Certificate Program in Public Procurement (CPPP)

Module I: Procurement and Public Procurement

1. Introduction to Procurement and Public Procurement

Look at these pictures. These are some day to day activities that take place in an organization or
in a country.
You have just seen the activities related to public transport, national development and business
growth. To undertake all these activities, you need to acquire machinery and materials, construct
buildings and hire services. Acquisition of these goods, works and services is called procurement.
Imagine these activities coming to a halt because of lack of resources.
Lack of trains would threaten he country’s public transport and affect the economy. Lack of
vaccine would affect people’s health. Absence of teachers and books would deny education to
children. Want of materials for manufacturing cars will halt production of cars. This will affect
the profits of the company.
Won’t this lead to a calamity?
With this, you have understood the importance of procurement and the vital role you play a procuremen
official.
Introduction
Procurement: Procurement is a business management function that manages the entire process
of acquisition of external resources in an effective and economical manner.
Procurement is a business management function that involves contracting with a supplier or
vendor. The funding of this procurement can be through outright purchasing, leasing, hiring, hire-
purchase or other innovative types of funding.
Let us understand the different types of funding for any type of procurement. A company can
purchase a car by paying fully for it. In this case, the car is owned as an asset by the company.
Alternatively, the company can lease the car from a leasing company. In this case, the car is
owned by the leasing company by paying lease rentals.
Another option for the company would be to hire the car for a period of time. In such a case the
company will have to pay the hiring fee per hour, per day or per month based on their choice.
They may also choose to do this with or without a driver. In terms of hire purchases, the company
doesn’t own the assets.
Sometimes a company might want to own the asset but is unable to fund it now. In such cases the
company will go in for hire purchases. In this case, the company will pay a cost of the asset
payment upfront and add the remaining over a period of time.
Processes in Procurement
Procurement comprises of identification of needs, sourcing, supply and access, risk management
and disposal or cessation.

Procurement also involves regulatory compliances in line with the objectives of the
organization, its stakeholders and customers. Taking the same car example forward, the
company will do the following.
i. It will identify the need for the car and specify the model
ii. It will source a company to supply the car based on the funding model planned
iii. It will get the car supplied and give access to employees to use the car
iv. It will manage risk by taking insurance
v. Finally, at the end of 3 or 4 years or once the car has driven 100 thousand km, it may
dispose the car
Relation between Procurement and SCM
In addition, procurement applies the principles of SCM

For example, to provide proper vaccination in remote village, you need to deploy health
workers. You must also distribute vaccines efficiently while ensuring that they do not get
contaminated.
To maintain such supply, the government has to maintain a department that manages the
vaccine supply through warehousing, storekeeping and distribution.
Consider the example of an election commission of a country. It oversees the process of
electing the country ‘s public representatives.

Let us analyses the process of election to know whether it involves a procurement process
The Election Commission needs to procure voting machine or ballot papers and ballot boxes.
It needs personnel to man the polling stations, take care of logistics and count the votes. The
hired personnel may be public servants. However, the Election Commission needs to procure
them from various government departments.
Let us look at an example.
A company secures a contract to make a 100 MW electric generator. It has to complete the
project in 2 months. To complete the project, the company must procure external resources,
such as copper windings, induction cores and chassis.
Based on this example, let us understand the importance of procurement
The company needs to complete the project in 2 months. Hence, the success of the project
depends on the economical, efficient and quicker procurement of external resources.

Importance of Procurement

• Improve profitability
• Capture large share of market
• Reduce time from design to market
• Improve customer satisfaction & competitive value
• Better products & services
• Faster & customer friendly channels of distribution
• Customization
Public Procurement
Public procurement refers to procurement of external resources by the central government or
state government and entities under their control. These may be
i. Ministries and the offices under their jurisdiction
ii. Urban local bodies
iii. Public utilities
iv. Public sector companies and other units owned wholly or substantially by them
v. Organizations established by the constitution of the country or any act of legislature.

