Part 2: The essentials of procurement

Spending on supplies and services by district health boards: Learning from examples.

In this Part, we set out the essentials of effective and efficient procurement.

The guidance in this Part should help senior management and Boards make sure that DHBs are spending their money well. The guidance also highlights the most important aspects of purchasing and contract management practices for those with hands-on roles in procurement. It should also be useful for those entities, such as HBL, with a role in the effectiveness and efficiency of procurement processes throughout the health sector.

The essentials of effective and efficient procurement are consistent with the basic principles that govern the use of all public funds. These principles are accountability, openness, value for money, lawfulness, fairness, and integrity.6

Procurement is integral to the business of district health boards

Between 36% and 70% of all the money each DHB spends annually is spent buying supplies and services from external suppliers and providers. Therefore, procurement needs to be recognised for what it is – a fundamental part of delivering effective and efficient services. Procurement planning is an integral part of the process for planning the effective delivery of services by DHBs. Procurement monitoring provides information about business performance.

Where funding constraints exist, DHBs could use more effective and efficient procurement practices to realise savings that do not affect levels of service. Sound processes for initiating purchases will also help protect the resources of the DHB from being wasted through inadvertent error and fraudulent activity, ensuring that all possible resources are directed to the delivery of services.

Procurement deserves a level of resourcing and attention from senior management and governing bodies that recognises its importance to the DHB.

Purchasing needs a strategic approach based on comprehensive knowledge

At the level of individual purchases, processes can be put in place to determine that each purchase represents good value for money. However, there is a risk that the individual purchase may not provide the best value for money for the DHB if it is made without the DHB knowing:

  • what other supplies and services it currently purchases;
  • which suppliers and providers it uses;
  • why it needs those particular supplies and services; and
  • what the future demand will be for those and other supplies and services.

For example, aggregating the required amount of the same supplies throughout the DHB and negotiating a price and delivery service levels for the consolidated purchase is likely to be more efficient than purchasing smaller amounts of the same supplies separately for individual departments. Knowing which departments within the DHB need which supplies and when can generate efficiencies by reducing internal DHB processing and by increasing the ability to negotiate better pricing or delivery service levels because of the increased volume. Similarly, combining the purchase of similar categories of supplies and services may also provide opportunity for efficiencies.

Effective and efficient purchasing needs to be informed by a comprehensive picture, for all activity in the DHB, of:

  • what supplies and services are needed, now and for the future;
  • what volumes of those supplies and services are needed;
  • where those supplies and services are needed;
  • when or how often the supplies and services are needed;
  • why those particular supplies and services are needed;
  • who those supplies and services are currently purchased from;
  • what purchase methods are being used;
  • the terms and conditions of those purchases and the expiry date of any formal contractual purchasing arrangements; and
  • the performance of the supplier(s) or provider(s) in delivering the supplies and services.

Purchasing also needs a good understanding of the supplier/provider market (not just who is in the market, but their capability and capacity for delivery and their financial sustainability), and a broader understanding of the purchases made by other DHBs and organisations purchasing similar supplies and services.

Having this information available lets DHBs take a "helicopter" view of their purchasing needs. They can strategically plan to manage the risks for:

  • what is purchased (including how purchases may be combined together for efficiencies, and how the supplies and services required may change over time);
  • what the most appropriate purchase approach may be for different categories of supplies and services (including working collaboratively on a regional or national basis); and
  • ensuring continuity of delivery of supplies and services (where necessary).

Good planning relies on good data systems and good data analysis

DHBs' information systems for purchasing need to be robust enough to provide the comprehensive picture required for strategic (and individual) purchase planning at local, regional, and national levels.

This means making sure that all information systems that record purchasing data (regardless of whether they are hard copies or electronic records) for all DHB activity are able to be combined in some manner and analysed to provide the complete picture. In addition, information systems that identify the delivery of supplies and services also need to be "mined" for useful procurement data.

The information systems that record purchasing data will include purchase order systems, contract management systems, accounts payable systems, and inventory management systems. They may also include patient management systems (for data about the historical demand for supplies and services), complaints systems (for information about the performance of suppliers and providers), asset management systems (for information about planned purchases for maintenance or replacement of assets), and others.

Ideally, where these systems are integrated, the DHB will be able to easily determine the comprehensive picture required for strategic planning. Where these systems are not integrated, greater analysis will be needed to join the pieces of the picture together.

In addition, the ability of HBL to achieve its expected purchasing effectiveness and efficiency gains will depend on the early establishment and analysis of baseline data for all 20 DHBs.

Detailed planning is also essential

Knowing the context for a purchase and that it has a place in the DHB's strategic planning is not enough. Good planning for each purchase is essential for effective and efficient purchasing. Planning needs to make clear:

  • who is responsible for the purchase process;
  • what exactly is to be purchased (the scope, volume, and value of the supplies or services to be purchased);
  • when the purchases are required;
  • what approach will be taken for the purchase and why that approach has been selected;
  • what the key factors are that will represent good value for money, so an appropriate supplier/provider can be selected and delivery performance can be evaluated;
  • what the risks in the purchase are and how they are to be mitigated or managed; and
  • who is delegated the authority to approve the purchase decision.

Good planning also includes documentation of planning decisions and approval of the purchasing approach and processes. Good planning is conducted early enough to enable the purchasing process to be completed either before existing arrangements for the purchase expire (for supplies and services of a continuing nature) or before the supplies and services are needed (for new purchases).

Consider scale and risk in procurement

In procurement, one size definitely does not fit all. DHBs need to consider the scale and risk of their procurement in determining what level of effort is required to:

  • purchase the supplies and services; and
  • provide enough oversight to ensure that the purchased supplies or services are delivered as agreed.

The principles underpinning procurement7 should always apply, but how these are applied in practice may differ from case to case. Everything we recommend as good practice may not be necessary to the same level for every purchase. Low-risk and low-value purchases will require different efforts, levels of formality, levels of documented support, and approval than complex or high-risk and/or high-value purchases. Similarly, simple supplies with a once-only delivery will require less contract management effort than the delivery of complex health services to the community over time.

DHB purchasing and contract management processes need to be flexible to enable different responses to different levels of scale and risk. Staff need to be given guidance to help them to apply this flexibility appropriately in practice.

Policies and procedures need to be useful to guide decision-making

Policies provide a framework for procurement decision-making, and procedural guidance provides staff with an understanding of how to apply the policies in practice.

Good procurement policies are clearly written, consistent with other DHB policies, and regularly reviewed and updated (as necessary). They describe the DHB's overall "attitude" to procurement and set rules about requirements. They need to clearly distinguish mandatory requirements from those that require judgement. They need to link to other DHB policies that may affect procurement (such as conflicts of interest, gifts and hospitality, sponsorship, and delegated authorities). Importantly, they need to cover both purchasing and contract management.

Good procedural guidance should be detailed enough to help new staff to understand the ways in which the policy is put into practice. It should assist the application of judgement where this is allowed and provide guidance about when, how, and to what extent judgement should be applied. It should also describe the processes that must be followed and the tools that are available.

Experienced and capable staff are essential

Having experienced and capable staff will go a long way to offset the risks to DHBs in procurement activity. Experienced and capable procurement staff are a valuable resource. They are also in high demand but short supply in New Zealand. Their skills are sought by the private sector as well as the public sector. DHBs should make the most of the experienced and capable staff they have by sharing their knowledge widely and investing in their continued training and development, within the DHB and within the health and disability sector.

Procurement is well on the way to recognition as a profession, both in New Zealand and around the world. There is a growing understanding that there is benefit in developing and setting internationally agreed standards for competency, formalised training and qualification programmes, and common role definitions. Access to a professional body that regulates and monitors procurement competency standards and shares new developments through training opportunities will add to the value that knowledgeable and skilled procurement staff already provide to DHBs.

The Government Procurement Reform programme8 has set up the New Zealand Procurement Academy to facilitate this professionalism within the State sector. It offers subsidised access for State employees to study towards an internationally recognised professional qualification. It also offers non-assessed training on specific procurement-related topics.

Decisions need to be recorded and clearly demonstrate their rationale

A major aspect of accountability, and of good risk management, is the ability to support the rationale for significant decisions. Having good records enables the significant decisions for each purchase and for the management of each contract to be recalled with accuracy, even some time after the procurement has occurred. Less reliance is placed on staff to remember what – and, in particular, why – decisions were made.

Good records protect against the risk of loss of critical personnel and the consequent loss of corporate knowledge of decision-making. Good records also provide evidence of decision-making should decisions be challenged for any reason.

Scope and quality of the purchase needs to be clear

The success of any procurement process is in obtaining the right supplies and services (the appropriate quantity and quality at the right time) for the right total cost to the DHB. Collectively, this represents value for money to the DHB. It is crucial that the DHB defines the supplies or services it needs as clearly as possible.

For simple purchases of familiar products, the definition may be a technical description of the supplies needed and the approximate quantity for the term of the contract. For more complex supplies and services, the definition may be more of a description of what needs to be achieved from the procurement (a functional description) or the performance parameters that the supplies or services will be required to achieve (a performance-oriented description), or some combination of these.

A clear definition of what is required is essential at the purchase planning stage. It will enable suppliers/providers to present proposals that best match the needs of the DHB. It provides the basis for accurately assessing whether (and how well) those proposals meet the DHB's needs. Clarity of definition reduces the time taken to clarify what is required to suppliers/providers before they submit their proposals, and also reduces the need to clarify how their proposals will meet the DHB's needs during the evaluation of proposals.

A clear definition of what is required forms the basis for determining the measures the DHB will use to determine whether the supplies or services delivered match its expectations. It determines the quality standards, quantity expectations, and timing of delivery that are needed to manage the delivery of the supplies or services.

Risk needs to be recognised and consciously managed

Risk needs to be consciously managed. Risk identification and assessment needs to be systematically carried out at an individual procurement level.

Risk needs to be considered in terms of the supplies or services being purchased. Such risks are usually reduced by clarifying the specification or performance requirements, selecting comprehensive evaluation criteria, or effecting appropriate contract monitoring requirements.

Managing process risk is also important. Does the process support the underlying principles of accountability, openness, value for money, lawfulness, fairness, and integrity? For example:

  • Is the selected approach "fair" to the market?
  • Is there appropriate consideration of conflicts of interest, or the need to keep information confidential?
  • In a non-competitive process, how is the risk to value for money addressed?
  • What processes are in place to reduce the risk of unfair access to information about the DHB's requirements?

Deliberate risk management is not a call to be overly risk averse. The key is to understand the risks involved and to have a balance between the risks and the benefit of addressing the risks. DHBs may choose to accept risk, but they must do so deliberately, conscious of the potential effect of doing so, rather than being unaware that a risk exists.

6: For definitions of these principles, see paragraph 2.3 in our June 2008 publication, Procurement guidance for public entities, which is available at

7 Accountability, openness, value for money, lawfulness, fairness, and integrity.

8: The Government Procurement Reform programme, managed by the Ministry of Economic Development, was approved by Cabinet in May 2009. The programme has four key focuses: achieving cost savings; building procurement capability and capacity; enhancing New Zealand business participation; and improving governance, oversight, and accountability.

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