Objectives is needed for an
effective Public Procurement Law

o A good public procurement law must incorporate an optimal mix of the

objectives to be achieved by the national public procurement system.
o It must achieve the appropriate balance between often conflicting
objective e.g. transparency may impede efficiency, domestic preference
may impact the immediate economy of the purchase etc.
ECONOMY AND EFFICIENCY OBJECTIVES

oECONOMY: stands for the objective of obtaining the best market

price.
oEFFICIENCY: stands for timely acquisition through an efficient and
proportionate competition procedure that is not burdensome on the
internal resources of the Procuring Entity (the principle of
proportionality recently emphasized by EU procurement legislation
and the MDBs).
COMPLEMENTARY OBJECTIVES

o NON-DISCRIMINATION: stands for equal and fair treatment of eligible bidders.

o TRANSPARENCY: stands for disclosure of the competition rules and the
predictability in the conduct of the procurement process (no change in the rules
of the competition game throughout the procurement process).
o ACCOUNTABILITY: stands for responsibility for actions/decisions taken and
exposure to liability for such actions/decisions.
o PROMOTION of DOMESTIC INDUSTRY and EMPLOYMENT: stands for promotion of
the domestic market and typically applied through a margin of domestic
preference which in turn promotes national employment in all national industry
sectors.
COMPLEMENTARY OBJECTIVES

oNATIONAL SECURITY OBJECTIVE: refers to exemption from full

competition under the law for sensitive contracts that are certified to
impact national security.
oSUSTAINABLE DEVELOPMENT OBJECTIVE: refers to using public
procurement to support the promotion of government policies in the
environmental and social areas.
 COMPARISON: Public and Private Sector Procurement
“Shared” goals and outcomes «Differences» between
In the private and public public and private sectors
sectors
• ensuring continuity of service • Accountability to wider range of stakeholders
and the public at large
delivery or production needs • More strict rules on transparency and non-
discrimination
• avoiding waste and duplication • Governments procure a broader range of
goods and services
• Governments must consider sustainable
• Maintaining pressure on reducing development, public safety, and other social
costs policy objectives
• Public agencies share data and can
consolidate procurement operations since
• maintaining required quality level they are not in in commercial competition
and efficiency with one another
• Profit is not an objective in public
procurement
• Long-term relationships with providers more
constrained in public procurement.
Needs Assessment and Spend
Analysis
 Learning Objectives
oBy the end of this presentation (Needs Assessment and Spend
Analysis, the participants will:

• Understand the processes for compilation of annual procurement

needs of the Procuring Entity
• Apply the Supply Positioning Model in the analysis of the PE’s
procurement spend
 Procurement Needs Assessment (I)
oPNA is the process by which the Procuring Entity compiles and
consolidates estimates of the annual purchasing requirements by its
constituent departments or administrative units.
oIt is typically initiated by the Procuring Entity requesting the end-user
departments to submit their expected procurement needs and covers
all categories of procurement needs (goods, works and services)
oIt must include both recurrent procurement needs plus evolving
needs in the upcoming year.
oThe process must be completed in time to coincide with the Procuring
Entity’s annual budget preparation process and its a critical point of
integration with overall financial management.
 Procurement Needs Assessment (II)
oAs the first step in the annual procurement planning process, PNA
serves to identify the overall scope of procurement needs, the
timelines for delivery and the estimated costs.
oNeeds assessment is a participatory (and usually iterative) process
that bring together:
• the end-users,
• Technical specialists,
• procurement and
• financial departments of the Procuring Entity.
oIt may require several cycles of consultation and can be re-adjusted at
the time of approval of the overall budget of the Procuring Entity.
 Procurement Needs Assessment(III)
o Procurement Needs Assessment relies heavily on historical consumption records from
the PE’s database of recent years.
o The Procurement department must ensure that requisitioners (or end-users) provide the
following details about their procurement needs:
• End-Users quantification of required items with related delivery time and technical
specifications to the extent possible;
• End-user justification for deviation from historical consumption records as well as new
requirements;
• End-user indication of any limiting factors with respect to the requested needs like
compatibility and inter-operability with existing infrastructure and equipment;
• Bills of quantities of new works requirements or related description and cost estimates
as prepared by the design engineers;
• TOR and scope of needed physical (like maintenance, security, catering etc.) and
consultancy services;
• End-user Indication of budget expected to be available especially for recurrent and new
requirements;
• Any other mandatory environmental or social requirements that must be met.
 Spend Analysis (I)
oSpend Analysis is an indispensable tool of sourcing requirements in a
manner that is efficient, cost effective and in compliance with the
procurement law and regulations.
oThe aim of Spend Analysis is to:
• identify cost savings opportunities through aggregating demand;
• manage risks using past experience in the acquisition of similar contracts and
guide potential market sourcing strategy;
• optimize the use of available financial and human resources of the
procurement department/Procuring Entity.
• Informs the identification of Key Performance Indicators (KPIs) and
benchmarks-setting process for evaluation by the procurement department.
 Spend Analysis (II)
o Once the procurement needs are compiled, the procurement
department pursues the next step of the Procurement
Planning phase which is to analyze and categorize the needs.
o Spend Analysis answers the following questions:
• What are we buying (and Why)?
• Who are we buying it from?
• Who needs to buy it? (Central department or sub-central procurement units)
• How often do we buy?
• When did we buy it last?
• How much did we pay in most recent purchase?
• Are we getting what we had been promised?
• Where will the items be delivered? (by geographical destination)
• How does the data compare with historical records from previous years?
 Supply Positioning Model
oThe Supply Positioning Model/ Tool informs which strategy may be adopted in
the acquisition of each particular item and provides a useful entry point into
Category Management.
oCategory Management organizes procurement resources to focus on specific
areas of spend. For example, goods are broken down into discrete groups of
similar or related products and each product category is then managed on its
own (through relevant optimal procurement strategy).
oThe Supply Positioning Model has four quadrants; each relevant to the assessed
contract value of the needed item of procurement and the risks associated with
its acquisition. The four categories are:
• Tactical Acquisition
• Tactical Advantage
• Strategic Security
• Strategic Critical
oEach item of the annual procurement needs is positioned by the procurement
team into the respective quadrant of the Supply Positioning Model/Tool.
 Supply Positioning Tool (courtesy WB PPSD)

