How the City of Cape Town used technology to enable its procurement processes

Nirvesh Sooful

Hetu Consulting

IntroductionAbout me About Hetu Consulting

Hetu Consulting is a strategic consultancy helping governments to accelerate the benefits of IT enabled change - through transformation of the public sector and the wider economy. Hetu brings together people with a track record of success delivering social, economic and public sector transformation.At the heart of Hetu is a team that has worked at the top global organisations and who led some of the country’s world’s most ambitious and successful programmes of e-transformation. Hetu is 100% Black owned and works in both the public and private sector, but is focussed on the public sector.

Agenda

City of Cape Town Context

ICT Enabled Procurement context

ICT enablement of City of Cape Town procurement processes

Population: 3.2 million

Share of National GDP: 10.5 %Share of Provincial GDP: 75 %

Area: 215 900 ha

Rateable Properties: 800 000

Employees: 23 579

City of Cape Town annual budget 2007/08:

Operating: 13,45 billion ZAR Capital: 4,316 billion ZAR

City of Cape Town annual Income 2007/08:

From Utility Services: 4,205 billion ZAR From Property Tax: 5,425 billiion ZAR

Demographics of Cape Town

Local Government – the delivery arm of Government

Electricity Water and Sanitation Solid Waster Roads, Stormwater and transport Public Housing Local Economic Development Social - and primary health services Emergency Services Municipal Policing Urban Planning and Environment Sport and Recreation City Administration

Transforming Cape Town

Merging autonomous Organisations is complex even though enabling legislation was in place:

“Lack of standardised financial policies and procedures”

“IT systems entrench the ‘old order’”

“Back-office systems were deemed to be outdated, functionally inadequate and not properly integrated”

“Difficulty in merging these systems was in fact hindering the merger of the administrations and undermining the objectives which motivated the creation of the Unicity”

7

Cape Town in Context

City of Cape Town has positioned itself to become one of our most technologically advanced cities, through successful IT sector intervention.

By implementing its visionary transformation strategy, Cape Town is now a frontrunner in South Africa’s National IT Strategy.

The benefits for all have been enormous. E-government services have been developed; the service to its citizens has been improved. All city

employees have access to mainstream banking giving low-income employees a measure of economic empowerment. The cherry on top of the cake for this project, is that they have instituted the largest IT training

programme in our history, boosting the IT skills of the city by training thousands of employees.

IT businesses owned by the formerly dispossessed are also benefiting through this partnership. In order for Cape Town to establish itself as a

municipal services leader there had to be a partnership between, business, labour and the community.

I am sharing this success story with you because I want to see more of such initiatives.

Address by Dr Ivy Matsepe-Casaburri, Minister of

Communications at Nedlac ICT Annual Forum Meeting, 25

January 2005

8

Developmental local government

Agenda

City of Cape Town Context

ICT Enabled Procurement context

ICT enablement of City of Cape Town procurement processes

Defining Procurement

Procurement refers to the overall process of acquiring a product or service. Depending on the circumstances, it may include some or all of the following:

identifying a need,

specifying the requirements to fulfill the need,

identifying potential suppliers,

soliciting bids and proposals,

evaluating bids and proposals,

awarding contracts or purchase orders,

tracking progress and ensuring compliance,

taking delivery, inspecting and inventorying the deliverable, and

paying the supplier.

Public Sector Procurement TrendsThe U.S. federal government is the single largest purchasing entity in the world

The U.S. General Accounting Office (GAO) reports that the federal government alone is wasting billions of tax dollars

owing to underleveraged spend and underperforming procurement and supply management operations

Procurement is key to reducing the cost structures of government agencies, improving operating performance and

service levels, and satisfying policies and regulations

The need to do more with less and increased scrutiny of legislators and watchdog groups will force government

agencies to improve their cost management operations

Public sector procurement initiatives are primarily driven by requirements to comply with contracting regulations and

mandates, such as full and-open competition, minority and small business goals, and the spend-to-appropriation

culture of government

Most governments have a procurement process that was drafted into law by its legislators, interpreted by judicial

branch judges, and carried out by executive branch leaders and their staff members

