Dynamic Procurement Audit

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Dynamic Procurement Audit

The ultimate objective of a Dynamic Procurement Audit is to enable better, quicker and higher profit decision making that will benefit the organisation’s customers.

A Dynamic Procurement Audit or perhaps if you prefer to call it a Procurement Assessment or ‘Health Check’ is a necessary step to ensure that the procurement function remains efficient and effective – and that the function of ‘Procurement’ proactively add value to the entire organisation as well as its customers by harnessing the capabilities of its supplier base.

This is best performed via an independent assessment, or third party in order to provide a non-skewed view of the Procurement Function and its cross-functional dependencies.

What if a Procurement Audit is not performed regularly?

“Similar to people having annual health checks, the results could end up being fine or something else could be discovered that could trigger a chain of events much harder to resolve if left unattended. And as we all know, the earliest this ‘something else’ can be discovered the better and are our chances to resolve it – with lots less troubles.”

Everyday examples and other analogies are many, fix a small leak in the roof before rots and mould takes over, change your car oil before your engine breaks down so on and so forth.

Therefore, why shouldn’t we treat the procurement function in the same way and give it the attention it deserves, after all, good procurement is a major contributor to an organisation’s profit.

Like in all things, we don’t know what we don’t know, and although all seem to appear fine on the surface there is always room for improvement. An amateur athlete may be able to run a marathon by running a few days a week, but a professional athlete will also address nutrition, breathing and running techniques, stretching, recovery training sessions etc.

So if an organisation is to move from an Amateur to a Professional state in order to become the competitor to beat, it becomes important and necessary to stay on the front foot and be open to knowing that we don’t know – the first step to true intellectual humility.

The recent economic meltdown due to COVID-19 is another example as to why regular Procurement Audits are extremely important. What if you could link you market demand, with your product and services, their profitability, and quickly address how to best maximise an organisation profit by tuning the attention of your procurement activities to the most profitable and less risky products/services, suppliers, and customers? And you might actually be more profitable by removing the ‘noise’ in products, services, and processes.

Now, we are moving past the more simplistic Procurement Audits (e.g. how many suppliers, how many contracts, what is being spent etc) and replacing it with a Dynamic Procurement Audit that ultimately allows to monitor the market pulse, the organisational internal pulse with its many costs and constraints (people, process, IT, risks), and the strength and weaknesses pulses of the suppliers base and logistic framework.

Dynamic Procurement Audit Definition

“…The rationale of a Dynamic Procurement Audit is to interlink the constant change activities of demand and supply, their processes, understanding the revenue triggers and how these can be proactively managed across the organisation variables which contribute to an organisation strengths and weaknesses. And maximise the value suppliers can bring in order to solidify and proactively control an organisation profit margin — and know-how.”

Christophe Barriere-Varju

What is a Dynamic Procurement Audit?

A Dynamic Procurement Audit is a review whose aims are to determine the effectiveness and efficiency of the procurement process from Strategy to Execution, to ensure that the Procurement Function is set up in the most optimal way to (a) support the business requirements, (b) ensure that consumer needs are met, and (c) has a supportive & collaborative supplier base.

The reasons / benefits of a Dynamic Procurement Audits are to place and review the internal procurement function and their interlinks from customers to suppliers in order to improve operations and adopt an dynamic improvement mentality within the business that fosters positive attitude, new ideas, and stimulates progress and ongoing improvement.

Dynamic Procurement Audit acts as a catalyst to provide assurance that the framework that supports procurement and its contracting activities is appropriate, comprehensive and effective. It also ensures that procurement and collaborative contracting activities comply with policies and procedures for the benefit of the entire organisation.

Being able to assign a ‘profitability’ pulse to products and service will achieve leaps and bounds to solidify revenues and maximise profits in periods of uncertainty.

And finally, how do you audit a procurement function? By reviewing all processes, skills, enabling technologies, costs and risk elements that come into contact with procurement to ensure of not only compliance but also of procurement readiness to respond rapidly to market needs and economic situations.

How often is a Dynamic Procurement Audit necessary?

The procurement function should positively contribute to the performance of the other functions within the organisation, be a major contributor to an organisation profit, and be responsive to the market conditions on both the Demand and Supply side.

To achieve the above it is critical to have a clear understanding and data to understand cost and spend behavior, drive sustainable savings, be proactively and collaboratively engaged with the wider organisation, ensure that value is consistently achieved on an ongoing manner through category management, contract management, and supplier relationship management performance frameworks, in order to drive optimal clients and consumer outcomes.

We recommend a major Dynamic Procurement Audit every 3-5 years depending on your industry, its level of competition, the complexity and reach of your procurement function, and internal employees turnover —  followed by an annual check aimed at fine-tuning some of the collaborative sub-functions of procurement as listed in the diagram below.

Note that the sub-functions listed above are not exhaustive and will differ based on the industry and level of procurement proficiency within your organisation.

How to Start a Dynamic Procurement Audit?

There are a few approaches an organisation can adopt to undertake a Dynamic Procurement Audit. First it is important to define the Procurement Audit Objectives which in turns will dictate the Audit Scope.

Once the Dynamic Procurement Audit Objectives have been documented and agreed, the first step is to begin an Initial and Light Audit Review of all the procurement sub-functions in order to identify and properly scope time, budget and resources required.

We recognise that not all organisations are the same or have the same internal capabilities, and enabling technologies that will allow data mining and analysis. So it is important to review all the sub-functions in order to identify them and scope the work accordingly.

Once the Initial and Light Audit Review has been completed and documented the two options are either a Complete Dynamic Procurement Audit or Partial Dynamic Procurement Audit(s) focusing on key sub-functions in sequential orders.

Each approach has its merit and similar to the Athlete example above wanting to train for a marathon and be in the best possible shape come D-Day, the same is true for an organisation. By combining all the training elements as part of a holistic training priogram, the performance of the Athlete will be at its best. Focusing on sub-elements will be less optimal.

It is important however to recognise the budget requirements may be prohibitive to a Complete Dynamic Procurement Audit and an organisation may instead focus on areas that may offer quick wins and ROI in order to create a self-funding model based on identified and/or banked savings. The Initial Audit Overview shall identify, rank and document those prioritised areas with a specific implementation plan.

Whilst we suggest a complete audit of the procurement function if your budget allows, a review by sub-function(s) is often preferred for quick ROI.

Dynamic Procurement Audit Score

The old adage says “you can’t manage what you don’t measure” — we also say that you “can’t measure if you don’t know what to manage (e.g. variables).”

In the case of Dynamic Procurement Audits, the intent is to define those variables that are critical to an organisation’s profitability — similar to a multiple unknown equation.

By understanding each variable and how they interact with one another — only then management will be able to proactively manage revenue, cost, and profitability of an organisation and fully understand what trigger ‘should’ and ‘could’ be pulled in times of economic downturn or growth.

Finally, by assigning a Performance Management Framework and independent scores to each variable as an outcome of a Dynamic Procurement Audit — in this case with Procurement at its centre — it will act as a benchmark to improve from.

Related Articles:
Guide to Developing a Procurement Strategy
Why Procurement Processes are Important

If you liked this article, feel free to share it with your colleagues or contact us for further information on performing a Dynamic Procurement Audit within your organisation.

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