High
Bottleneck items
Strategic items
Ensure supply- few reliable
Form partnerships
suppliers
Risk or Vulnerability

(Strategic Security) (Strategic Critical)

Non-critical items Leverage items

Simplify and automate Exploit purchasing power
and minimize cost
(Tactical Acquisition)
(Tactical Advantage)

Low

Low Cost COST High Cost

32
 Supply Positioning Tool (courtesy WB PPSD)
Top Right Quadrant
• Strategic items where supply risk and impact on service provision are high
• Highest impact on citizens’ experience
• Price is a large portion of the cost
• Typically have a single or few suppliers
• Focus on long-term partnerships with suppliers

Bottom Right Quadrant

• Items with high impact on service provision
• Low supply risk (leverage items)
• Many suppliers
• Small percentage of cost savings will have a large impact on bottom line
• Focus on cost reduction by competition between suppliers
 Supply Positioning Tool(courtesy WB PPSD)
Top Left Quadrant
• High supply risk but low impact on service delivery.
• Bottleneck components
• Do not contribute a large portion of the operational cost
• Suppliers have power position
• Ensure continuous supply, even possibly at a premium cost
• Focus on long-term contracts or by carrying stock (or both)

Bottom Left Quadrant

• Non-critical items
• Simplify and automate the procurement process as much as possible
• Use a decentralized procurement policy with no formal requisition and approval
process
Supply Positioning Tool (courtesy WB PPSD)
Session 2 B: Market Analysis: Supply Positioning Tool
Market Research and Market
Engagement
 Learning Outcomes
By the end of this session, the participants will be able to:

o Understand a market is
o Know how to apply market research and access related sources of
information
o Recognize types of competition in the market
o Undertake Market Sounding and Market Engagement.
 What is a Market?
oA market can be defined as
• A place where Buyers and sellers come together; and
• Where the providers of goods, works and services operate;
• Where the price is usually determined by the realities of supply and demand.
oMarkets can be complex and they are often segmented based upon
• Scale
• Specializations
• Geography
 Why Market Research?
o To develop an appropriate understanding of the market sectors that
have been identified as relevant to the PE’s procurement portfolio.
oTo enable the Procurement Entity can maximize the likelihood of the
right bidders participating, and the right supplier being selected thereby
minimizing failed procurement processes due to no bids or n
oMarket research needs to examine the market from both the perspective
of the PE and the providers/suppliers operating in that market.
oThe overall intent is to identify what motivates the right response of the
suppliers /providers through their proactive participation in the intended
procurement competitions.
 Sources of Market Information
• Trade journals;
• Supplier annual report and accounts;
• Contacts in other organizations;
• Own experience and that of other organizations in the country;
• Internet searches;
• Specialist industry research groups;
• Government-sponsored industry groups;
• Government statistics;
• Government agencies and tax authorities;
• Stakeholder knowledge,
• Commodity markets,
• Issue of Requests for Information by the procurement department;
especially for innovative procurement.
 Scope of Market Analysis
othe type of market for the PE’s various procurement requirements;
othe nature of competition and how it really works;
oAssessing supply market’s capability to deliver successfully
oKnowing the factors influencing the market, and how these may effect
bidder participation;
oSourcing: who the key suppliers are and their plans for the future;
oIdentifying cost structure and the pricing methods used by the suppliers in
this market in connection with the PE’s needed goods, services and works;
oEstablishing price benchmarks and trends in terms of actual prices and
pricing methods;
 Scope of Market Analysis (cont’d)