Government procurement culture maintains a strong belief that competition (manifested via the RFx process) limits

cronyism and corruption, and leads to higher performance and lower costs

More than ever, governments across all industries view procurement as a catalyst not only for supply cost reduction

and assurance but also for compliance

Sources: RAND Corporation, “High Performance Government”, 2005; NASPO Research Brief, May 2005; Aberdeen Group & GCN, “Supply Management

in the Public Sector,” May 2004; Aberdeen Group, “Center-Led Procurement”, Nov. 2005

Government Procurement Drivers

Source: Aberdeen Group & GCN, “Supply Management in the Public Sector”, May 2004

Procurement Reform: Asia Pacific / ANZ

“E-procurement has been identified as an instrument in public sector reform. It enables government to monitor the efficiency and effectiveness of procurement and provides more transparency and accountability.”

“In many government organizations, the tools necessary to complete the procurement transactions (e.g., search, requisition and payment) often reside in different departments or agencies. Related policies and procedures may also reside outside the procurement organization. Therefore, the full integration of the complete end-to-end process and the deployment of usable policies and procedures to support this process remain a key challenge.”

http://www.agimo.gov.au/publications/2005/may/e-procurement_research_reports/Case_Studies_on_E-

procurement_Implementations.pdf#search=%22Case%20Studies%20on%20E-procurement%20Implementations%22

Procurement Reform: European Commission

Brussels, 25 April 2006

eGovernment: Commission calls for ambitious objectives in the EU for 2010Hundreds of billions of euros could be saved for European taxpayers every year as a result of administrative modernisation in the 25 EU Member States, outlined today in the European Commission’s eGovernment Action Plan. Information and communication technology is the key to modernising government services: making them more efficient and more responsive. 100% take-up of electronic invoicing and electronic public procurement is predicted to save 300billion euros every year. All Member States already signed up to an ambitious agenda to achieve these goals in Manchester last year

The new eGovernment action plan adopted today by the European Commission addresses five priority areas for 2010 and underlines the commitment of the European Commission to delivering tangible benefits to all Europeans, in cooperation with the Member States:

Implementing e-Procurement: Government procurement represents 15% of GDP or about €1.500 billion a year. The Member States have committed to achieving 100% availability and at least 50% take-up of procurement online by 2010, with an estimated annual saving of €40billion. The action plan will lay out a road map for achieving these goals as well as the practical steps required for such large-scale cross-border procurement pilots and full electronic handling of company documents (the “Electronic Company Dossier”).

Procurement Reform: Developing Countries

”…procurement is often one of the top three types of spending (besides salaries and debt payments) [in government]. Public procurement spending is estimated to account for 15% of the world’s GDP.

The influence of good procurement on the effectiveness of public spending is mirrored by its impact on development of the private sector. A government’s most direct impact on the private sector is through its procurement behaviour. The government is often the largest investor in and purchaser of services, especially in poorer nations. The way it manages its commercial relations with the business community has a profound influence on whether acceptable business practices will evolve or not, and on the dynamism of the private sector. Procurement systems can promote competitiveness and improve the local market’s ability to survive in international markets by awarding contracts on an economic basis, just as they can promote inefficiency and corruption by awarding contracts on the basis of personal relations or private negotiations. In this manner, a country’s procurement system has a significant impact on national investment rates, as well as long-term growth rates.

Strengthening procurement can potentially generate enormous savings, especially in developing countries. Improving the performance of a national procurement system even slightly could, in many cases generate enough savings to more than pay for the cost of the reform programme itself and leave a significant amount of money left over to increase e.g. social spending. Strengthening procurement efficiency and increasing transparency might equally increase the confidence and trust of the civil society in its government, in particular in government’s credibility honesty and commitment to development.”

EIU 2005 Global Survey• “What role do software tools […] play in ensuring

the overall success of your purchasing strategies and initiatives?”

