Framework agreements in Chile: Leveraging the State purchasing powerFelipe Goya - RPM South Asia

Framework agreements are a tool to simplify procurement and leverage the purchasing powerUseful when standardized commodities will be purchased many times

Framework Agreements in Chile

Goods and services are centrally tendered and the outcome of the tender (the awarded goods and services) are put into an electronic catalogue.

Afterward, buyers can access the catalogue and buy from it without any further procedure.

Agency 1 Agency nAgency 2 ChileCompra

Purchase Order $98

Purchase Order $98

Purchase Order $98

Fram

ework A

greement

Award for 100 Award for 110 Award for 95 Award for 98

It is like an option where the buyer has the right to buy

and if he buys the seller has the obligation to sell

What is the price of this option?

Call option

Example

Case 1: Framework agreement price’s $100 and Market Price $150, I use the option so I buy from the FA

$ 100 $ 150$ 50Case 2: Framework agreement price’s $100 and Market Price $50, I don’t use the option so I buy from the market.

This example explains the complexity of the dynamic that this tool could create

Operations

71,600,000

204,885,223

445,557,057

648,963,126

900,000,000

2005 2006 2007 2008 2009

Monto Transado ChilecompraExpress

Monto transado ChilecompraExpress (USD)

Nowadays USD 1.5 BB160.000 different

products

15.000 different vendors

60 different Framework Agreements

30% of the system’s purchasing orders

Framework agreements accepts prices modification, products replacement, commercial offers, etc… but following the rules defined in the tender

Close to 20.000 products are replaced every month.

Thousands of prices are modified per month.

Plus handling 500.000 e products

Lesson learned: Operations are key

Vendors are responsible for their product datasheet

information and propose any price modification or product mix adjustment

Central Procurement agency approves or rejects

CR

M +

em

bedd

ed

wor

kflo

ws

OK

Posted

Handling this information is difficult. When it is provided by the OEM OK, but it is almost never the case.

Lesson learned

Category managers

Contracting officer 1

Contracting officer 1

Contract Manager 2

Category Manager 1

Category Manager 2

Category managers must know their categories by hart. Including a deep understanding of the relevant market.

Tender Manage Asses Tender

Tender Manage Asses Tender

Lessons learned

Prices are not always the cheapest of the market, additionally

they require active management to remain competitive. Because buying is easy and riskless buyers will not

care about the price (up to a limit)

Adverse selection: The price is optimum for the State, but if the most advanced buyers purchase from the market, prices will increase. Every one or not !!!

Buyer 2100

computers: $ 120

Buyer 11.000

computers: $ 100

FA Price

$ 102New FA price

$ 120

Transaction cost. Vendors face a larger transaction cost when dealing with government than with consumers (logistics, payments, etc..) this should be

minimized otherwise is more efficient to buy from the shop next door !!!

The value of the option

This cost should somehow be on

the price

The problem of volume uncertainty: Entry prices are for an undefined

volume. Additionally in many areas, the State is no so big. How much does the State weight into the vendors wallet?

A solution: Above some thresholds, short tenders inside the framework agreement. It

defines the volume

Conclusion: Prices must be managed, but is not so difficult, 1% of the vendors of the overall public procurement system are

receiving 30% of the purchasing orders.

Framework agreements in Chile: Leveraging the State purchasing powerFelipe Goya - RPM South Asia