Funding of Public Procurement

Public procurement includes acquisitions of external resources using public funds. It also
uses other sources of funding such as grants and gifts

Items Procured in Public Procurement

External resources procured include routine items. It includes routine items such as
1. Stationery
2. Temporary office staff
3. Furniture or printed forms
The external resources also include complex expenditure areas such as
1. Construction
2. Private public partnership projects
3. Defense equipment
4. Support to major changes initiatives

Services Rendered in Public Procurement

Public procurement also includes growing expenditure of direct delivery of services to citizen
through private and NGO sectors. The services are in areas such as
• work-for-welfare
• adult education
• weaker section subsidies
• Empowerment schemes and rural social care and health

Strategic Importance of Public Procurement: South-Asian Countries

Public procurement generally accounts for a large share of public expenditure in a domestic
economy. It is estimated that the annual Indian public procurement is more than 300 billion
dollars. This is 25 to 30 % of its GDP.
Similarly, Bhutan spends about 25 % of its annual budget in public procurement. Maldives
spends to the tune of 2.2 billion dollars. Bangladesh spends more than 3 million dollars in
public procurement.
Strategic Importance of Public Procurement in the national fiscal space
The magnitude of spending involved is large. Hence, public procurement can release large
financial resources by the way of economy and efficiency in its operations.
In India, a mere 10% saving would mean release 30 billion dollars per year. This can lead to
effective development for the country, particularly the poorer section of the society.
Strategic Importance of Public Procurement in the national policy space
The outcome of any national policy including public procurement policy is to promote national
growth. This is done by addressing
• Alienation in society
• Reducing poverty
• Creating a tolerant and safe society of well-educated citizens
The public-sector can affect the structure of the market and incentives of firms through its
procurement policies. Therefore, procurement policy may be used to shape a more inclusive
national economic growth. This can be done by longer term support to weaker sectors of
industry, economy and society such as
• Small and medium Enterprises (SME’s)
• Disadvantage sections
• Environmental concerns
• Business
• Trade or investment sentiment
Strategic Importance of Public Procurement in Public Finance Management (PFM)
PFM deals with all aspects of resource mobilization and expenditure management in
government. PFM includes
• Revenue collection
• Prioritization of programs
• Budgetary process
• Effective expenditure management
• Exercising controls
Public procurement is an integral and important part of this PFM system. Even a minor
improvement in efficiency of public procurement would result in tremendous benefits to the
financial management system. This can enable the PFM system to normalize tax-rates and
release more funds for developmental projects.
Aims of Procurement
The process of procurement is designed to achieve the right balance on five parameters. These
are the 5R’s of procurement. They are

1. Right Quality
Procurement does not aim for the best quality available in the market. The best quality may
have adverse implications on cost, technical aspects, maintenance and operations. Therefore,
procurement tries to get just the right quality that suits the needs -no more or less.
2. Right Quantity
Buying large quantities irrespective of the current needs is as wrong as buying just the
immediately required quantity. There are extra costs and systemic problems involved in buying
an item too frequently in small quantities or with buying large quantities and storing them for
prolonged use.
Hence, buying just the right quantity balances the extra costs associated with larger and smaller
quantities. There are methods to calculate such right quantities.
3. Right Price
It is incorrect to aim for the cheapest material available. The price should be just right for the
quality, quantity and other factors involved. The concept of price can be refined further to
include concepts of life cycle costing, total cost of ownership, value for money to take into
account not only the initial price paid for an item but also take into other costs like maintenance
costs, operational costs and disposal costs.
4. Right Time & Place
If we need some material I our factory in 3 months’ time, it will be costly to get it too late or too
early. If we get it too early, we may incur costs in storing it. If the vendor delivers the material
in another city, we would require extra time and money to transport it to our factory.
5. Right Source
The source or supplier of material has to be just right for our needs. Buying a few packets of
printer paper directly from large manufacturer may not be right. If our requirements are very
large, buying such items through dealers or middlemen is also not right.
Seven principles of Public Procurement

1. Transparency
Transparency is the ability of all prospective participants to know and understand the actual
means and processes of how contracts are awarded and managed. It also implies
• Clarity
• Openness
• Lack of secretiveness
• Equal opportunities
• Non-discrimination
• Absence of arbitrariness in process

It also implies simultaneous and symmetric availability of information for all likely
participants.
2. Responsiveness
Public procurement is obliged to be responsive to the aspirations of its many stakeholders.
These may include
• Citizens
• Tax payers
• Electorate
• Elected officials
• Management & Procurement officers
 3. Professionalism
The professionalism principle also means that the methodology adopted for procurement should
be reasonable and appropriate for the cost and complexity of the subject matter of procurement.