oIdentifying risk associated with a market and describe how the risk should
be managed;
oAssessing the PE’s previous experience in achieving VfM when operating
in similar markets;
oDescribing how other customers in the market achieve VfM, and get the
right result; and
oDetermining whether the PE’s contract is likely to have any positive or
negative impact on the market (Will the right suppliers bid? In the right
way? To get the right result?).
 Market Analysis: Results
o Market capability to meet its procurement needs (typical experience
levels, product availability, package sizes, financial performance, etc.);
o Previous experience in the market by the PE and other customers;
o Market view of the PE (from a supplier’s perspective) in terms of
attractiveness for contracting with (e.g., reliability of payment,
procurement capability, timeliness in decisions, complaints handling, and
imposing onerous conditions) – whether the right suppliers are likely to
bid considering such constraints;
o Modification to the requirements (if needed) to align them to the
market’s capability, or actions to influence the market place so that it is
willing and able to meet the requirements unchanged;
 Market Analysis: Results (cont’d)
o The nature of competition and what is needed to ensure appropriate
levels of participation;
o Current good practice for procuring from the market including pricing
methods, risk allocation, and benchmarks of performance and cost;
o Risks identified and a management plan based on allocating risk to the
party best placed to manage the risk; and
o Market’s risk tolerance ( there is usually a cost in transferring a risk to
another party and if the PE attempts to transfer too much risk to
suppliers, it may result in few or no suppliers willing to bid, or a bid that
is too expensive to the PE).
 Market Research Outcomes
oIdentify High Level Procurement Strategy Options — an overview of the
options available for all PE planned contracts.
oWhere information collected through market research is insufficient or
needs further elaboration or needs pro-active initiatives by the PE to
motivate the supply side then the procurement team will need to do
further work like:
Develop a Market Engagement Plan — the approach that the PE will adopt to
directly engage with bidders to provide feedback and ideas on PE requirements
and to create marketplace interest in bidding for PE’s contracts.
 Market Engagement
oMarket engagement can provide ideas on alternative approaches for
meeting the PE requirements, highlight potential risks early in the
procurement process, and provide an insight into likely marketplace
interest. It can also motivate the right suppliers to bid.
oThe information collected can then be used to develop a procurement
strategy/approach that manages risk in the right way for the PE and the
bidders thereby generating wider competition, and maximizing the
opportunities to meet the PE’s objectives.
oMarket engagement can be undertaken through a number of ways
including concept viability exercises (innovative procurement), supplier
questionnaires, market sounding exercises, suppliers’ conferences, trade
events, paid-for market research, and publication of outline procurement
strategies for consultation.
 Market Engagement Stages
o Communicating the CAs requirement to the supply chain.
o Assessing the state of the market and the ability of the market to respond to the
requirement.
o Consulting with the market to discover the market conditions that are necessary to
deliver the requirement.
Market Engagement

The process needs to be carried

Market
Sounding
out in a way that demonstrates
credibility and convinces the
Market market that the PE is serious
Sounding
analysis
about buying a solution.

Market
Consultation
 Expected Outcomes of Market Engagement
oThe supply chain has advance notice of the PE’s requirement and the wider
market opportunity it represents and has time and opportunity to actively
engage in delivering a solution.
oThe PE has a good understanding of what the supply chain is able to deliver,
and the timeframes and costs involved.
oThe PE has a better understanding of the market conditions required to
deliver the envisaged solution need, the risks involved and potential barriers.
oTogether this gives the PE a wealth of information and insights into the
market which can be use to write better tender documents, making the
subsequent procurement process more focused, efficient and ultimately
more effective.
oThe PE can stimulate the process of transforming the marketplace to support
the sustainable commercialisation of innovative products and services.
 Market Sounding
othe process of assessing the reaction of the market to a proposed
requirement.
oExpected to begin at the earliest possible stage in the procurement process.
oFocuses on suppliers as a whole, rather than the merits of individual
suppliers - at no point does it involve supplier selection or evaluation.
oThe manner in which the market sounding is carried out needs to support
the development of trust and credibility with the supply chain.
oAs with all public procurement activities:
• It is vital to ensure that the market sounding process remains open, and that the
suppliers involved are treated with fairness and equality.
• All possible efforts should be made to preserve a 'level playing field' and the process
should be formally documented.
 Market Sounding (cont’d)
o6 key areas of information about the market as a whole that Market
Sounding is commonly used to assess:

n Maturity: is the market ready to deliver what's required?

