HomeMy WebLinkAbout1999-11-03 City CouncilCity of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
FINANCE COMMITTEE
FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:
SUBJECT:
NOVEMBER 3, 1999 CMR: 384:99
PROCUREMENT COST SAVINGS PROGRAM
This is an informational report and no Council action is required.
BACKGROUND
In 1996-97, Council approved the addition of two new Contract Manager positions,
bringing the number of Contract Managers in the Purchasing Section to three. The intent
of these positions was to provide central ownership and accountability for the contracting
process, to reduce the cost of purchased materials and services, and to simplify and spee.d
up the contracting process. Through aggressive sourcing, contract negotiations, and the
elimination of poorly drafted specifications that limit competition, staff projected that
these positions would reduce the City’s purchasing expenditures. Staff estimated an
annual savings of 1 to 2 percent of total contract dollars (or approximately $150,000 to
$300,000), which would more than offset the cost of the new positions. Council directed
staff to monitor the savings achieved by these new positions to ensure they recovered
their cost.
In 1996-97, staff developed a Purchasing Cost Savings Program, which included a
methodology for identifying, quantifying, and documenting the cost savings realized by
the Contract Managers. In 1997-98, staff added a new impact measure (save 5 percent of
the Section’s annual purchasing volume through effective purchasing techniques)~to the
Mission Driven Budget to track the results of the Purchasing Cost Savings Program.
During the July 20, 1999 Finance Committee meeting, the Committee expressed an
interest in the status of the Purchasing Cost Savings Program. This report is written in
response to the Finance Committee request for information.
CMR: 384:99 Page 1 of 3
DISCUSSION
In 1996-97, the Purchasing Cost Savings Program generated cost savings of $208,401. In
1997-98, the cost savings totaled $478,658. In 1998-99, the first full-year with three
Contract Managers, the Program generated a total savings of $671,994, or 1.1% of the
City’s 1998-99 purchase volume. The overall results of the Purchasing Cost Saving
Program are provided in the following table:
COST SAVl~GS PROGRAM 1998-99 1997-98 1996-97
RESULTS
Total Purchases $62,713,799 $52,584,218 $38,785,839
Purchases with Savings 2,573,162 2,480,747 1,572,211
Purchases with Savings as a Percentage
of Total Purchases 4.1%4.7%4.1%
Cost Savings Earned 671,994 478,658 208,401
Savings as a Percentage of Total
Purchases 1.1%0.9%0.5%
Savings as a Percentage of Purchases
with Savings 26.1%19.3%13.3%
The Purchasing Cost Savings Program measures cost savings in 4 primary categories:
competition, negotiation, specification or source change, and process change. In the
competition category, savings are computed by comparing the new price to the previous
price paid. In this category, staff is able to employ new sources of supply to increase
competition. This frequently lowers the market price. In the negotiation category, cost
savings are computed by comparing the proposed price to the final price paid by the City.
Unfortunately, there are limited opportunities for cost negotiations. Many of the City’s
contracts (e.g., construction, heavy equipment, stores contracts) are formally bid and
price negotiations are prohibited. In the specification or source change category, savings
are realized through recommending specification or supplier changes to departmental
staff. The process change category includes cost reductions from grouping purchases to
increase volume with a given supplier and from entering into long-term agreements for
ongoing needs. The other category includes savings resulting from items such as: the
implementation of a new airfare ticket program; selling surplus furniture as part of a
purchase; and negotiating the purchase of catalogs at no charge. The cost savings
generated in each of these four categories is detailed below:
COST SAVINGS CATEGORIES
Competition
Negotiation
Specification or Source Change
Process Change
Other
Total Savings
1998-99
321,101
149,388
103,370
9,138
88,998
$671,994
1997-98
329,911
114,957
12,784
5,000
16,005
$478,658
1996-97
24,150
165,312
18,519
0
420
$208,401
CMR: 384:99 Page 2 of 3
The City’s Purchasing Manager oversees the Cost Savings Program and is responsible for
ensuring the Program only captures savings that are generated through direct intervention
of purchasing staff (e.g., had purchasing staff not been involved, the savings would not
have been realized). The Purchasing Manager tracks COSt savings by employee, by
category, and generates a Purchasing Cost Savings Report on a quarterly basis.
It is important to note that the Cost Savings Program is most effective in quantifying
savings related to the purchase of materials and standard commercial services (e.g.
moving and storage services, testing of soil samples, uniform rental services, etc.). These
types of purchases lend themselves to measurement because they are repetitive purchases
of standard products. It has been more difficult to quantify the savings related to personal
services, construction services, consulting services, and human services because there is
no uniform measure to apply to these mainly custom and special services. Staff
continues to refine the process utilized to quantify cost savings.
PREPARED BY:
Administration
M.Howard Edwards, Manager, Purchasing and Contract
CARL YEAT~/
Director, Administrative Services
ITY MANAO .
Assistant City Manager
CMR: 384:99 Page 3 of 3