4. Constitutional Provision
Constitution of a country has certain provisions regarding fundamental rights and public
procurement. Courts extended and interpreted these constitutional provisions to confine public
procurement within certain limits. These are not applicable to private sector procurement.
5. Multiplicity
• Multiplicity principle states that public organization has to serve many goals besides
organizational goals. Some of them are economy and effectiveness.
• According to multiplicity principle, public procurement should promote public trust in
governance and serve conflicting expectations of the general public. Some of the
expectations are cheap and effective transportation.
• In addition, public procurement should support broader social, policy and programme
objectives of the government. Some of the objectives are job and employment creation,
strengthening of local industry and economic growth.
• Public procurement also takes affirmative steps to procure from backward regions and
weaker sections and small & medium enterprises.
• Public procurement facilitates administrative goals of other departments of government.
For example, ensuring tax or environmental compliance.

6. Public Accountability
Public accountability principle states that public procurement entities and their officers must be
accountable for all the principles to the official bodies in that country. In India, the official
bodies are
• Parliamentary Committees
• Central Vigilance Commission (CVC)
• Central Bureau of Investigation (CBI)
• Comptroller and Auditor General of India (C&AG)
There are similar accountability institutions in other South Asian countries. Therefore, a public
procurement officer is obliged to operate under intense public scrutiny
7. Transactions
Public accountability principle helps each individual procurement transaction to be evaluated
independently. They do not judge the entire procurement process over a period like in private
sector.
Therefore, in public procurement the compliance of rules and procedures is important compared
to private procurement. Training of procurement managers in respective sectors also reflects
this difference in focus.
Public Procurement Framework
Because of differences between public procurement and private procurement, public
procurement must be performed under a framework with
• Special legislation
• Rules
• Manuals
• Guidelines for public procurement
This framework, under which public procurement has to function, becomes the determining
characteristic of public procurement. This framework also lead to some limitations
Limitations of Procurement Framework
This framework of public procurement leads to certain limitations.
1. There is a complex interplay of various elements of the framework for public
procurement. As a result, these elements could be mutually contradictory or elusive.
2. The framework becomes extensive and may become a hunting ground for lawyers,
arbitrators, facilitators and middlemen.
3. Compliance may become the focus of public procurement instead of the outcomes.
4. There is not much room for the public procurement official to go even marginally beyond
the terms of contract. Hence, every dispute could end up in dispute resolution forums.
5. The transactional nature of the framework prevents establishing long term, strategic
relationship with suppliers. So, public procurement does not benefit from the modern
trends in private sector. For example, integrated Supply Chain Management (SCM) &
Supplier Relationship Management (SRM)
 2. Management Concepts and Techniques

Value
Value is a concept of management and economics. With regard to aims of procurement, value is
management concept related to Right Price (5R’s)
The value represents the satisfaction a product provides based on the Hierarchy of needs of a
person. The value is related t the need of the customer.
For this example, you can infer that the value of anything is subjective and difficult to quantify.
This is because different persons have different hierarchy of needs and get different levels of
satisfaction or value from the same product.
How value is determined?
Consider the example. Suppose the government wants to procure cars for the ministers
and government officials. For ministers, it buys luxury cars and for officials, it buys
standard cars. Now let us understand how the value is determined through this example

There are three sources of the value of a product. They are

1. Use Value: Comes from functional usage of the product

Ex: Both luxury and standard cars have same use value

2. Esteem Value: Comes from ownership

Ex: A standard car has far less esteem value than luxury car

3. Disposal Value: Comes from the price that one can get by exchanging or scrapping
the product at the end of its useful life

Note: Value is the sum total of all the three values

VALUE = Use value + Esteem Value + Disposal Value

Importance of Value
To understand the importance of value, consider this example. The transportation authority of a
country needs to acquire coach sets for its newly commissioned metro service.
In this case, transport authority needs to procure the coach sets at right quality, right quantity
and right price from manufacturers. To achieve the goals of quality, quantity and price, it is
essential for the transport authority to understand the value of coach sets.
Knowing the value helps purchasers to purchase goods, works and services at the most effective
price and in the right quantities. If proper value of the purchase is not known, then you may end
up buying a product beyond our budget.
Total Cost of Ownership (TCO)
With regard to aims of procurement, TCO is management concept related to Right Price (5R’s).
The total costs incurred on a product should take into consideration the initial cost of the
product and various elements of costs incurred over whole-of-life of the product. This is called
“Whole-of-Life” (WOL) or “Life-Time-Cost” (LCC) or “Total Cost of Ownership” (TCO)

