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TRANSPARENCY & COST EFFICIENCYIS THE KEY IN MANAGING YOURPROCUREMENT VALUE CHAIN

This document outlines procurement related good governancepractices to help you achieve the twin objectives of transparencyand cost efficiency

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Effective and transparent procurement process is gaining importance after the recent economic slowdown.

Worldwide, transparency in procurement management is being increasingly promoted by the organisations

and regulatory bodies as procurement is the largest spend area for any manufacturing organisation. The

decision to select and arrive at an optimum vendor mix is a complex affair thereby making the buying

process highly opaque. Typically in a manufacturing company, on an average, the procurement spend ranges

between 45% - 85% of revenue. Out of this, the spend on A category (the items that highly influence the

cost of final products) ranges between 60% - 75%. Lack of detailed analysis and transparent practices lead

to potential increase in input costs, which is not visible to the organisation.

Effective procurement supports delivering ‘value for money’ and savings. On an 80:20 principle, business

focuses on the A Category items which normally consists of 5 to 50 key raw materials, whereas B & C

categories consisting of 25%-40% of the total spend involving thousands of items remain out of 

focus/unattended. This means:

ANALYSING THE PROCUREMENT SPEND

CATEGORY TRANSACTIONAL VALUE

A High Transactional Value Low number of Transactions

B & C Low Transactional Value High number of Transactions

TRANSACTIONS

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In simple terms, for the A category, the transactional activities are very low, whereas the transactional activities are

generally on a higher side for B & C categories of items procured. Since the attention span is directly proportionate to th

value of a transaction, B & C categories run a high risk of insufficient controls, visibility and non-transparent negotiation

efforts leading to cost leakages which may go up to 25%-50%.

What could be the total value of B & C categories of Spend?

Annual Procurement

INR 1000 crores

INR 250-400crores

This indicates that the cumulative value of the spend of low value transactions is still very high. Identification of low

value B & C category items and developing an annual procurement budget with stringent monitoring controls can

 play a vital role in managing the procurement cost.

The below mentioned process flow reflects generic process followed by any organisation to plan, manage and

administer the procurement processes.

THE PROCUREMENT VALUE CHAIN –HOW MUCH IS VISIBLE?

Procurement

Planning

Solicitation

Planning Solicitation NegotiationSource

Selection

Contract

AdministrationContract

Close-out

Make-or-

Buy Decision

Issue

Request For

Proposal

Receive

Proposal

Discussionand

comparison

Award

Contract

CompleteSubstantialamount of 

Work

Formallyclose

contract

PROCUREMENT PROCESS

The above processes may be partially supported by Enterprise Resource Planning (ERP) and other legacy systems.

Any inefficiency or lack of effective checks and balances in the procurement value chain can significantly impact the

bottom line of an organisation. Many organisations with support of ERP's and analytical tools have been able to

optimize controls and achieve efficiency within procurement function. However there are some inherent challenges

within procurement value chain which need to be appropriately addressed.

Considering procurement as a major spend it is necessary to adopt certain good practices within the procurement

value chain. One of the good governance practices would be to establish a balance between transparency and

accountability. These must be further balanced with other good imperatives such as providing guarantees for fair

competition. If the level of transparency is adequately defined, the benefits will outweigh the cost, especially when

comparing the initial cost of transparency with the potential negative consequences of fraud.

As a good governance practice, many organisations are developing robust procurement policies/practices which are

effectively implemented through an appropriate web application to bring agility in the process of buying, thereby

ensuring complete transparency in this highly sensitive decision-making process.

Spent

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THE PROCUREMENT RISK GRIDWithin the procurement value chain, there are certain few risks which may remain partially addressed or unaddresse

An illustrative matrix is produced below:

Absence of a defined procurement policy

encapsulating roles and responsibilities for

various activities

Absence of accountability for every decision

involving negotiation with vendors

Absence of KPIs for the procurement function

Absence of market information or market

information not being appropriately leveraged

Lower transparency in supplier selection process

Critical

High

Medium

High

High

Addressed

Partially addressed

Unaddressed

Partially addressed

Partially addressed

A critical analysis of the procurement risks can help in identifying the right strategy to address various risks that wil

also facilitate the optimum utilization of available resources for overall control and efficiency. One can conclude tha

there is ‘Low’ or ‘No’ visibility within the Decision-making process leading to accountability and transparency risks.

PROCUREMENT: Fraud RisksOf all the forms of white-collar crimes, so-called procurement, or contract fraud is probably the least visible and

most costly. That's largely because it's frequently a hidden by-product of seemingly legitimate transactions

often involving millions of rupees.

Procurement fraud includes, though not limited to, cost/labour mischarging, defective pricing, defective parts,

price fixing, bid rigging and product substitution.

Of all the areas mentioned, bid rigging is an area where due to least visibility, controls are at a

minimum level.

There are several other areas of risks within procurement function where there is a potential for fraud and

corruption: Gifts and benefits, collusion between staffers/organisation personnel function with suppliers, a non

genuine competition, unfair advantage to suppliers, circumventing thresholds, inadequate knowledge of market ornature of goods/services being procured, inappropriately issuing expressions of interest or requests to quote etc.

