This is a follow-up to, “Types of Procurement Compliance – Part 1” blog post. We asked in Part 1: “While ‘compliance’ is a favorite word in executive circles, 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.” In Part 1, we discussed compliance related to savings and price and the impact of changes in currency and inflation. In Part 2, we’ll discuss spend and operational compliance.
Spend compliance: A combination of supplier and/or contract compliance may be considered spend compliance by an organization. Spend compliance may be the percent of spend influenced by procurement through the use of the designated supplier and/or contract. Spend not influenced by procurement may be considered ‘rogue’ spend, if it is purchased from suppliers or contracts other than those set up by procurement for the required goods or services. If procurement hasn’t been involved in a certain area of purchases, for example purchases of raw materials for new product development, then this may be considered spend not under compliance. Instead, it is an area of opportunity for procurement to influence rather than an example of ‘rogue’ or ‘non-compliant’ purchases. The key is to have a clear definition of spend compliance that is understood and tracked consistently within the organization.
Supplier compliance: This type of compliance is a measure of the use of ‘designated’ suppliers for corporate purchases. From a procurement perspective, the ‘designated’ supplier is one that has been chosen after some involvement or approval from procurement and preferably has a contract with the organization for the required goods or services. If a supplier has been designated as the supplier of choice, for e.g. the company’s media agency, by the CMO (Chief Marketing Officer) but the contract was awarded with no involvement from procurement, do you consider this to be supplier compliance? Many of our clients would not consider this supplier compliance.
Contract compliance: Procurement executives face similar questions with contract compliance. This is similar to supplier compliance, except it measures the percent of spend being purchased through contracts set up with procurement’s involvement. There are several subtleties related to this type of compliance. While the supplier may be a contracted provider, is the supplier meant to be a provider of the specific items or services purchased? For example, company personnel may purchase both computer peripherals and paper from a contracted office supplies provider, but there may be a separate contracted provider of computer peripherals. In this example, the use of a limited, company-specific catalog may mitigate these ‘rogue’ purchases of computer peripherals from the office supplies provider instead of from the appropriate computer peripherals provider.
Contractual commitments: Operational compliance is related to the non-price commitments made within a contract. These may include performance metrics or SLAs that include on-time deliveries, measures of quality or safety, customer service satisfaction scores, etc. Typically, these are industry specific and supplier bonus or compensation may be tied to achieving or exceeding these metrics. Compliance measures the ability of the supplier to maintain operational levels at or above levels specified in a contract. Now, sustainability metrics are also being added to contracts and may be considered operational metrics to be measured for compliance. Performance is typically reviewed annually or quarterly depending on the strategic nature of the purchase or the supplier.
Codes of conduct: While similar to operational compliance, codes of conduct typically involve acceptance of a customer’s broad expectations of supplier behavior related to use of diversity suppliers, following local laws and regulations, maintaining acceptable work place labor, safety and environmental standards, etc. Companies may have a formal or informal method of obtaining acceptance through language in a contract, purchase order or a signed form. Review of the level of compliance is conducted through formal audits by company or third-party auditors.
Tracking spend and operational compliance requires a process and organization to record purchases and compare to commitments made by suppliers. In our experience, dedicated resources are needed to hold suppliers accountable, obtain required reports, and determine spend and operational compliance. How does your organization track these types of compliance?