TCO is defined as the present value of all cost associated with a product, its service or capital
equipment incurred over its expected life.
How TCO is Determined?
Typically, we can divide TCO in to four broad categories. They are

1. Purchase Price: Is the amount paid to the supplier for the product, service or capital
equipment.

2. Acquisition Costs: Costs associated with bringing the product, service or capital
equipment to the customer’s location
Ex: Sourcing, administration, freight, taxes and so on
 3. Usage Costs: In case of a product, the usage costs are all costs associated with converting
the purchased part or material into finished product and supporting it through its usable
life.
In case of a service, usage costs are all costs associated with the performance of the
service not included in the purchase price.

In case of capital equipment, usage cost are all costs associated with operating the
equipment through its life.

Examples of Usage Costs: Inventory, wastage, lost productivity, lost sales, warranty, installation,
training, downtime and so on.

4. End-of-Life Costs: Are the costs incurred when a product, service or capital equipment
reaches the end of its usable life, net of amounts received from the sale of remaining
product or the equipment or salvage value as the case may be
Examples: Obsolescence, disposal, clean-up and project termination costs.

When calculating TCO to purchase a product, you must analyse the costs beyond the
purchase price.
For example, if you want to purchase an IT related product then besides the purchase price
you must consider other costs. Such costs include installation, support and maintenance,
associated software costs and staff training.

Importance of TCO

1. Helps purchase a product at the lowest price over its expected life.
2. Facilitates better investment decisions
3. Allows to compare two similar products
4. Instils confidence that product is financially well-managed.
Value for Money (VfM)
With regard to aims of procurement, VfM is management concept related to Right Price (5R’s).
In other words, using VfM, procurement officials were able to ensure optimum utilization of
scare budgetary resources and provide value added product. The procurement official has his
own notion for value of product and value of a particular sum of money.
When the perceived value of a product matches or increases the perceived value of the amount
of money or cost of product – the procurement official feels he/she has got full value for the
money. This is called “Value-for-Money” (VfM)
Vfm: Perceived value of a product ≥ perceived value of the amount of money or cost of product

How Value for Money (VfM) is achieved?