Source: Economist Intelligence Unit, April 2005

Category Management

3212

Spend Analysis

3126

Supplier Collaboration

3417

Electronic Procurement

3119

Supplier Connectivity

3416

RFx and Auctions

179

Very ImportantVital Role

Contract Management

3117

Performance Management

3626

E-procurement is widely appreciated Supplier connectivity equally important

Spend analysis at top of agenda Collaboration valued higher than auctions

High demand for performance management Contract management is seen as key

Automate and Accelerate Processes

Optimize and Reduce Cost

Improve Strategy and Compliance

General Procurement Trends

Tactical Purchasing

Generate savings

Manage compliance

Expedite processes

Analyze spend history

One-off initiatives

Strategic PurchasingGenerate valueManage contributionExtend processesAnalyze supply

strategyContinuous

improvement

VALUE ADDING ACTIVITIES

TRADITIONAL ACTIVITIES

Moving From Tactical To Strategic Purchasing

Agenda

City of Cape Town Context

ICT Enabled Procurement context

ICT enablement of City of Cape Town procurement processes

Procurement in the City of Cape Town

In terms of Section 217 of the Constitution of the Republic of SA, the City of Cape Town is required to implement a procurement system that is fair, equitable, transparent, cost effective and economical. It is further required by Section 14 of the Municipal Supply Chain Management Regulations to keep a list of accredited prospective providers of goods and services that must be used for the procurement requirements of the municipality though quotations and formal bids. Fundamental to the city’s supply chain management strategy is the fact that procurement is a Strategic Function within Local Government – through which it is able to influence economic development, give action to its developmental objectives and exhibit good governance. In the private sector the supply chain is predominantly a transactional overhead – best suited to transactional outsourcing and where only those procurement items which provide a competitive advantage is retain in-house.Been an evolutionTwo platforms underpin the strategy

SAP and Internet

SAP Fact Sheet

420 end-to-end Business Processes

Cost: R354mil (2000-2002)

Single Instance – 8 terabyte db

7 500 Users

580 SAP Sites City Wide

3,2 mil ISU contracts

1,2 mil consolidated invoices per month

2 mil equipment items.

SAP-R3 & ISU Foot Print

R/3 and IS-U/CCS

FIFinancial

Accounting

COControlling

AMFixed Assets

Mgmt

WFWorkflow

ISIndustry

Solutions

MMMaterials

Mgmt.

HRHuman

Resources

SDSales &

Distribution

PMPlant

Maintenance

GISAM/FM

WorkClearance*

CAD

FieldServiceSupport

PSProjectSystem

PPProductionPlanning

QMQuality

Management

EDI

SCADA*

SMServiceMgmt

IS-U /FERC

IS-RE

IS-U/CCS

- Financial Accounting

- Management Accounting

- Asset Management

- Procurement & Inventory Management

- Project Accounting

- Billing to sundry debtors

- Real Estate Management

- Industry Solution for Utilities

- Customer Care & Revenue Management

- Human Resources & Payroll

- Plant Maintenance

Accounts Payable services provided centrally – but each Line Dept. performs own buying.

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The ERP and Process Based Organisation Design(Business Processes – eg. “Procure to Pay”)

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Each Dept has its own Procurement and Accounts Payable responsibilities.

Accounts Payable services provided by Shared Service Organization.Procurement now added as a Shared Service but Line Dept still feels the need to approve.

Performed by Line Dept

Performed by Supply Chain Specialists

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High volume buying and paying of vendors centralised for control and efficiency.

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Key System Statistics

The SAP transactional environment :

23 000 payroll members. 1 200 000 invoices every month 22 592 Purchase Order Line Items per month 2309 Cost and 1550 Profit Centres 25 Business Areas

7 500 named system users (12 500 user licenses) 554 SAP sites in the City

19 977 254 online transactions per month + 50 overnight batch jobs Prod 24x7, 99.85% availability for 2006 (includes planned down time) Average online response = 0,7 sec / transaction (1.5 sec design) Database = 8TB, growing at 60-80GB per month 130 calls per day logged with our SAP Support Desk

MM : Procurement and Inventory Management• Standardised and structured Procurement process implemented.