Identified RiskRisk

ClassificationRisk Treatment through

ERPs & Process Elements

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The prime most key challenge faced in maintaining internal controls within the procurement function pertains to the

buying decision. ERPs fail to address the complete decision-making process post release of Purchase Requisition to

 finally arriving on a decision to raise order on a particular vendor.What is currently being audited is the order which is the outcome of the final decision, but is there a trail available for 

 actions taken by purchasers? If no, then how do you determine whether the decision is the most optimum decision unde

the given circumstances?

To justify the buying decision, hard/soft copy of negotiations process like quotes etc retained by the purchase department.

Unfortunately it lacks credibility due to manual handling of supplier data and absence of visibility on actions of the buying

officers.

To bring desired transparency and dynamic transaction capability in the decision-making process, an organisation nereal time access to supplier/ supplier base located across the world to facilitate exchange of information with the supplieConsidering this, it is strongly recommended for organisations to adopt an appropriate balance of process and technoloto bring transparency and visibility in procurement function.

There is an urgent need to re-rate the sourcing risks, implement processes and new age systems which establish desirevisibility and transparency for all buying decisions to support your buying offers in arriving at an optimum buying decis

We follow a 4-step approach to perform a specialised review of procurement spend:

BDOs SUGGESTED APPROACH

TO MEET THE PROCUREMENT CHALLENGES

About BDO Consulting

International Presence & Capability

As a member of BDO International, BDO Consulting is able to deploy resources wherever needed, with accessto BDO Member Firms around the globe. Our professionals have successfully completed engagements utilisinresources from BDO International in various locations, including North America, South America, Europe, Asia

and other parts of the world.

BDO Consulting Pvt. Ltd. is the Indian Member Firm of BDO. BDO is the brand name for the BDO Internationalnetwork and for each of the BDO Member Firms.

BDO International is a worldwide network of public accounting firms, called BDO Member Firms. Each BDO MembeFirm is an independent legal entity in its own country. The network is coordinated by BDO Global Coordination B.V.incorporated in the Netherlands with its statutory seat in Eindhoven (trade register registration number 33205251)and with an office at Boulevard de la Woluwe 60, 1200 Brussels, Belgium, where the International Executive Office ilocated.

We work closely with you to understand your business issues that you currently face. Our approach allows us todeliver pragmatic and clear solutions to address your issues.

1 2 3

• Understand business

• Interview key process owners

• Review authorisation and

approvals configured in ERP

• Review procurement manuals

• Identify risks using BDO

normative process models

• Map controls to identified

risk with an objective to:

• Identify controls notadequately designed

• Control activities whichmay be eliminated

• Identify control activitieswith automation potential

Processunderstanding

Controlassessment

Perform data analytics

to assess:

• Impact of operational failuresof controls designed

• Efficiency opportunities

• Recommend leading practices

Submit controlassessment summary report

with observations andsuggested recommendations

procurement

4Transactionanalysis Reporting

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HUZEIFA UNWALANational Head - Risk AdvisoryServices

Direct +91 22 6672 9786

Mobile +91 98200 51936

huzeifa.unwala@bdoindia.co.in

CONTACT USIf you would like further information about this note

or our wide range of services, please contact:

BDO INTERNATIONAL – OUR OTHER RELATED PUBLICATIONS

To read more about our latest publications around the world on manufacturing,

visit our website www.bdoindia.co.in

VIJAY SACHDEVAPartner - Risk Advisory Services

Northern RegionDirect +91 11 4711 9911

Mobile +91 98109 07030

vijay.sachdeva@bdoindia.co.in

SUNIL BHADUPartner - Risk Advisory Services

Western RegionDirect +91 22 6672 9796

Mobile +91 98210 52931

sunil.bhadu@bdoindia.co.in

ANAND JHUNJHUNWALAPartner - Risk Advisory Services

Eastern RegionDirect +91 33 2229 8936

Mobile +91 98309 93305

anand.jhunjhunwala@bdoindia.co.in

SUNIL BIRLAPartner - Risk Advisory Services

Southern RegionDirect +91 80 6454 2545

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sunil.birla@bdoindia.co.in

SAKET MEHRAAssociate Director -Risk Advisory Services

Direct +91 11 4711 9905

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saket.mehra@bdoindia.co.in

BDO: ManufacturingOutlook 

December 2010

BDO: Manufacturing:60 second Survey 

March 2010

BDO: Changing shape of UK Manufacturing

 April 2010

Disclaimer:This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied

to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please co

BDO Consulting Pvt. Ltd. to discuss these matters in the context of your particular circumstances. BDO Consulting Pvt. Ltd., its partners, employees and agents do not acc

assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based

BDO Consulting Private Limited, a private limited company incorporated in India, is a member of BDO International Limited, a UK company limited by guarantee, and form

of the international BDO network of independent member firms.

BDO is the brand name for the BDO network and for each of the BDO Member Firms.

May 2011

For other useful procurement practices visit www.vend-x.com