VfM is often established through a Competitive Process. A strong competition from vibrant
market delivers a Vfm outcome.
When competition is limited or even absent, other routes are used to establish VfM. These
includes
• Benchmarking
• Construction of theoretical cost models
• Shadow bids by the procurement agency
For major contracts, this requires considerable financial expertise and justifies external
support.
A VfM assessment, based on the published conditions for participation and evaluation criteria,
includes consideration of factors such as
• Fitness for purpose
• A potential supplier’s experience and performance history
• Flexibility (including innovation & adaptability over the lifecycle of the procurement
product)
• Environmental sustainability (such as energy efficiency & environmental impact)
• Total Cost of Ownership (TCO)
Importance of Value for Money (VfM)
Procurement based on VfM helps deliver the right goods, services, and/or works, of the right
quantity, at the right price.
Value Analysis (VA)
Value analysis is a process of systematic review applied to product specification. When it
comes to aims of procurement, value analysis is a management concept related to the Right
Price (5R’s of procurement)
It aims to identify and eliminate product and service features that add little or no value to the
product.
Such features incur disproportionate cost to the process of manufacturing a product or providing
a service.
Value Engineering (VE) is a value analysis approach. It is applied in the manufacturing industry
at pre-manufacturing stages, such as concept development, design and prototyping
Value analysis is used in procurement at the stage of developing specification and descriptions.
It is used especially in complex equipment, works and services. It is used to develop a
specification, which can improve the VfM of the procurement.
Value Analysis (VA)is Performed?
Value analysis process is carried out by a team of representatives from all departments. They
are involved in the procurement and usage of the product over its whole-of-life. There are five
stages in the value analysis process. They are
• Orientation
• Functional analysis
• Creative Brainstorming
• Analysis & Evaluation
• Implementation
Orientation: In this stage, the team is formed. They select the product for value analysis. The
team understands the usage of the product functions & cost element.
Functional Analysis: In this stage, they break down the product into its various functions. They
also analyse the function and rank them in the order of essentiality and usefulness.
Creative Brainstorming: Is an interactive & creative process to analyse various “What if”
alternatives.
Analysis & Evaluation: The team assigns “Worth” and “Costs” to various functions of the
product. Value potential is the difference between the “Worth” and “Cost” of a function.
The team then checks if it is possible to eliminate completely or replace, substitute or modify the
function with low or negative value potentials.
The team makes a report with its recommendations.
Implementation: The departments involved in the usage of the product take a final call on the
recommendations of the VA team.
Importance of Value Analysis
• Value analysis reduces cost by eliminating the unnecessary functions in product, process
or service.
• It is one of the most effective ways of increasing an organization’s profitability.
• New ideas that arise from the creativity stage add major improvements to the product.
• It roots out old practices and replaces them with modern approaches.
• It helps uncover design flaws at an earlier stage.
• It offers a high performing product or service to the customer at low cost.
Just-in-Time (JIT)
With respect to the aims of public procurement, JIT is a management concept related to the
Right Time & Place (5R’s of Procurement)
Consider a car manufacturer operating with very low inventory levels. In such a case, the
manufacturer has to rely on the supply chain to deliver the parts needed to build the cars.
The parts needed to manufacture the cars neither arrive before nor after they are needed. Rather,
they arrive just in time when they are needed. The part manufacturer may, in turn, be dependent
upon supply of raw material from his supplier.
In Just-in-Time or JIT manufacturing, the actual orders dictate what the company should
manufacture, while producing the exact quantity at the right time.
In JIT, the logistics of parts of the car have to be coordinated across the complete supply chain
to match the pace of production of the cars at the car manufacturer’s plant
JIT production requires intricate planning in terms of procurement policies and the
manufacturing process.
What is JIT?
“JIT” has been defined as an “Inventory control philosophy”.
Its goal is to maintain just enough material in just the right place at the just right time to make
just the right amount of product.
The essence of JIT purchasing is to purchase materials so that they can be “just-in-time” for
consumptions.
JIT has been successfully used in manufacturing sector, such as mass production of
automobiles.
JIT helps achieve
• Low inventory carrying costs
• Higher Quality
• Fast response to engineering changes
• Administrative Efficiency
• Better Productivity
Properties of JIT
• JIT purchasing system is not inventory policy and not even a series of techniques.
• JIT purchasing system is an operating philosophy
JIT Purchasing
• Requires permanent changes in how a firm conducts business
• Requires cultural & personnel mindset changes on the part of purchasers & suppliers
• Does not mean pushing inventory back to the supplier
• Requires cooperation, coordination and information sharing to eliminate inventory
across the supply chain.
Importance of JIT
The essence of JIT is to have
• Manufacturing small quantities of a product in one lot
• Sourcing in close geographical area, stay with same suppliers and no annual re-bidding
• Suppliers are evaluated on the ability to provide high quality products
• Fully specify only essential product characteristics and do informal value analysis to
reduce price.
• Less formal system, hence, reduced paperwork
• Vendor certifies quality so that the receiving inspections are eliminated
• Frequent delivers are in small lot-sizes

It is difficult to implement JIT in public procurement as it requires long-term preferential tie-

