Procurement

Conducting an Effective Procurement Process Audit

Many clients bring me in to audit their expenses and identify inefficiencies in their procurement and Accounts Payable processes. Generally, a procurement process involves the following factors:

  • Current business need to purchase raw materials and supplies
  • Vendor research and price comparison, including the development of a quality plan
  • Approving the vendor and authorizing the purchase
  • Purchasing the needed items
  • Receiving an invoice
  • Delivery of goods
  • Inspection of goods before using (random sampling)
  • Paying the supplier after quality, delivery and contract agreements have been met

From my experience, errors and waste start to creep up during the Sourcing stage as many Procurement Managers are focused on price per unit instead of the total cost. This is never the best course of action because these vendors will have to recover their costs by lowering quality, not delivering on time, et cetera. It is imperative that when conducting a procurement process audit you use random sampling to analyze purchase orders, invoices and contract agreements to ensure quantity, item description, prices, discounts and any other relative information matches. Sometimes a third party may be liable for the payment of the purchase and it was paid by the company instead which results in an unnecessary expense.

In addition, the company may have entered into a contract agreement with a freight carrier that states a guaranteed delivery, if this is not being met then the company is not liable to remit any payment.

In regards to vendors, it is also imperative that you familiarize yourself with the company’s internal controls for approved vendors. You should audit their vendor profile database in their accounting software to ensure they are legitimate and compare addresses with employee addresses to detect fraud. You should also ensure early pay discounts are being taken advantage of and that the correct discount is being applied.

It is also important to actually view the process in action and write notes about what you see. You should also speak with the employees who actually performing the activities in the process to truly understand bottlenecks and pains. After you gather this information, you should collaborate with them to create a process map to further detect inefficiencies and improve the process.

Further reading on reducing procurement costs:

How to stop freight charges from eating away at profits

Price Focused Sourcing is bad for Business

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Price focused Sourcing is bad for business

We live in a capitalist society. It’s understandable that companies want the best prices on supplies and materials to make their products or provide a service.

When your procurement team is only motivated by price instead of the total cost, quality, delivery and logistics is lost. agreement-clip-art-478088

For example, your Procurement Manager may think, “Hey, we just saved 12% by switching to a new handbag manufacturer but then it comes to your attention that their workers are not as skilled as your former provider and the bags are in poor quality. Now you have to pay workers overtime to fix the issue and deliver to customers on time. Since they were focused on category savings they spent more money on zippers for the bags, in turn, going over budget for materials. That 12% did not save you much at all.

It is also important that accounting, sales, marketing, and procurement teams actively share data so that smart decisions and better forecasting can be made. For example, if the accounting team had made budget data available to the procurement team they would not have ordered more zippers.

Therefore, instead of focusing on price encourage your procurement team to engage suppliers in a several years contract with quality stipulations and locked in year by year price. Savings can also be realized by auditing invoices/Purchase orders to identify unapproved vendor charges, purchases and price increases.

In short, don’t look at price but the total cost.

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