• Single master record of all vendors created(21 000 vendors reduced to 8 000)

• Compliance with procurement policy (SMME’s)• Consolidated inventory management through standard material codes across 100 stores.

• Real time postings and reconciliation of store ledger to main ledger.

Implemented30 December 2002

MM : Creating Financial Value through:• On-line authorisation of expenditure with full audit trail.• Improved financial control through visibility of financial commitments and the

lowest level of detail relating to all expenditure.• Stock holdings optimization through maximising stock turns, visibility across all

stores and facility rationalisation.• Procuring against contracts and use of Electronic Bulletin Board for quotations.

MM : Opportunities• Better use of Supply Chain Management functionality and E-procurement.

Financial benefit realisation:Inventory Optimisation

• Inventory holdings to be kept to a minimum, while ensuring adequate availability.

• Stock visibility across all stores is the primary driver of this benefit.

• Stores Consolidation will be a function of Organisational Restructuring.

• Reducing the cost of holding inventory by, e.g. disposal of redundant stock and improving stock turns; and

• Optimising the Stores infrastructure based on optimal stock holding.

Financial Benefits (R millions)

• Inventory Optimisation• Stock Value reduction = R 55mil• Recurring Interest saving = R 6.6mil pa (@ prime = 12%)

Calculation:• The year on year value of stock holdings was compared.

• Value of stock compared to March 2003• Monthly Stock value discounted by CPIX back to

baseline date.• Interest saving calculated and allocated to

How is this benefit realised?

Inventory Benefit: Discounted Value of Stock Holdings - month on month comparison.

R 50,000,000.00

R 70,000,000.00

R 90,000,000.00

R 110,000,000.00

R 130,000,000.00

R 150,000,000.00

R 170,000,000.00

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Stoc

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Mar

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003

July 2003 to June 2004 July 2004 to June 2005

Financial benefit realisation:Procurement: Price Standardisation, Inventory Optimisation• Procurement will be done in a consolidated and standardised fashion with the

maximum use of tenders and in accordance with City’s procurement policy.

• Inventory holdings to be kept to a minimum, while ensuring adequate availability.

• Eliminating price discrepancies between administrations and vendors on the same commodity – goods & services;

• Reducing the cost of holding inventory by, e.g. disposal of redundant stock and improving stock turns; and

• Optimising the Stores infrastructure based on optimal stock holding.

Financial Benefits (R millions) • Price Standardisation

• Low Road = R 60mil pa (@ 5pm)• High Road = R 96mil pa (@ 8pm)

• Inventory Optimisation• Stock Value reduction = R 55mil• Recurring Interest saving = R 6.6mil pa (@ prime = 12%)

Calculation:• Minimum prices across all commodities were compared to the

prices paid over the period that SAP has been live for Store purchases only;

• The top 20 stores were assessed for their stock value and turn.

• Total stock holding = R 141mil (ideal = R 86mil);• Ave ST = 2.4 (best case = 4);• Total materials = 52 000 (34 000 active); and• 3500 materials contribute to 97% of all stock movement

in stores.

E-FuelAverage Daily Value            R744,201

Average Daily No. of Txns    1140“Another interesting area has been the

automation of fuel payments through e-fuel system and interface into SAP. Through this we pay approximately R750 000 per day for fuel to the respective suppliers without any

human intervention......

......What makes things even better is that the price is checked

against contract pricing and payment is optimised to ensure that we only pay on due date. In the past we had the fuel supply

cut to the city due to late payment, now nobody worries

about it.”Andre Stelzner, ESC Manager, City of CT

In conclusion – it is a process of evolution

Tactical Purchasing

Generate savings

Manage compliance

Expedite processes

Analyze spend history

One-off initiatives

Strategic PurchasingGenerate valueManage contributionExtend processesAnalyze supply

strategyContinuous

improvement

VALUE ADDING ACTIVITIES

TRADITIONAL ACTIVITIES

Moving From Tactical To Strategic Purchasing

28

Thank You

Questions/ Discussion

Nirvesh Soofulnirvesh@hetuconsulting.com

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