Procurement

97442444

Moshav Bnei Zion P.O.Box 151, 60910 Israel Tel. 972-9-7444474 Fax. 972-

February 13, 2007 Greetings to all participants of the Procurement Managers Round Table Review! I would like to thank you for taking part in the meeting held last month. For your convenience, we have attached a list of participants. At the next meeting, scheduled for July 151, we shall discuss matters of software and specifically agreements vis-à-vis Microsoft and Oracle. The meeting will be in a slightly different format. I will open the meeting with a lecture on licensing policy and the art of negotiating with Microsoft, and then we will hold a discussion on tips for negotiating with Microsoft. If we still have time, we will apply the same format in respect of Oracle. I remind you that if you need information on this subject, you can approach us immediately (and not wait until the next meeting). The following is a brief digest of the messages coming across in the meeting, including a specific recommendation (appears at the end of the summary). The key issue discussed at the review was that of how to deal with suppliers in general. How many suppliers should one maintain, for how long, how should prices be updated, at what intervals should one hold an invitation to tender and so forth. The following are some examples of approaches mentioned in the discussion: 1. Most organizations construct a contract for a certain period of time, and in that time, they make all their purchases from the same supplier. There are organizations that carry out procurement by quantity. In other words, they decide to purchase 2000 Number One Personal Computers, and then go in for a new invitation to tender. 2. A certain public organization uses the results of the Invitations to Tender issued by the Accountant General and if, during the term of the tender, production of one of models is discontinued, then the supplier can supply a better product at the same price. 3. An organization purchases a PC from one manufacturer but uses a different marketing agent for each region, which is to say, the same product is acquired through different marketing agents. 4. One way of creating pressure on suppliers is to halt orders (obviously, all parties are harmed by this type of move).

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At 13:00 hours – this is the scheduled time, but it may change, so please check this before coming

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Moshav Bnei Zion P.O.Box 151, 60910 Israel Tel. 972-9-7444474 Fax. 972-

97442444

5. An organization holds an invitation to tender in respect of servers for two years with an option to extend for a six moth period five times. 6. An organization spoke of a requirement from the supplier regarding supply times – “for supply within 5 days” but with no penalty clause. Thus, if there is any deficiency (or if other conditions are not met), such as the price being noncompetitive) then the organization switches to a different supplier. This means that there is a contract with one supplier, but sometimes other suppliers enter the picture. 7. A large organization mentioned that in a procurement agreement, they do not commit to any particular quantity to be purchased (or at what time). Even so, they obtain excellent discounts. 8. An organization that tries to maintain two manufacturers for each domain, holds an invitation to tender every three years, in which it chooses two manufacturers (such as HP or Dell, but not different marketers of the same product). The two selected manufacturers then compete in regard of any proposed procurement. The organization endeavours that the smaller supplier shall be at least 30% - 40% the size of the larger supplier, otherwise there will be no sense of having two different suppliers. The drawback of course is that the organization gets two different types of equipment. A number of subjects were raised aside from this pivotal issue. I have tried to outline a summary including most of them: •

Warranty for PC. Most participants spoke of a 4 year warranty at the customer’s site, sometimes with a commitment to a response time of 4 hours at the customer’s site. Mention was also made of a situation in which the manufacturer supplies a spare parts warranty only, not including assembly (the outsourcer installs the spare parts). This represents a 20% savings in the cost of the PC. One organization spoke of purchasing Dell servers with a 5-year warranty.

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In terms of the management of Images, participants spoke of an attempt to limit the number of images, and in some instances there would be just one or two images per organization.

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In terms of the use of brands for a PC manufactured by white boxes most participants spoke of the use of brands, and it was mentioned at the time that when compatible computers were being used, there were relatively numerous problems of reliability and compatibility.

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In terms of UNIX environment, reference was made to the absence of competition (after the supplier was chosen the first time). There is also a dearth of competition in upgrades, as well as in maintenance, the 2

Moshav Bnei Zion P.O.Box 151, 60910 Israel Tel. 972-9-7444474 Fax. 972-

97442444

maintenance of UNIX being relatively very expensive. Mention was made of an instance in which the charge for the technician was considerably less in Linux environment compared with the charge for the same technician in UNIX environment. Organizations with a relatively large UNIX environment spoke of maintenance in Fix configuration – which is to say, a fixed price for each site, regardless of the number of computers, the number of processors, memory and so forth. •

In warehousing (procurement or maintenance) are Tera/ Mega 2 to the power of 10 (meaning 1024) or exactly 1000. This has repercussions.

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VMware significantly reduced increase in the number of servers. For 4 processors there are 15 applications in production. It is very convenient for the system - facilitating transition between physical environments.

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Utilization term of a PC is between 3 and 5 years.

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The computers are considered capital expense

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Thin clients: an organization made a calculation and the solution came out cheaper. The calculation related to everything that works on a thin client. In the event that use is made of a thin client, but, even so, things must be installed on the client (with the exception of the citrix client), representatives said there were problems. One organization carries out a test on a thin client including the recording of screens + Voice (the new Perform of Nice). Also mentioned was a problem in Nice’s service. In the past, there were problems of printing but that has been resolved. An issued raised in the discussion was that of whether or not to maintain the citrix licenses. One organization spoke of the use of thin clients for those working at home, instead of supplying them with laptops.

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Thin screens, 17”, speed 8msec.

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Printers in procurement, not per unit charge. Photocopying machines belong to household supplies - which is to say: political problems. Organizations mentioned that they are examining all in one options.

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Refrigeration cabinets – ranging in price from K$15 to K$20.

Conclusions and a recommendation in terms of dealing with suppliers

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97442444

Moshav Bnei Zion P.O.Box 151, 60910 Israel Tel. 972-9-7444474 Fax. 972-

My conclusion from the discussion was that “genuine competition” is “genuine competition”. This means that in order to conduct genuine competition, there must be at least two independent suppliers competing against one another. Thus a situation in which a price war is held, for example, between two marketers, the product being a Dell computer, is not genuine competition. In the domain of computerization, due to the rapid changes in the technology (which is to say – in the models) it is not possible to use the results of genuine competition over time because after a time, new models come out that were not included in the competition, and also there is a general reduction in prices in the market (other than in terminal situations when there is an increase in prices). Therefore the conclusion is that such “genuine competition” must be created all the time. On the other hand, the problem of “genuine competition” is that it injures the uniformity of equipment used by the organization, and involves additional overheads such as: 1. Holding an invitation to tender/ price war procedures is a costly process in itself 2. Dealing with a number of suppliers – issuance of invoices, different liaisons and so on, is more expensive than in case of a single supplier. 3. Operation of the computers in terms of building an image that will include specific drivers. Construction of an image is a complicated task that includes examination of the compatibility of software and hardware (connection of iPaq Palm, synchronization to cellular telephones, burners and so forth). 4. Different images necessitate different attitude on the part of the help desk team in terms of takeover, dealing with malfunctions and running outside suppliers. 5. Maintenance of the computers after the end of the warranty period is problematic (if the organization decides to continue maintenance for the computers are the expiry of the warranty) since a service provider must be found who is able to service various types of equipment. 6. Specifically in respect of laptops, significance attaches to continuous replacement and purchase of different accessories, batteries, docking stations and so forth. And when items of equipment come from different suppliers, there is less flexibility and less chance of obtaining good prices for the accessories due to economy of scale. Accordingly, the question arises as to which is more economic for the organization: to remain with the same supplier with prices that are a little higher, or to hold a bidding war, thus securing better prices, but involving an increases in related expense. What is the optimal frequency for holding a competition?

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97442444

Moshav Bnei Zion P.O.Box 151, 60910 Israel Tel. 972-9-7444474 Fax. 972-

On this point, I would like to make two important recommendations that are relevant to the issue: 1.

Software distribution technology has progressed significantly in recent years and today an image can be created that is suitable for a number of types of hardware (an example of such technology is BDD of Microsoft). Other options exist for distributing software, and these handle different types of hardware. Incidentally, Vista, too, will improve the situation in the management of images and in the distribution of software. And therefore, our recommendation to customers is to thin things that will ease the construction of the images and the distribution of the software. This technology will reduces costs related to the inclusion of another manufacturer and will increase the profit from the institution of “genuine competition”.

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Organizations must make an estimate of the costs related to bringing in an additional manufacturer into the organization. In other words, organizations must conduct a lateral survey involving the procurement department, the technical support department and other departments, and obtain an evaluation such as that “bringing in an additional PC manufacturer signifies K$5 fixed costs and K$20 per computer2. Such as evaluation should also be made in respect of the servers and warehousing domain. Only after making such an evaluation will it be possible to reaches an informed decision as regards the frequency and modality of holding a competition.

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As regards the UNIX world, our recommendation is to make a gradual transition to Linux environment which is more competitive.

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We recommend that there should be a maintenance agreement that includes all hardware (which is to say, a supplier that maintains both dell and HP, and so forth) so that the costs of adding suppliers are not increased. Yours truly, Schwarzkopf the Knowledge Integrators - STKI

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The figures are imaginary

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