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Competitive bidding drives up costs

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CALGARY — How do you go about spending too much for too little? It’s not easy. Most people have a predisposition against this kind of thing.

Fortunately, no challenge is too great for the purchasing department. When not changing their name to "supply-chain management" or "procurement," the people buying stuff for industry and especially government are busily determining how best to waste time and money.

It turns out, there’s a process for that. There’s a process for everything these days, including purchasing.

Two processes actually.

The first is the advance contracting awards process.

Whenever the federal government wants to buy something without going to competitive bid, it must issue an ACAN to let the market know what it plans to buy. Essentially, this is a means of keeping the government honest in its purchasing practices.

It’s not working. According to a recent report from procurement ombudsman Frank Brunetta at Public Works, only 247 of the 442 advance contract award notifications had enough information in them to allow other suppliers to mount a competing bid.

Worse, only 100 ACANs appeared to be a "legitimate attempt by the contracting department to test the market for an alternative source supplier." In other words, when it comes to purchasing goods and services, the government is acting fairly and honestly about 25 per cent of the time. Then again, it’s better than the comparable number in the competitive bidding process that runs about zero per cent.

ACANs are a terrible way to purchase things, but light years ahead of competitive bidding.

You might think competitive bidding would keep costs low, but that’s only because ordinary people don’t buy things the way purchasing mandates.

For example, suppose you want to buy a television. Most people would shop around, visit a few electronics stores, check out what’s available in their price range; screen sizes, how the colour looks, LCD versus plasma, 3D versus 2D, that sort of thing. It’s hard to know what to buy until you know what’s available and at what cost. When you find something you like and can afford, you buy it.

In the competitive bidding process, however, you must specify your requirements in advance and in a vacuum. Do you want 42, 50 or 60-inch? LCD or plasma? Hard to know without seeing it. Dolby sound or not? Difficult to decide without listening.

The purchasing process forbids any contact between you and the seller so there’s no looking, no browsing, no fact-finding, no research. You must guess at what will work and compile your guesses in a requirements document.

Managers have a name for this: WAG (wild-ass guess). Economists have a different name for it — irrational. So already, we’re off to a bad start.

Well, at least you will get to watch different televisions when the competitive bids come back, right?

Wrong. Purchasing doesn’t allow you to actually watch the product. Instead, vendors respond with written documents describing how great their televisions are (You should see them!) while affirming each of your requirements. Yes, it’s 50 inches, yes, it’s LCD, and so forth.

Further, you may or may not be invited to read the proposals. Instead, a committee may be selected to review them and decide on your behalf. Yes, it’s nuts, but there’s more.

Fully specifying requirements is a well-understood impossibility. There’s always something you’ll forget.

Vendors know this and bid low to meet the minimum requirements and win the bid. So low, it’s impossible to deliver what you want for the price bid.

No matter, purchasing has a process for that too. It’s called the change order process. Once you’ve bought your television, the vendor starts asking if you want things you forgot to mention in the requirements document. Need a remote? Yes! That’s a change order and it’ll cost you an extra $800. Seems expensive for a remote but that’s the idea.

You should see the change order costs on fighter jets, bridges and computer systems. By the time everything you need, but forgot to list, is added as an option, a television costing $2,500 at Costco has cost you $3,500.

Competitive bidding ensures too much is spent for too little.

The good news? Competitive bidding isn’t really about avoiding waste. It’s about avoiding responsibility. No manager, purchasing or otherwise, was ever fired for following the process, no matter how bad the deal.

The bottom line is that competitive bidding isn’t a solution to anything. It’s the problem.


Robert Gerst is a partner in charge of operational excellence and research & statistical methods at Converge Consulting Group Inc. He is author of The Performance Improvement Toolkit: The Guide to Knowledge-Based Improvement and numerous articles in peer-reviewed publications.


—Troy Media

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