Types of Procurement Compliance – Part 1
Compliance is a favorite word in executive circles but what does it mean to Procurement leaders? It appears a lot of different things. We have come across several types and measures of compliance as we support our clients. Perhaps your organization is grappling with these and more. Procurement professionals typically get involved with two types of compliance: Procurement and Operational. Procurement compliance includes all procurement-related processes and associated compliance while operational compliance includes all others that procurement is not directly responsible for but may support at some level. This blog discusses some of the procurement-related compliance areas.
Savings Compliance: Savings usually receive significant attention as they are measured and reported extensively. But do procurement executives define savings compliance the same way? It’s typically a measure of realized or actual savings compared to “identified” or “estimated” savings (see GEP blog: it’s all about realized savings). Savings are “identified” at the end of a sourcing process and “realized” as purchases are made on the contract. Another comparison made is between realized and targeted savings. In this case, targeted savings are those that the procurement department has signed on to for the coming year.
While it is a key measure of category management and even procurement department effectiveness, realized savings can be significantly impacted by changes in the business environment. If purchases take a dip due to quality issues or budget cuts, should the identified savings estimates be adjusted? Conversely, if purchases rise due to increased sales (and resulting purchases of materials) or a special campaign that wasn’t planned earlier, should the category manager and procurement department receive the credit for higher savings through increased usage?
In general, identified savings aren’t adjusted but realized savings are recorded as they occur (as they are actual savings). On the other hand, targeted savings may be adjusted given business conditions as they are used to track business results – what have you seen in your organization?
Price and Discount Compliance: This refers to contracted unit or service price and discounts and includes multiple measures:
- Price compliance includes a review of contracted and billed line item prices within a catalog or a group of items or services, for example lab supplies.
- Discount compliance includes discounts off list prices e.g. from a logistics tariff or a manufacturer’s list price.
- Volume discount or rebate compliance upon reaching a certain buying threshold (e.g. a spend value or unit volumes that trigger a discount)
- Bonus payment compliance – this may be in the form of a check written at the start of a contract (initiation bonus) or an extension (renewal bonus).
Currency Impact: Savings across countries may have to be converted at the time of reporting. This may impact savings due to currency fluctuations. Some clients maintain prior year currency rates to neutralize savings impact; however when analyzing the company results in foreigner countries this measure is only effective on a minimum 3 to 5-year horizon. Picking a shorter period outlook for performance analysis can skew the overall results. The difficulty is even worse to compensate foreign executives since their bonus period is usually counted annually and not under a longer timeframe. In this case, should the Company exclude the currency impact?
Inflation Impact: Results can also be impacted by inflation. In some countries in Latin America for instance, companies have to deal with official inflation, posted by the government solely for handling internal interest rates, and the non-official inflation, usually experienced by real price increases observed in the market. In this situation, many companies do not have effective measures to control their suppliers and respective unexpected increases on the acquisition prices. In addition, many suppliers do not honor their clauses and contracts signed, forcing price increases as the only way to maintain profitability and to sustain the whole supply chain. In this sense, the lack of contract compliance cannot be forced and legal disputes can lead companies to a huge loss due to potential supply shortage and sales rupture.
Tracking price and savings compliance requires a process and organization to record purchases and compare to commitments made in a contract. In our experience, dedicated resources are needed to hold suppliers accountable, obtain required reports and determine price and savings compliance.
How does your organization track these contractual commitments? Tell us more about your experience with compliance in the Procurement space.
CPOs and CFOs in any enterprise are interested in tracking identified potential savings against realized savings. GEP specializes in providing tailor-made dashboards for client-specific spend categories and procurement processes. Learn more about GEP’s savings and compliance tracking solutions.