n Feasibility: will the market be technically capable of meeting the requirement?
n Competition: how many suppliers provide what is required; will procurement be
sufficiently competitive?
n Capacity: are there enough suppliers, with sufficient capacity, to meet the
requirement?
n Working together: will the requirement bring suppliers from different sub-sectors
together in a new way? how will this work?
n Traditions and prevailing attitudes: what are they in this market? how will they affect
the project?
 Market Sounding: Benefits, Forms, Pitfalls
q Gaining ideas about structure and scope of proposed procurement, and
its acceptability to bidders
q Potential bidders welcome involvement since they may express their
commercial concerns.
q Early consultation can also involve other stakeholders
v Request for comments on draft specifications or other conditions,
structured process with questions on market response to specific ideas
v Can involve ‘road show’ or meetings with selected potential bidders
o To avoid bidders seeking collectively to influence the transaction to their
advantage, make use of experienced consultants to ensure suggestions
are well founded
o Early canvassing of range of opinions helps to avoid accusations of bias
in the formal procurement process
 Elements of Market Sounding
oA Communication Plan
sets out the framework to be used by the PE to inform the supply chain
about the market sounding and stimulate its response.
oA concise description of the PE’s needs setting out:
n the problem or issue to be addressed;
n the requirement (in outcome terms);
n the context (current situation);
n the procurement opportunity (scale and timeframe);
This description may, but it is not imperative to have a complete
technical specifications or the ToR.
oA Response Channel and Form
to collect and standardise the supply chain’s responses.
 Elements of Market Sounding (cont’d)
o The communication plan will ensure that the supply chain (in its widest sense) is aware
that a market sounding exercise is underway and knows how to respond.
o The PE, as a public sector organisation needs to make sure, and be able to demonstrate,
that the market sounding is carried out in a way that is open and transparent.
o A communication plan provides:
n the means to maximise the level and quality of the supply chain response, and
n a record of the PE’s communication approach, documenting that the CA made every
effort to be comprehensive and inclusive, open and transparent and maintain a fair
playing field.
o A typical communication plan involves:
n Publication of relevant advertisement
n Engagement of supply chain intermediaries in order to communicate to their
networks that the market sounding is underway.
n Targeted communication to key supply chain members and integrators.
 Market Sounding Timeframe
o Typically, the market engagement phase takes several months,
depending on the complexity of the requirement.
n Market sounding documentation and planning: 4-8 weeks.
n Market sounding period: 2-3 months.
oThis timeframe can be shorter if, for example, the definition of the
need and the requirements are already well developed, and
connections with the supply chain are well established.
oThe PE needs to allow a suitable length of time for the supply chain to
hear about the opportunity and then to respond, in order not to
undermine the success and credibility of the process.
 Market Sounding Analysis Report
oThe Market Sounding Analysis will provide a snapshot of the state of the
market and an insight into the supply chains response to the requirement.
oDepending on the structure of the responses, the analysis may be a
relatively straightforward task, but it can be time consuming.
oThe analysis can be carried out by officials of the CA or may be outsourced
to independent consultants. This is often a question of time and
availability of resources, although it can be helpful to employ the support
of consultants with an understanding of the supply chain in question.
 Contents of Market Sounding Analysis Report
o Typically the “market sounding analysis report” will:
§ present a consolidation and analysis of the response to the market sounding
exercise;
§ draw top level conclusions from the responses regarding the markets response to
the supply requirements,
§ assess the feasibility of delivering the requirement and the capacity and capability of
the supply chain to deliver a solution
§ draw attention to issues and barriers to the delivery of the requirement
§ identify information gaps and questions and discussion items for follow up
consultations with the supply chain and / or individual suppliers
o The analysis should be objective and based on the information provided.
o Any additional insights into the supply chain provided by consultants should be
distinguished clearly in the report.
 Contents of Market Sounding Analysis Report
(cont’d)
o The report should give an assessment of:
§ Appetite: is there interest in the supply chain in delivering a solution?
§ Options: what is the range of options being presented and do they meet the
requirement?
§ Maturity: is the market ready to deliver what's required?
§ Feasibility: will the market be technically capable of meeting the requirement?
§ Competition: will procurement be sufficiently competitive?(competitive, monopoly,
oligopoly, monopsony)
§ Capacity: does the supply chain have capacity to meet the requirement?
§ Working together: will the requirement bring suppliers from different sub-sectors
together in a new way? Are consortia likely to form?
§ Traditions and prevailing attitudes: what are they? will they affect the project?
§ Barriers to delivery and how these might be overcome.
 Market Consultation
oAlthough the market sounding provides a wealth of valuable information, it is
often incomplete. Information gaps will have become apparent during the analysis
oThe market sounding process will also have raised new ideas, issues and questions
that need to be explored further with the supply chain before you can finalise the
procurement specification and strategy.
oMarket Consultation is the next step in the market engagement process.
oWhile the Market Sounding exercise is carried out remotely with little, if any,
direct contact with the supply chain, Market Consultation involves direct contact
with potential suppliers to enable the PE to deepen its understanding of the state
of the market.
oIn simple terms market consultation is a two way exchange of information and
discussion between the PE and the supply chain.
 Market Consultation (cont’d)
oThrough consultation the PE will fill in information gaps for both
suppliers and itself, discuss alternative options and approaches to
delivering the requirements, bring barriers (e.g. regulatory,
certification, practical and operation) into focus, address questions of
delivery and procurement process.
oBy the end of the market consultation phase the PE will have the
information and insights it needs to refine the outcome based
specification and develop a procurement strategy best able to
deliver the requirement.
 Market Consultation (cont’d)
Is the PE allowed to engage openly with potential suppliers?
oThe Public Sector is often reluctant to engage directly with suppliers in fear
of contravening public procurement regulations.
oIt is however perfectly legitimate for the PE to discuss its needs and get
feedback from the supply chain in advance of formal procurement.
oBUT the Market Consultation has always to be performed within the normal
parameters of fairness, transparency and fair play.
oThe Market Consultation aims to increase PE’s understanding of the supply
chain and the options available, and not to the assessment of potential
suppliers and solutions.
 Market Consultation (cont’d)
What does market consultation looks like?
oMarket Consultation may take the form of a workshop, supplier
briefings, meetings with small groups or individual companies or
phone calls to follow up the market sounding.
oThe advantages of a workshop is that it gives the CA a formal
structure to engage in more detailed discussions with a cross section
of the supply chain, and avoids any potential difficulties in engaging
with individual companies.
Types of competition in the markets
and analysis of suppliers’
preferences
 Outline
o Understanding the type of competition prevailing in the market
o Types of Market Competition
o Porter’s five forces
o Supplier Preferencing Tool
o Outcome of Supplier Preferencing Exercise
Understanding the type of competition
prevailing in the market
oAs part of market research and analysis, the procurement team needs to
determine the extent of competition that exists in the market for each
substantial item of needed procurement.
oThe type of prevailing market competition will have a direct influence on
the cost and success of the procurement and will help the PE in
determining:
• type of competitive bidding to be pursued for the particular contract (as
determined by the level of competition in the market and the availability of
substitutes/alternatives);
• most effective contract pricing, or costing mechanism (as determined by
the market pricing approach); and
• level of risk transfer the market will realistically bear (as determined by the
relative strength and power of the buyer and the supplier’s motivation to
participate).
Figure I:

Types of Market Competition

Perfect Imperfect Oligopoly Monopoly Monopsony
Competition Competition
Number of
Suppliers in the Many suppliers Few large suppliers One supplier One buyer (usually one or two
market Fewer larger suppliers suppliers)
Market Power of No market power by Dependency on the PE
the suppliers suppliers
Little market power High market power Absolute market power
Substitutes in No substitutes No substitutes- make?
the market Differentiated supply
with close substitutes
Differentiated supply:
Homogeneous goods, degree of substitution
works and services that limited
are interchangeable
Price One market price: Price competition Seeking of price Price set by one 'price Price set by need to achieve
suppliers are 'price stability by price maker': potential for return on investment
takers' leadership or price discrimination
collusion

Profit Normal profits Abnormal profits

Abnormal profits, Questionable Return on

Small abnormal depending on Investment and Strategic
profits, short term competition Focus
Barriers to entry
Minimal barriers to Limited barriers to Significant barriers to Investment case hard to
Barriers to Entry entry entry entry justify
Porter’s Five Forces
o“Porter’s Five Forces" analysis is used when a more in-depth analysis
is needed to determine the level of competition and where the
balance of power resides, between suppliers and buyers, within the
market for the desired item/s.
o“Porter’s Five Forces" analysis will support the choice of the
procurement method or procurement approach for the particular
contract.
Porter’s Five Forces
oThe nature of competition in any industry can be considered on the
basis of the following five forces:
• bargaining power of suppliers (supplier power);
• bargaining power of buyers (buyer power);
• rivalry among current competitors (competitive rivalry);
• threat of substitute product/services (product and technology development);
and
• threat of new potential entrants (new market entrants).
Porter’s Five Forces Analysis

