4.3: Differences between Public and Private Sector Supply Chains

Public procurement professionals have different outlooks of SCM compared to their private sector counterparts. It is important to understand and compare public and private sector SCM to understand the concept of public procurement. In public works and government services, billions are spent on goods and services annually to support the activities of agencies and departments. Public sector procurement forms the biggest national spending and is directed within a strictly controlled legislative environment wherein processes are prescribed, and the relevant norms and standards are constantly monitored.

Supply Chain Management (SCM) involves managing all the interlinked activities within a value-adding chain. These include, but are not limited to, Planning, Procurement, Manufacturing or Production, Distribution and Customer Service. Also included are all the value-adding linkages outside an organization.

Procurement management, on the other hand, is one of the elements within a supply chain that primarily focuses on the sourcing and purchasing of goods and services. Procurement can be described as one of the macro processes within a supply chain. It is the activity required to plan, implement and control the sourcing and purchasing of tangible or intangible goods.

Public and private procurement responsibilities differ in their fundamental goals and practices. While public sector practitioners are governed by legislative bodies, laws, and regulations, private sector practitioners are guided by boards of directors and business plans. Public agencies draw revenues from taxes and fees and use these funds to serve the public. On the other hand, private firms generate revenue through sales of goods and services. Unlike their public sector counterparts, these private firms have profit-making motives. Constrained by rules and regulations, the public sector cannot develop strategic supply chain partnerships in the same way that the private sector can. For instance, in the South African public sector, the head of the SCM unit is the National Treasury. The National Treasury (NT) develops laws, policies and regulations governing SCM implementation.

There  are a number of unique characteristics of public sector purchasing, including the following:

• Perceived lack of interest expenses and inventory carrying costs
• Lack of traffic and transportation expertise
• Lack of confidentiality about dealings with suppliers
• Emphasis on competitive bidding (vs. negotiation) in the procurement process
• Greater focus on outside pressures such as public scrutiny, political competitors and media
• Source of authority established by law
• Greater focus on supporting public service programs, balancing acquisition costs with providing local benefits, e.g., sourcing from a local Indigenous-owned business instead of a large multinational organization to generate and drive local employment

These characteristics affect public sector procurement and SCM and contribute to a lack of collaborative, long-term relationships with suppliers. SCM occupies centre stage in the public sector’s financial management reform process. SCM aims to add value at each stage of the process, from the demand for goods or services to their acquisition, management of the logistics process and finally, after use, to their disposal.

Supply chain management consists of traditional business functions that include marketing, sales, research and development, forecasting, production, purchasing, logistics, information systems, finance, and customer service. Unfortunately, historically, the government’s implementation of supply chain management practices is far from satisfactory. This is due to a lack of personnel with the necessary knowledge, skills and capacity to effectively implement supply chain management as required by the SCM policy in various departments and municipal entities.

Private sector procurement is typically more receptive to entrepreneurship and innovation, whereas public procurement is based on legislation, policy and process. Public sector procurement serves a broader range of stakeholders, emphasizes accountability and transparency, and allows little or no flexibility for negotiating with bidders/responders to a request for proposal (RFP).

The role of the public sector purchasing manager is geared more toward supervising the procurement process and preparing reports than negotiation and strategic partnerships. Accounting Officers in municipal entities and departments must ensure compliance with the SCM process and report to the treasury. Although public sector procurement operates in a rulebound environment, many of its tasks can be automated. Public procurement is known for being tactical, even clerical, adhering to stringent rules and regulations. However, public sector procurement is shifting from tactical to more strategic with a focus on alliances, global sourcing, life cycle costing, and empowerment through the use of tools such as procurement cards. The move to professional training and education of those personnel responsible for the strategic direction and practical application of procurement action is needed in the public sector. Most governments are considering several initiatives to increase efficiency nationwide. These include rolling out strategic sourcing objectives and contracts across multiple regions or departments.

Based on the review indicated above, it is evident that there is a difference in the application of SCM in the public and private sectors. This is because the two sectors have diverse goals and objectives. While the key goal in the public sector is delivering value service to the public, the private sector’s goal is to maximize value and profitability in its supply chain. Table 1 shows the difference in practices between the supply chain management practices of the private and public sectors.

The private sector is profit-oriented, while the public sector is oriented toward quality service delivery. Furthermore, the enablers of SCM (which include integration, collaboration, coordination and information systems) apply to both the private and public sectors. However, the rate of application in the public sector is limited due to complex rules and procedures. Despite the comprehensive legislation and measures implemented by the public sector, there are always challenges in managing the risks of fraud and corruption in the supply chain. The incidence of financial mismanagement, which includes the SCM process, remains prevalent in the public sector. Therefore, a system of continuous monitoring and improvement of the supply chain is critical for the success of the public sector.

Attributions

“4.3: Differences between Public and Private 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 Unported License, except where otherwise noted.

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.