Strategies for Cost Containment
- By Ellen Kollie
- March 1st, 2016
It’s a classic struggle: school districts have chronically tight budgets. Most recently, the need to contain costs stems from the 2008 stock market crash. “Here in Pennsylvania,” says Jeffrey Kimball, cooperative purchasing services director for Milton, Pa.-based Keystone Purchasing Network (KPN), “since the crash, school districts have had to increase their contributions to the pension system. Having a higher outlay of pension costs reduces budgets for other products and services.”
Judson C. Crane, CPPB, CPPO, director of Purchasing and Contract Administration for Santa Rosa County School District in Milton, Fla., agrees that 2008 was hard for school districts. “For years,” he says, “not only was our funding cut here in Florida, but it was often cut more mid-year. That’s difficult when you’re already on a tight budget. We haven’t fully recovered, and I don’t anticipate that we will for years to come. So cost containment is extremely important. Any time we can save funds and lower costs, that’s funds for which we don’t have to rely on the state or another source to provide.”
A solid starting point for a discussion about how cost containment is important when you have a tight budget, especially for readers who are less familiar with the purchasing side of school operations, is with some definitions. Here are four key terms.
1. Cost containment: Cost containment is controlling expenses by limiting unnecessary spending or reducing costs to stay within budgetary constraints. “Any dollar that you don’t have to spend that you regularly do spend is cost containment,” says Crane, whose district educates more than 26,000 students. For example, you may have to purchase your electricity from the only supplier in town, which means you are not able to contain the cost by shopping for the lowest-priced supplier. You can, however, contain the cost by raising the thermostat setting for air conditioning and reducing it for heat, thereby consuming less energy overall. “Similarly,” he continues, “Gaining lighting efficiencies by installing bulbs and fixtures that produce the same or more light at the same cost is cost containment. Overall, you have to be vigilant in seeking out the latest technologies and products that enable you to reduce costs.”
2. Purchasing: “Purchasing is a process of ordering and receiving goods and services,” says Gary Link, C.P.M., senior vice president of Consulting & Contracts for Jericho, New York-based E&I Cooperative Services. “It’s a subset of procurement.”
3. Procurement: “Procurement is a broader term,” Link continues. “It’s the supply chain. It involves logistics. If you want to describe procurement activities, it would include sourcing, market research, evaluation, negotiation, distribution. It’s looking how you can more effectively manage your supply chain.”
4. Strategic sourcing: “Strategic sourcing is a systematic and strategic approach for optimizing an organization’s value and spend,” says Link. “It really involves leveraging spend. Utilization of data, data management, the ability to understand that data, cleanse and categorize the data, and the development of multi-year and long-term agreements. It also is continuously improving and reevaluating the activities that are occurring within the organization.”
Kimball adds that strategic sourcing includes aligning with a handful of select vendors so that, instead of having 100 vendors, you may have just 10. “And it includes standardizing on one particular brand,” he adds, “for copiers or custodial supplies, for example.”
When it comes to sourcing, Texas-based Houston Independent School District (HISD), which educates 215,000 students, is an industry leader. “Our mission is to become the premier K-12 delivery platform in the nation,” says Rick Gay, CPPO, procurement officer for HISD’s Procurement Services. “Because we’re the 7th largest school system in the country, we have a large, dedicated professional procurement staff. This gives us the opportunity to do things that a lot of other school systems, because of size or lack of staff, can’t. For example, we do a nine-step sourcing process and then we have a separate buyers’ section, which processes purchase orders and sends them to the vendors. We have a large data analysis group to see if we’re getting the best price that the market can bear and, because of our size and negotiating power, we can share that with other school systems.”
“The difference between purchasing, procurement and strategic sourcing,” says Duff Erholtz, who handles membership relations and communications for Staples, Minn.-based National Joint Powers Alliance (NJPA), “is that strategic sourcing should be a proactive exercise, and procurement and purchasing are the net result of having strategies employed to get the products you need; they are more process oriented.
“In a progressive business office,” Erholtz continues, “all three components are working together to determine what products best meet the school’s needs and what is the most efficient procurement method to deliver them.”
COST CONTAINMENT STRATEGIES
Now for the strategies. Here are four ways school purchasing officials work to contain costs.
1. Data Analysis: HISD is staying on top of procurement challenges by building sophisticated databases and analysis tools that are based on how commercial businesses do procurement. “The benefit we have here in Texas that other states don’t,” says Gay, “is that we can do best value, as opposed to lowest price. Our statute has nine things we can take into consideration. The best value process allows us to negotiate pricing to a better value.”
Gay explains market analysis using milk prices as an example. You have to understand who are the players in the market, how big is the market and if there is truly competition. This can be powerful in allowing you to know what kind of pricing to expect. Then, you have to break down product usage — when and how much you order, how much you use, how much spoilage occurs — so you don’t over or under order. All that information is entered into a database so you can look at the CPI and
break it down through, say, a one-, two- or three-year period.