Reference: WB-PPSD
Porter’s Five Forces
1. Bargaining Power of Suppliers:
Suppliers are in a favourable bargaining position and can increase their
profits by increasing their prices. A supplier’s strength can be determined by
assessing:
• the availability of substitutes: A supplier with an established market of premium
quality goods, services, and works tend to be unique and unlikely to lower its prices;
• the cost of switching to another supplier’s product: The position of the supplier is
strong where the buyer has to pay high switching costs to move to an alternative
supplier’s product; and
• the importance of goods, service, and works to the buyer: A strong supplier exists
where the buyer has a strong dependency or need for the supplier’s particular
product.
Porter’s Five Forces
2. Bargaining Power of Buyers
The Buyer has the ability to drive down the prices charged by the suppliers in the
market; or to increase supplier costs in the market by demanding better quality and
service. The buyer’s strength can be determined by assessing:
• the size of their requirement is large compared to the market in general or
especially in relation to an individual supplier’s size within that market;
• the ease of switching products: there are many other suppliers providing the
same or similar services, goods, and works in the market, at a lower or similar
cost and the buyer would not suffer from any switching costs; and
• the number of other buyers in the market: A buyer is in a strong position
when there are few other buyers in the market for an individual supplier’s
goods, services, and works.
Porter’s Five Forces
3. Rivalry Amongst Current Competitors in the market
The competitive struggle for securing a “market share” among suppliers poses a
strong threat to their profitability. The strength of rivalry in a marketplace can be
determined by assessing the:
• Extent of barriers to exit and entry;
• Amount of fixed costs a supplier has to bear;
• Competitive structure of the particular industry;
• Presence of global customers;
• Absence of switching costs;
• Growth rate of the market; and
• Demand conditions.
Porter’s Five Forces
4. Threat of Substitute Products
Threat of substitute products refers to the availability of other goods,
services or works that have the ability to satisfy customer needs
equally and as effectively. Substitutes create an upper limit on the price
that suppliers can charge in a market. The smaller the number of close
substitutes, the greater the opportunity for a supplier to increase its
prices.
Porter’s Five Forces
5. Risk of Entry by Potential Competitors
Entry of new suppliers increases the market’s supply capacity, increases
competition for market share, and lowers the current prices. The threat of entry by
potential competitors can be determined by assessing the extent of barriers to
entry such as:
• Economies of scale available to suppliers currently in the market;
• Customer brand loyalty to existing supplier goods, services, and works;
• Government regulation;
• Customer switching costs;
• Cost advantage enjoyed by existing suppliers in the market;
• Ease of distribution; and
• The value of set up costs and capital investment.
Porter’s Five Forces
oThe Five Forces together, determine the competition, profitability,
and the behaviors of suppliers within a market because they shape
the prices that can be charged, the costs that can be borne, and the
investment required to compete in the industry.
oFor the PE, this tool help determine where the balance of power lies
in the market and what level of influence and impact the PE’s
procurement requirements will have on the market.
oThus the PE can source the market for its requirements with thorough
knowledge of its power and the optimal strategy that it needs to
adopt.
Supplier Preferencing Tool
oSupplier Preferencing is a tool that helps the PE in assessing how a
supplier views the PE (as a customer) and depending on this view,
how the supplier is likely to behave as a result.
oThe Tool has four quadrants that will enable the PE to define what will
be the reaction of a Supplier towards the business that the PE offers.
Two parameters are used by the PE, namely:
• value of the business to the supplier; and
• overall attractiveness of the business to the supplier.
Supplier Preferencing Tool

oSupplier Preferencing is a tool that helps the PE in assessing how a

supplier views the PE (as a customer) and depending on this view,
how the supplier is likely to behave as a result.
oThe Tool has four quadrants that will enable the PE to define what will
be the reaction of a Supplier towards the business that the PE offers.
Two parameters are used by the PE, namely:
1. value of the business to the supplier (as a proportion of the
supplier’s turnover); and
2. overall attractiveness of the business to the supplier (accumulated
experience and future potential).
Supplier Preferencing Tool
Supplier Preferencing Tool
oThe Supplier Preferencing Tool will help the PE to put in place a plan
of action to improve its general attractiveness to market and to put
this plan into effect throughout the selection of the right
procurement method/approach.
oThe Tool is also helpful in early identification of the risks in dealing
with certain suppliers within the market.
oSuch determinations, reached through this Tool, can be further
validated through the PE’s market engagement processes and/or any
prequalification exercise or incorporated in the bid evaluation criteria
and risk management plans.
Supplier Preferencing Tool
oThe Supplier Preferencing Tool will help the PE to put in place a plan
of action to improve its general attractiveness to market and to put
this plan into effect throughout the selection of the right
procurement method/approach.
oThe Tool is also helpful in early identification of the risks in dealing
with certain suppliers within the market.
oSuch determinations, reached through this Tool, can be further
validated through the PE’s market engagement processes and/or
employed to inform any prequalification exercise conducted by the PE
or incorporated in the bid evaluation criteria and risk management
plans.
Supplier Preferencing Tool
The Supplier may generally perceive the PE in 4 ways:
1. As a customer for Development:
A PE will be seen as attractive and while the value of business is currently
relatively low, suppliers will be keen to win new contracts and make sure
current contracts are operating effectively.
The supplier is likely to offer very good service and show considerable
interest in resolving any issues that may arise with the PE. Correspondingly,
PEs should actively encourage receiving bids from such suppliers.
Bids and any subsequent contracts are likely to be very competitively priced,
with exceptional service levels, as the supplier will be seeking to nurture the
PE to secure future bidding opportunities.
Supplier Preferencing Tool
2. As a core customer:
Suppliers will invest significant effort to retain and expand the current business
levels and as such the PE can expect:
• To be treated as an important customer;
• To have a beneficial relationship that drives value for both the PE and supplier;
• To receive a high level of service and response as the supplier will want to retain and expand
the business;
• The supplier to attempt to increase profitability slowly, while sharing the benefits with the
PE; and
• Suppliers to be receptive to ‘partnerships’.
The PE can use the above at both supplier qualification and bid evaluation stages.
Bid evaluation using rated criteria offers the best opportunity for PEs to identify
and attribute value to suppliers and bids that offer above characteristics.
Supplier Preferencing Tool
3. Nuisance
PEs that are considered Nuisance will be given minimum attention and the supplier
is likely to seek not to pursue any new bidding opportunities. Suppliers will rank a
PE as very low in its list of priorities since:
• Little profit to be made;
• Difficult and/or expensive to service; and
• Poor at paying bills.
As a result of a PE being considered Nuisance, the supplier is likely to offer poor
service and show very little interest in resolving any delivery, quality, or contractual
issues. Correspondingly PEs should be very cautious about receiving bids from such
a supplier and should also consider whether they should try and exit any existing
contracts.
Supplier Preferencing Tool
4. Exploitable
PEs which are considered as Exploitable will be attractive to suppliers due to the value of business
and the supplier will seek short term advantage from what the supplier will perceive to be a
position of strength.
• Suppliers will seek to maintain the business as long as it does not involve any particular effort for
them. The converse may also occur, where effort is applied by the supplier, it seeks to exploit the
PE through raising prices on existing contracts or submitting bids with higher prices which if they
win will continue the pattern of increasing prices.
• Suppliers may also seek to reduce their own costs through reducing the costs of serving the PE.
Price increases can occur beyond normal price adjustment procedures and PEs can anticipate
requests for contract variations for volume increases, extension of time, unforeseen
circumstances, etc.
Working with these suppliers will be a real challenge for the PE, so considerable effort will need to
be placed into contract management.
In such scenario the said suppliers and respective contracts will need to be carefully managed and
contingency plans may be needed to deal with the risk of a supplier withdrawing from contracts.
Supplier Preferencing Tool
The Table below shows the reaction of the Supplier to PE business
depending on how the PE is perceived and how valuable is PE’s
business: Quadrant Description Action
Development Get Further Business
• Low-value
• But Still Attractive
Core Retain and Expand