ups with a small number of vendors in JIT.
However, JIT system can be used in rare situations for proprietary products. In addition, the
cold chain operation of reaching the vaccines, for example polio vaccines, to remote parts of the
country does meet most of the definition of JIT.
Thus, the concept has relevance in public procurement too.
Total Quality Management (TQM)
With respect to the aims of public procurement, TQM is a management concept related to the
Right Quality (5R’s of Procurement)
Total quality management or TQM was first used by Toyota in Japan. The success of using this
management approach in Japan encouraged other countries to adopt it worldwide.
From 1960 to 1990, when the market was down, Xerox used TQM to regain its market share. In
the 1980, Ford was driven by TQM. Using TQM, the company improved its assembly line
practices.
The objective was to increase production of vehicle with high quality
TQM is also an important procurement management concept.
What is TQM
Quality is the ability of a product or service to satisfy the expectations of customers.
TQM is the optimization and integration of all functions and processes of continuous
improvement.
Is aims to provide total satisfaction to customers.
The Seven Features of TQM are
• Customer Focus: The goal is to identify & meet customer needs.
• Continuous Improvement: A philosophy of never-ending improvement.
• Employee Empowerment: Employees are expected to seek out, identify & correct quality
problems
• Use of Quality Tools: Ongoing employee training in the use of quality tools.
• Product Design: Product need to be designed to meet customer expectations.
• Process Management: Quality should be built into the process. Sources of quality
problems should be identified and corrected.
• Managing Supplier Quality: Quality concepts must extend to a company’s suppliers.
How TQM Improves Quality?
One of the well-known technique used is the Plan-Do-Study-Act (PDSA) cycle.
The Plan-Do-Study-Act (PDSA) cycle describes the activities a company needs to perform in
order to incorporate continuous improvement in its operation.
This is also called the Shewhart Cycle or the Deming Cycle.

The circular nature of this cycle shows that continuous improvement is a never-ending process.
Different tasks taken out in each of the Four phases are as below
Plan Do Study Act
• Evaluate the • Document all • Study the data • Act on the basis of
current process & changes made collected in the the result of the
plan based on any • Collect data for previous phase. first three phases.
problem they find. evaluation. • Evaluate data to • Communicate the
• Document all check whether the results to other
current procedures, plan is achieving members in the
collect data & the goals company.
identify problems. established in the • Then, implement
• Study this plan phase. the new procedure
information & use if it has been
it to develop a plan successful.
for
a) Improvement
b) Specific measures
to evaluate
performance.
Importance of TQM
1. TQM stresses that quality is an organizational effort.
2. To facilitate the solving of quality problems.
3. TQM places great emphasis on teamwork.
4. Teams work regularly to correct problems using techniques, such as
• Brainstorming
• Discussing
• Quality control tools
5. One of the most common types of teams is the quality circle, a team of volunteer
production employees and their supervisors whose purpose is to solve quality problems
Failure of TQM
1. Financial benefits were difficult to assign to TQM efforts.
2. Root cause was not always determined resulting in recurring errors.
3. There was no common metric to measure the level of quality attained.
4. Quality efforts were sometimes aimed at processes or operations that were not critical to
the customer.
Six Sigma (6σ)
With respect to the aims of public procurement, six sigma is a management concept related to
the Right Quality (5R’s of Procurement)
• Six sigma filled the vacuum created by TQM failures.
• Under the six sigma methodology, quality improvement projects are carefully defined so
that they can be successfully completed within a relatively short time frames.
• Financials are applied to each completed project so that management knows how much
the project saves for the Organisation.
• ‘Six Sigma (6σ)’ is the application of a statistical methodology to business processes
• It helps in improving effectiveness, thereby raising profitability.
• Sigma (σ) is a letter in the Greek alphabet, which is used to indicate standard deviation
• To achieve six sigma, a process must not produce more than 3.4 defects per million
opportunities for non-compliance.
• A defect is defined as anything that is outside customer specifications
How does Six Sigma (6σ) Ensure Quality?
Six Sigma (6σ) involves the application of two subsidiary initiatives. They are
1. DMAIC: Define Measure Analyse Improve Control
The aim of this method is to improve existing processes that do not come up to
specifications with respect to quality.

2. DMADV: Define Measure Analyse Define Control

This method can be applied if an existing process or product needs more than just small
improvements.
Note: Both these six sigma methods are carried out by Six Sigma Green Belts & Six
Sigma Black Belts. They are monitored by Six Sigma Master Black Belts.
Importance of Six Sigma (6σ)
• Six Sigma consists of strategies, tools and statistical methods that improve operating
profit
• It reduces defect
• Improvements to business processes
• Reduction in costs
• Shorter process cycle times
• Greater customer satisfaction
• Other important metrics
An essential goal of six sigma is to eliminate any suggestion of waste often found in
organizational processes.
Game Theory
With respect to the aims of public procurement, six sigma is a management concept related to
the Right Source (5R’s of Procurement)
• Game theory is the formal study of conflict and cooperation
• Provides a language to formulate, structure, analyse and understand strategic scenarios.
• Game theory is the branch of decision theory concerned with interdependent decisions
• Involves multiple participants such as individuals, groups, firms or any combination of
these
• Each of the participants has individual objectives related to a common system or shared
resources
• In Game theory, the Problems are called Games
• In Game theory, the Participants are called Players
• Deals with any problem in which each player’s strategy depends on what the other
players do
A few examples in which game theory is applied are
A. Businesses completing in a market – say for a procurement tender
B. Diplomats negotiating a treaty
C. Gamblers betting in a card game.

