Procurement is the process through which an organization buys the goods and services that it needs to carry out its functions. Although it involves purchasing, procurement is a more holistic process encompassing various functions. The entire procurement process typically spans the scope from identifying what needs to be acquired, selecting who to buy it from and how to go about it.Procurement is a part of a company’s strategy and feeds into it. Without the necessary input to create its services or products a firm’s operations would grind to a halt. As a process, it involves several steps which are collectively called the procure-to-pay cycle.
Steps Involved in Procurement
These are the stages comprising of a complete procure-to-pay cycle:
• Identifying items the organization needs.
• Authorizing of a request for purchase.
• Approving a request for purchase.
• Supplier identification.
• Making inquiries.
• Receiving the quotation.
• Selecting a vendor.
• Purchase Order acknowledgment.
• Advance notice of shipment.
• Receiving the goods.
• Invoice recording.
• 3-way match.
• Paying the supplier.
The exact nature and degree to which each step involves depend on the type of organization and the nature of its processes.
Finance and Procurement
The relationship between procurement and finance has been a contentious one with the main reason stemming from their functional difference. Finance focuses on efficient utilization of money and cost cutting is one of its core strategies to achieve that. Procurement, on the other hand, focuses on spending money to purchase goods and services.Despite the fundamental differences in their core functions and resulting priorities, procurement and finance can find some ways to be partners. These can include:
• Collaboration between teams from the two departments in risk management.
• Procurement aligning its targets to those of the finance department where possible. A mutual point of divergence will encourage working towards a shared vision.
• Regular face-to-face communication between procurement and finance teams to facilitate consistent sharing of information.
A procurement audit is an analysis of a company’s procurement process carried out to assess how well an organization’s purchasing framework functions. Its primary goal is to gauge the efficiency and accuracy of all processes involved in contracting vendors for supplies.
The Importance of Procurement Audit
The overarching importance of procurement audit in project management is to identify the weaknesses and strengths of the entire procurement process chain. It is typically carried out by a contracted procurement service provider chosen by the organization. Some reasons as to why it’s important to conduct a procurement audit include:
1. Fraud Detection and Prevention
A complete analysis of the various processes used in purchasing can identify loopholes that can be used to perpetrate fraud by dishonest workers. Regular audits ensure that these gaps are continuously being uncovered and plugged to minimize or eliminate fraud.
2. Enhanced Agility
Organizational processes tend to develop their traditions over time. This can lead to barriers within these processes arising that reduce the efficiency of the procurement process as a whole. An audit helps to infuse agility into the organization’s process making them nimble. Overall process efficiency increases as a result.
3. Increased Accountability
When procurement officers are aware that superiors will scrutinize the reports of an audit, they tend to be more accountable. Functions within the department will lay greater emphasis on selecting purchases based on proper indicators. Maverick spending of company resources reduces with the expectation of oversight. As a result, transparency increases and information on the procurement department’s spending pattern is more readily available. This makes it easier to identify potential cost reduction areas.
Procurement Audit Program
A procurement audit program is a framework that provides a distinct outline through which an audit takes place. Organizations adopt different approaches to reviewing due to the various needs they may have. There are however a few key procedures that a procurement audit program will focus on.
Procurement Audit Checklist
A procurement audit checklist is a set of items that an audit will seek to assess during evaluation.Key areas that specific items on the list should zero in are:
1. Vendor Assessment
Suppliers who pass scrutiny join an approved list that an organization can regularly refer to when the need arises. A review of the vendors on this list on a regular basis is necessary to ensure only the best suppliers are on record. Vendors who are approved should be assessed alongside the requirements to identify any that have failed to qualify since their last approval. Grade each listed supplier with their ability to deliver and review them in light of the company’s requirements. An audit will not only review the approved vendors but also the procedure used to approve them.
2. Purchase Approvals
A checklist critically looks at the company’s chain of command in authorizing purchases and receiving deliveries. Analysis of the dates and signatures for any orders placed takes place. The purchases made are gauged to verify their integrity, and any questionable ones flagged for investigation. A critical look at the procurement chain of command and how it functions helps improve the overall process and minimize fraud.
3. Quality Analysis
A continuous assessment of the quality of goods delivered by the vendor helps ensure there is consistency in its quality. Compare the processes used in receiving deliveries against any feedback on quality from customers and product faults that you discover. A well-executed analysis here will reveal a pattern that reflects on the ability of a vendor to maintain high-quality standards continuously.
4. Communication Assessment
Internal communications involved in the procurement process and external communication between suppliers and the firm need a regular checkup. Assess the timeliness and accuracy of this communication and how the procedures used affect it. Notes to your vendors or any updates communicating company policy changes should reach suppliers in time. Employees involved in the various procurement functions need a clear line to other and an open system that’s easy to audit.
Procurement plays a significant role in an organization’s strategy. It encompasses more than just a purchasing function and works best when complementing finance rather than opposing it. For it to work effectively regular audits by procurement management professionals ought to be carried out. A checklist that focuses on analyzing the suitability of the vendors, the quality of their deliveries, communication and the processes involved helps keep procurement agile.