• High-value
• Highly Attractive
• Supplier's Core Business
Nuisance • Low-value Withdraw
• Little Profit

Exploitable • High-value Maximise Profits

• But not Attractive
Outcome of Supplier Preferencing Exercise
The outcome of this supplier preference analysis will allow a PE to
establish:
• what changes the PE needs to make to become more attractive to the market;
• how to motivate the market to bid and provide a good solution to meet the
PE’s requirements; and
• how to engage with the market to optimize the level of supplier participation
in a bidding process.
 Steps in Procurement Strategy
Preparation, Setting Procurement
Objectives and Selection of the optimal
procurement strategy
Strategy Definition
Strategy: Procurement strategy:
1. A method or plan chosen to The purpose of the Procurement
bring about a desired future, Strategy is to define the optimal
such as achievement of a goal procurement approach to deliver
or solution to a problem; the right procurement result for the
Procuring Entity (PE).
2. The art and science of
planning and marshaling
resources for their most
efficient and effective use.

Without a carefully researched Procurement Strategy, it is impossible to

know whether or not the PE’s procurement activities will meet the 5 R’s
requirements and also be an optimal fit in order to achieve its mandate
and objectives taking into consideration its context and capacity as well as
the market in which it operates.
Steps in Developing a Procurement Strategy
The PE’s or the Project’s Operational Context
( PESTLE Analysis)

Internal PE Capacity/Resource Analysis and Resource PLAN

(SWOT Analysis)

Market Analysis and Procurement Risk Management

(Supply Positioning Model, Supplier Preferencing Tool, Porter’s 5 Forces Analysis and the Risk
Mitigation / Management Plan)

SMART Procurement Objectives linked to procurement portfolio and to the

PE/Project mandate (RAQSCI Model)

Selection of Optimal Strategy Option

STEP 1
The PE’s Operational Context ( PESTLE Analysis)

• PESTLE analysis of the context in which the PE operates will

provide information that can influence the Procurement
Strategy.
• The priority is to identify factors that could impact the
Procurement Strategy (approach to market) both positively
and negatively (at the Political, Economic, Social,
Technological, Legal and Environmental levels), while
drawing conclusions from this information to inform the
design of the Procurement Strategy (PS).
STEP 2
PE’s Internal Strengths and Weaknesses and External Threats
and Opportunities (SWOT Analysis) - leads to the
development of a Resource PLAN
• The objective of the PE’s capacity assessment is to identify
any known factors, both enablers and constraints, which
may have an impact on both the delivery of the
Portfolio/Project and the Procurement Strategy being
developed.