Game Theory in procurement Scenarios

• Involves interdependent decisions and calls for strategic thinking
• Implies making use of available information to devise the best plan to achieve one’s
objective
• The technique for analyzing interdependent decisions differ significantly from those for
individual decisions
• In game theory, the objective is not to win.
• The goal here is simply to identify and use the optimal strategy
• In gaming, player’s actions are referred to as moves.
• The role of analysis is to identify the sequence of moves that you should use.
• A sequence of moves is called strategy.
• An optimal strategy is a sequence of moves that results in your best outcome. Such an
outcome doesn’t have to be unique
• One strategy could result in outcome that have equal payoffs. And, they would all be
optimal.
Types of Game Theory
There are two fundamental types of Games. They are
1. Sequential Games: The player must make alternate moves.
2. Simultaneous Games: The players can act at the same time.

Importance Game Theory

• Interdependent decisions are everywhere, potentially including almost any endeavor in
which self-interested agents cooperate and /or compete
• Game theory can be used to design credible commitments, threats or promises.
• Used to assess propositions and statements offered by others.

Application of game theory to public procurement indicates that for commonly available and
bought items, exactly similar information should be available to as many prospective bidders as
possible.
This helps in obtaining Value for Money(VfM). Thus, transparency and open tendering are
based on sound theoretical foundations
 Module II: Public Procurement Operations

1. Planning for Procurement

Let us analyse the case of two villages on the either bank of a river. The only mode of
connection between the two villages is by boats. We need to transport people and goods
across the river. Hence, there arises the need for a bridge

What do you think the village committee will discuss and finalize during the procurement
planning stage? They will decide whether they should go for solely public owned or
public private partnership. If you don’t do this kind of procurement planning, you may
end up with poor identification of needs.

Poor identification of needs leads to

• Inefficiencies
• Sub-optimal assets being procured.
• Loss of time, effort & cost
Proper Planning of needs helps in
• Evaluate all the options carefully
• Satisfy the need before finalizing the indent.

Various Operations in Procurement

1. Planning for Procurement

• Planning for procurement and procurement operations have the same relationship
that exists between foundation of a building and the building
• Planning for procurement has great leverage in procurement operations
• Amount of time & effort invested here would save multiple amounts of time &
efforts in subsequent operations.
• It will help in decide success or failure of the entire procurement operations.
Planning for procurement includes steps such as
a) Need Assessment
b) Developing Specification
c) Developing Procurement Plan
Need Assessment: Is the process in which details of requirement are assesses before an indent
is prepared. The process ensures optimization of
• Economy in quantity
• Scope in services
• Technical requirement
• Terms of reference in service
• Timeliness in procurement
Need assessment involves both commercial and technical aspects. Therefore, it should also
involve procurement and finance functions.
The important issue addressed during need assessment are:
• Expression of needs and methods of satisfying it
• Techno-economic evaluation of alternative methods and selection of a solution
• Compatibility and inter-operability with existing infrastructure or system
• Estimation of costs including Bill of Quantities (BOQ) in case of works
• Budgetary provisions and availability of funds
• Description of the selected solution
• Time-schedule and place of product, work or service delivery
• Sustainability criteria and legal requirements of environment or pollution control and
obtaining clearance from local authorities, if required.
• Obtaining technical, administrative and budgetary sanctions

Developing Specifications: Specifications are the detailed quantitative requirements of

procurement. Developing specifications has the greatest impact on Value-for-Money(VfM) in
procurement.