“For example,” Gay continues, “we know that, since 2011, we’ve seen a 28 percent increase in milk prices. When we look at the pricing, we can actually see what it was in February 2014 vs. February 2012 and can begin to do a trend analysis to see if there are times when the price is lower at some times of the year and if there’s an opportunity to do a bulk purchase, buying ahead and buying more when prices are lower. You can’t do this with milk, but you can with items that have extended shelf lives, like electricity.
“This helps with budgeting,” Gay continues. “Your CFO will bear hug you because you can give a forecast of prices down the line, anticipate if you’ve put enough money in the budget for that commodity or supply item and ask if you have earmarked enough money to pay for items down the line.”
HISD administrators don’t keep all this information to themselves. They share it with small districts in the Houston Statistical Metropolitan Area (SMA). “We can show them how we broke down the information,” Gay indicates, “and give them the knowledge so they can duplicate it themselves without much problem.”
2. Cooperative Purchasing: Cooperative is another tool in the cost containment toolkit. “Having pre-bidded and pre-negotiated contracts from which purchasing officials can make purchasing decisions saves them both time and money in terms of not having to do their own bids,” says Kimball. “Cooperative purchasing offers better prices than districts can get individually because they’re larger contracts.”
Crane agrees: “I have a small department, and that’s by design. We don’t spend a lot of time bidding products. We’re allowed to join co-ops, and as long as the resulting contract was approved by the governing board, and the contract and contractor say it’s available to other public entities, we can use it. And we do. We’ve joined just about every cooperative purchasing group we’re qualified to join, so I have sources to go to when I need to make a purchase. I think it’s a must for purchasing.”
Crane also cautions that not every contract is solid. “The prices that are offered have to be in line and competitive. And you must know what the terms and conditions are to ensure that, when you use the contract, there are warranties, information on how product is delivered is provided and returns are favorable. Just getting a cheap price is not a good deal if the contract doesn’t deliver quality product. You also have to know that the contract’s competition was sufficient. If a contract had only one bidder in an industry where there should have been more, then that’s a red flag.”
3. Outsourcing: Outsourcing is another tool in the cost containment toolkit that allows purchasing officials to stay on top of procurement challenges. “We are seeing cost containment through print services, which we recently contracted,” says Crane. “Instead of sending print jobs to an in-house print shop, which buys the materials, does the labor and sends the jobs back to us, we now send our requests online to Office Depot Print on Demand. We did see a little cost increase on the school level because the district was subsidizing the cost of labor and delivery — the schools were only charged for the ink and paper. However, district-wide, costs have gone way down, and schools are getting print jobs back in one to two weeks instead of four to six weeks.
“For example,” Crane continues, “we were printing 30,000 Code of Student Conducts every year, one for every student, plus plenty left over for new students and replacing lost copies. Now we post the Code of Student Conduct online and buy 5,000 printed copies per year.” Even though the cost per copy went up, the total cost went down significantly because the district isn’t printing 30,000 copies and, as a bonus, students and their families would rather have it online.
Santa Rosa also contracts out transportation, food service and custodial services. “Employee cost is the number-one cost in a lot of businesses,” says Crane. “This is a great way to contain costs. We don’t have to worry about workers compensation, unemployment costs or difficult employees who soak up time and energy in managing and administrative work. We need to spend our resources and administrative time on our students and teachers, not on buying toilet paper and planning what we’re having on the lunch menu next month.”
4. Whose Money Is It?: In Canton, Ga., Cherokee County School District officials, who educate 41,000 students, take an additional tack in containing costs: “We behave as though it’s our own money,” says Shannon Nolan, purchasing supervisor. “We’re stingy with it. We try not to spend it so it can go to the classrooms.” To that end, they employ a number of techniques.
One technique is using surplus as much as possible. “We have 44 schools,” says Nolan. “We take surplus from one school, clean and repair it, and take it to a school that needs it.” A second technique is to purchase items that are timeless rather than trendy so that they look nice, rather than dated, even after being in service for years. A third technique is assembling and installing furniture themselves whenever possible. “In our RFPs, we ask for the price for us to install items and the price for the supplier to install items,” she says. “Nine times out of 10 we do the install ourselves We are fortunate in that we have 12 employees in the warehouse and, in the summer, they’re able to go to each school, unbox new items, assemble them and dispose of the cardboard. It’s a significant savings.”
Piggybacking on Nolan’s understanding that the money belongs to the students, Gay sums cost containment: “It’s about being able to save dollars on the business side so we can return the dollars to the classroom to educate the students. For us it’s all about cost savings, getting the best conditions we can in our contracts and making sure we have well-written technical specifications to ensure we’re getting what we want and need at the very best price we can.”
This article originally appeared in the March 2016 issue of School Planning & Management.