• It will also help identify any targeted early interventions

such as training, staff reinforcements or enhanced support
that the PE may need now and downstream throughout
execution of procurement.
STEP 3
Market Analysis and Risk Management Plan ( Market
Analysis informs development of the Procurement Strategy)

• The PE needs to assess the market from the following

perspectives:
1. Supply Positioning Model — Identify the value and
criticality of each contract or category of contracts in
its portfolio of purchases and establish the risks that
must be dealt with in setting the Strategy;
2. Type of competition in the market for key contracts
and related market dynamics using Porter’s 5-Forces
analysis tool and Suppliers’ Preferences tool.
STEP 3(cont.)
Procurement Risk Management

• In this part of the Procurement Strategy, the PE analyses

and prioritizes the “risks” identified in Steps 1, 2, and 3
that relate to the Operational Context, PE capacity
assessment and Market Dynamics which then need to be
mitigated through the Procurement Strategy with respect
to each procurement contract in the PE’s portfolio or in the
project.
STEP 4
Setting the Procurement Objectives:

• Based upon the Strategic & Market Analysis, Risk

Assessment and Stakeholder Analysis (if needed), outline
the key Procurement Objectives that if achieved will support
the achievement of the PE’s objectives and deliver Value for
Money (VFM).

• The Procurement Objectives need to be SMART (Specific,

Measurable, Achievable, Realistic, and Time-bound):
inspired by the 5 R’s and RAQSCI.
STEP 5
Selection of Optimal Procurement Strategy:

• Here the PE outlines the alternatives/options considered for

procuring each contract and the recommended
Procurement Strategy for each contract in its annual
portfolio (or as detailed in the Project description) including
its justification for the selected strategy based on the
analysis of the preceding Steps.

• This Section must be completed for each major contract in

the portfolio/project as well as for Low-Value purchases.
Characteristics of Objectives
The objectives of the Procurement Strategy (PS). The Key Procurement
Objectives should be inspired by the 5 R’s and the RAQSCI Model and
shall be phrased in compliance with the SMART rule, i.e. they should
be:
• Specific,
• Measurable,
• Achievable,
• Relevant and
• Time Bound.
RAQSCI- based Objectives
The Procurement Objectives are framed to refer to:

1. Regulatory Requirements
2. Assurance of Supply
3. Quality levels
4. Service levels
5. Cost affordability
6. Innovation and continuous improvement

In complex procurement these objectives must be quality-assured by the key

stakeholders, (as a minimum those within the PE and the stakeholders’
organizations).
PE’s Procurement Strategy
• The appropriate procurement strategy is developed to cover:
• All the items the Procuring Entity is purchasing;
• level of risk for each item of procurement;
• impact of the procurement item on the PE’s objectives and
mandate;
• Capability of the market to supply and the state of competition in
the market;
• Lessons learnt from previous experience;
• Resources and capacity of the PE; and
• Specific objectives in compliance with governing rules (also those
of donors if applicable).
The aim of the Procurement Strategy is to document:
“How can the Procuring Entity ensure timely delivery of needed
procurement of the right quality and at best VFM without undertaking un-
due risks?”
Optimal Procurement Strategy
• The optimal Procurement Strategy is a “fit for purpose”
procurement approach which is tailored for delivering the
PE’s Objectives taking into consideration the individual
circumstances, and business and operating environment of
that particular procurement.
 KEY PARAMETERS OF THE OPTIMAL PROCUREMENT STRATEGY (courtesy
WB PPSD)

Attribute Selected Strategy/Approach Justification

1. Specifications
Conformance/Performance
2. Additional Sustainability Requirements Yes/No

3. Contract Type
A. Traditional
B. Design and Build
C. Design, Build, Operate, Maintain
D. Design and Build-Turnkey or Prime Contractor
E. EPC and EPCM

4. Pricing and Costing Mechanism

A. Lump Sum
B. Performance based contracts
C. Schedule of Rates/Admeasurement
D. Time and Materials
E. Cost Plus
5. Supplier Relationship Adversarial/Collaborative
A. None, Fixed Price
B. Negotiated
C. Percentage
State any special conditions of contract
6. Form of Contract (Terms and Conditions)
A. Request for Proposals (RFP)
B. Request for Bids (RFB)
7. Procurement Method C. Request for Quotations (RFQ)
D. Direct Selection
A. Competitive Dialog
8. Selection Arrangement B. Public Private Partnerships (PPP)
KEY PARAMETERS OF THE OPTIMAL PROCUREMENT STRATEGY-
Cont’d
(courtesy WB PPSD)

Attribute Selected Approach Justification

9. Consultants’ Evaluation Selection
Method
A. Quality Cost Based Selection (QCBS)
B. Fixed Budget Based Selection (FBS)
C. Least Cost Based Selection (LCS)
D. Quality Based Selection (QBS)
E. Consultant's Qualifications Based Selection
(CQS)
F. Direct Selection

10. Evaluation of Costs

A. Adjusted Bid Price
B. Life-Cycle Costs
11. Domestic Preference Yes / No
12. Rated Criteria
List the type of criteria to be used
(mandatory/desired)
VFM optimization through early effort in
Strategy and Planning

Opportunity and Influence in Delivering VfM in the Procurement

Process. Earlier investment of effort pays off.
Thank you for
Listening