Attributes of Specifications
• Meet essential needs
• Be objective, functional, generic and measurable
• Set out required technical, quantitative and performance characteristics
• Provide a level playing field for prospective vendors
Types of Specifications

1. Proprietary Specifications:
• Patents or intellectual property rights to some specifications are owned by the
proprietary firms.
• These are protected by intellectual property rights
• These specifications are not available with the buyer
• Firm’s certificate of quality is accepted.
• Essential technical and performance characteristics required for inspection must be
mentioned in the specifications.
Examples: The patents of spare parts of certain locomotives are owned by certain manufacturers. In this
case, proprietary specification is used to procure these items

2. Brand or Trade Names:

• In public procurement, specifications by brand name is not allowed
• Using brand or trade names along with model number gives sufficient information
for procurement.
• The quality of branded product is generally reliable.
• Procurement of branded products cannot ensure Value-fir-Money(VfM)
• Manufacturer’s price list often includes heavy margin for wholesalers and retailers

However, in public procurement, if it is inescapable, specifications of brand name with “or

equivalent” has to be included.
Unless the alternatives in the market are nearly equivalent and comparable, the stipulation “or
equivalent” leads to intractable complications at the stage of evaluation of bid.
This is appropriate for commonly used items, where quality is more important that cost or when
it is not possible to make technical or performance specifications
Examples: Lubricants for locomotives are procured this way
 3. Tailored Technical Specifications:
• They give lot of details on how to achieve what is required
• Used when commercially available products do not meet the requirements even
with minor changes
• Requires the supplier to design a tailor-made product
• Limits the ability of supplier to offer more cost-effective solutions and puts the bulk
of performance risk on the buyer.
• If a supplier designs a tailor-made product, it leads to restricted competition and
added cost and time.
Tailored Technical Specifications are appropriate, when
a) Buyer has design expertise, which suppliers do not have
b) Procurement is of high value, critical and of complex nature
Examples: The space research Organisation of a country may need to procure a complex spare part for the
rocket

4. Tailored Performance Specifications:

• Describe only essential performance requirements and allow the supplier to
establish the best solution
• Gives value for money and widens the competition
• The supplier carries the bulk of performance risk
The Performance Specifications includes
a. What is to be performed and the required level of outputs
b. Operational and maintenance performance
c. Maximum costs
d. Rules for measuring performance
Tailored Performance Specifications are appropriate, when
a) Supplier possess greater design or functional expertise
b) Technology is changing rapidly in supplying industry
c) Innovation is important
Examples: The election commission of a country may lay down tailored performance specifications to
procure electronic voting machines. In this case, government depends on the different vendors to come up
with solutions
 5. External Technical & Performance Specifications:
• External standards enable buyers and sellers to communicate common parameters,
terminology or symbols
• Must be preferred is they meet the requirements adequately
• Helps offer wide competition and standardization of production, thereby giving
value-for-money and better lead times.
Different categories and sources of external standards include
a. Industry standards
b. National standards
c. International standards
Examples: Procurement of electrical motors by specifying the national and international standards.

6. Specifications Involving Samples:

• In public procurement of goods, purchase is done as per drawing, standard,
specification and so on.
• Purchase of goods as per sample is discouraged
• In national or international standards, for certain items, there are built-in sample
clauses.
• These clauses illustrate characteristics such as
a. Shade
b. Tone
c. Size
d. Make-up
e. Feel
f. Finish
g. Workmanship

Examples: Procurement of woolen dress materials for factory workers. The relevant national specification
lay down that the purchaser and supplier should come for an agreement on feel and finish of the cloth based
on agreed samples.
Developing Procurement Plans:
• It is true that if you fail to plan, then you plan to fail.
• Appropriate procurement strategies cannot be built for unplanned, ad hoc and emergency
procurements
• Advance procurement planning helps develop appropriate procurement strategies.
Steps to develop procurement plans

1. Develop organizational procurement plans:

• Procurement agencies must prepare organizational procurement plans of the
budgetary year. These plans set out
a. Procurement objectives
b. Finalisation of annual requirements
c. Identification of common use items for collaborative purchasing
d. Procurement profile of procurement agency
e. Procurement systems, processes and practices
f. Procurement strategies
g. Ways to fulfil social or development objectives of Procurement Policy
h. Procurement measures, targets and annual comparison against targets

2. Develop Individual Vital Category Procurement Plans: