Our design of a new framework agreement brings annual savings of US$5M for the State

The new applied methodology in ChileCompra increases competition among bidders and results in better prices, without significantly affecting the variety of products.

ChileCompra is the largest electronic marketplace in the country, where some 858 public institutions buy from 125,000 suppliers. With an interdisciplinary approach, which integrated engineering and economics tools, Industrial Engineering researchers from the Universidad de Chile and the Complex Systems Engineering Institute (ISCI) designed a platform for the implementation of more competitive framework agreements that guarantee high efficiency, with greater savings in time and money for state agencies.

The Food Framework Agreement area first appeared in 2010. It has 247 suppliers with some 360 billion Chilean pesos (US$468 million approx.) changing hands annually. The objective of the Framework Agreement is to offer an expedited purchase mechanism for public institutions, while simultaneously taking advantage of purchasing power to obtain competitive prices. This is achieved through a bidding process where suppliers submit prices for their products and services, with the bid awarded to the supplier submitting the lowest price.

Following the 2014 bidding process, experts detected problems in the system. There was limited competition to enter the marketplace, as suppliers tended to offer a redundant variety of similar products to avoid competing. In addition, the cataloging of products offered was not standardized, making it difficult to make comparisons between one supplier and another. This combination of factors generated an adjudication mechanism that was deficient.

Against this backdrop, collaborative work commenced between the academics and the public sector to create new rules and definitions for the operation of the market. “This project sought to offer support in the design of the ChileCompra’s framework agreements, so that this instrument achieves a compromise between prices and variety of products, generating competition to enter the market, and ensuring competitive prices.”, explains project leader, Marcelo Olivares.

The researchers established key changes in the system:

  • An orderly catalog was generated, adapted to the specific requirements of the public food market. The catalog saw an increase in the range of products offered and offered a high level of standardization based on key attributes. A better cataloging alone improves the efficiency of the agreement in two dimensions: it paves the way for more competition to enter the market, since suppliers compete for standardized products based on price and, once awarded, a more orderly catalog makes it easier for users to compare similar products and select better prices.
  • The uncertainty of prices was deemed a relevant factor, since previously suppliers were not allowed to readjust them according to the variation of their costs caused by factors such as seasonality. The new proposal included a dynamic price index based on objective information, which led to a reduction in the prices offered by suppliers, since uncertainty decreased in terms of the modification of their prices according to their observed costs.

This new design methodology was empirically tested with the implementation of the new Food Framework Agreement tendered in 2017 and in operation since August 2018.

Marcelo Olivares concludes “Even the more conservative estimates indicate that the new design lowered prices by 10%, mainly due to an increase in competition. This represents a potential savings of US$ 5 million annually in the Food Framework Agreement. In addition, public buyers still have access to a wide variety of products, and it remains the preferred purchasing channel for the sector. The project supported a paradigm shift in how to address public purchases within ChileCompra and raised the possibility of extending it to many other mechanisms for the acquisition and categorization of products, which could have a significant potential impact on how the State is supplied.”

Comunicaciones ISCI