1.2: Managing and Controlling Public Sector Supply Chains

Supply chain management (SCM) is a term used in business literature to refer to the control of materials, information, and finances as they move from supplier to manufacturer to wholesaler to retailer to consumer. The term supply chain (SC) is inspired by the product flow that should be delivered to citizens or businesses through several organizations. In a functional sense, this focus on activities and relationships involves logistics, marketing, purchasing/supply, and production/operations.

In essence, SCM integrates supply and demand management within and across organizations. A supply chain consists of all parties and functions involved directly or indirectly in receiving and fulfilling a customer request.  These functions include but are not limited to new product selection, procurement, marketing, operations, distribution, finance, and customer service.

A supply chain, as opposed to supply chain management, is a set of organizations directly linked by one or more of the upstream and downstream flows of products, services, finances, and information from a source to a customer.

Supply Chain Management in the Public Sector

In the public sector, SCM is responsible for the flow of supplies. Its main goal is to achieve the best value for money. Supply chains in the public sector address different focus areas. The focus of SCM can differ from sector to sector.

An example of a government sector-to-sector focus area could be the health sector, where the focus may be more on logistics and the effective movement of goods and services in and out of hospitals. In contrast, SCM in the education sector may focus on streamlining the chain through which teaching materials are delivered to students. The responsibility and goal of the supply chain processes will vary depending on the organization.

Public Services and Procurement Canada (PSPC) supports public sector procurement departments and plays an important role in daily operations by providing a reference framework through its acts and federal regulation requirements. PSPC is committed to engaging public sector supply chain stakeholders with the necessary training in interpreting the regulations. Since government procurement activities are executed with taxpayer money, most countries have laws and regulations around procurement activities to ensure value for money and reduce unethical risks. This is why many procurement regulations and trade agreements have been created to ensure fairness and transparency in public procurement markets. Public sector procurement must consider the development of its local economy and small businesses, job creation, fair competition, general services and transparency.

The Role of Stakeholders in Supply Chain Management

A stakeholder is an individual or organization that benefits from or is affected by the project, product or service. In public procurement, stakeholders are comprised of two major categories: internal and external stakeholders. Key internal stakeholders in procurement include those who operate within the organization, such as procurement managers, budget owners, manufacturing, finance and legal teams. External stakeholders contribute to the project but are not directly connected to the organization. Suppliers and other partners are considered external stakeholders.

Procurement officials must constantly weigh the trade-offs between objectives such as economic interests, trade agreements, fairness, equality, transparency requirements, and enhancing procurement efficiency.

Supplier Performance Management

Supply chains and associated management processes often remain invisible to the public sector client. Governments have traditionally focused on contracting with first-tier suppliers, the supply chain members with whom the procuring organization directly contracts. Historically, public procurement departments have not included an analysis of their suppliers’ supply chains as part of their criteria for selecting suppliers. Thus, they lack assurance about the reliability and resilience of their key suppliers’ subcontractors.

Supplier performance management has become a key element in the public sector, and many governments have introduced it to measure efficiency and meet the needs of the public. Increasing the effectiveness, efficiency and transparency of public procurement systems has become an ongoing concern of governments and the international public sector community. Effectively managed strategic supplier relationships contribute to higher levels of customer service and reduced costs.

While it is relatively common, especially in complex procurements, for the first-tier supplier(s) to manage the supply chain on behalf of the contracting authority, relatively little effort has been made by the public sector to improve the visibility of its supply chain and its ability to exert influence over how the first-tier suppliers manage this chain, except perhaps in the construction industry.

The limited effort in other industries to improve the supply chain performance could be for reasons of simplicity, resource constraints, a lack of understanding or perceived need for understanding, or perhaps even a perception on the client side that the policy and legal framework do not allow for such activities.

Increasingly, the complexity of many contracts, a greater appreciation of the need to improve competition and innovation, and an increasing awareness of the impacts of terrorism or natural disasters on SCs and business continuity mean that wider supply chain issues need to be considered in seeking improved efficiency and value for money.

The Strategic Value of SCM for the Public Sector

The supply chain is an area of strategic importance to an organization due to the significant percentage of overall cost it accounts for. But is it strategic? In the commercial world, companies seek to create a competitive advantage, lowering their cost base to contribute to their bottom line or profit. In the public sector, the cost advantage gained through the procurement function contributes to lower costs for the organization, enabling funds to be diverted to frontline services such as hospitals and schools. This means better value for money for public sector shareholders that are taxpayers.

Countries such as the UK, US and Canada have long employed SCM to manage their procurement and logistics in the private industry. Health Canada has established a digital supply chain infrastructure enabling more efficient tracking and traceability of critical supplies and equipment from the supplier to hospital care settings. The Department of Defence (DOD) in the US has minimized costs in managing its logistics by employing SCM best practices. The Office of Government Commerce (OGC) in the UK releases year-to-year updates about best practices of SCM in the public sector. (Gansler et al., 2004)

Governments must follow the private sector with digital integration and adopt more available and proven tools for implementing a modern supply chain. Streamlining and modernizing the government supply chain can result in substantial cost savings and improve delivery times for essential goods and services. (Gansler et al., 2004)

One of the ways governments in several jurisdictions are attempting to improve efficiency in the delivery of public-sector services is through the introduction of supply chain management (SCM) best practices. Citizens expect their public services to operate as an efficient, seamless and effective system, optimizing the same best practices as the private sector. Governments and their partners are trying to ensure this happens through proper SCM. If excessive amounts of time and money are spent needlessly on back-office processes, fewer amounts are left to be spent on classrooms, hospital wards and the general needs of the public. It makes sense, therefore, that if there are better ways for the public sector to plan, source, move and pay for goods and services, these should be examined and implemented.

Benefits of Implementing Good SCM Practices in the Public Sector

Effective management and control of SCM yields several clear benefits to the public sector. These include:

• Better risk allocation. Effective risk allocation is a critical consideration in procurement. Risk should always be allocated to the party best placed to manage it.
• Greater visibility. Visibility creates subcontracting opportunities for a range of organizations that can bring increased competition, dynamism and specific skills or strengths to the public sector. This can increase competition and allow organizations with particular skills or strengths to get involved in the public sector marketplace.
• Greater opportunities for innovation. Supplier innovation in the SC can contribute to better quality, faster delivery and reduced cost of ownership over the life of an asset, also known as the total cost of ownership. Effective SCM encourages innovation in the supply chain.
• Better-defined requirements. Early supply chain involvement shapes business needs through understanding stakeholder requirements or market sounding, which is the process of figuring out the interest of potential investors in a transaction.
• Improved ability to identify risks or bottlenecks. In contract delivery, greater authority creates awareness of how the contract will be implemented and the key SC dependencies.
• Better quality. Solutions offered by suppliers are opportunities to improve quality, increase delivery times and reduce costs in their supply chains.

More effective use of supply chains contributes to the wider agenda of improving efficiency and value for money in the public sector’s commercial activities by promoting competition, not just at the first-tier supplier level but across the wider supply base and by encouraging more efficient management of suppliers.

Tension between Citizen and Customer Requirements

There are enormous challenges in applying SCM in the private and the public sector. One of the challenges that needs to be addressed for the successful management of public sector supply chains is the tension between citizen and customer requirements.

In the private sector, the key goals of SCM are lower costs, customer-focused and demand-oriented production, and optimization of goods and information flow. In the public sector, the need for supply chain control is derived from the complex relationship between the general demand for public goods and the individual citizen’s willingness to pay for the provision of goods. Customers in the public sector are tax-paying citizens who demand efficient utilization of public resources. There are also differences in attitudes and values, creating a challenge in considering democracy participation.

This reveals a serious tension between the assumptions of citizens and established SCM practices. Due to the overall perception of the supply chain demands and procurement processes, citizens become most frequently “forced” customers. The central benefit of rewarding the entire network with a customer’s positive purchase decision thus loses its effect in public supply chains.

Citizen/customers’ demands are understood as a society’s interest in public goods. However, due to the peculiarities of public goods and the resulting problems of collective action, it is difficult to assess citizen/customers’ demands by their willingness to pay.

Attribution

“1.2: Managing and Controlling Public Sector Supply Chains” is adapted from “Managing and Controlling Public Sector Supply Chains,” copyright © 2011 by Intaher Marcus Ambe and Johanna A Badenhorst-Weiss from the edited volume Supply Chain Management edited by Pengzhong Li, licensed under a  Creative Commons Attribution-NonCommercial-ShareAlike-3.0 License, except where otherwise noted.

“Practical Procurement: Scenarios and Solutions” box was created with the assistance of Microsoft CoPilot and is shared under the Creative Commons – CC0 1.0 Universal License.

The multiple choice questions in the Checkpoint boxes were created using the output from the Arizona State University Question Generator tool and are shared under the Creative Commons – CC0 1.0 Universal License.