Michael Harris | Partner | Letsema Consulting | mail me |
Optimised procurement processes have the potential to refine supply chain management and resolve ongoing corruption challenges.
According to the 2021 Corruption Perception Index, South Africa ranks 44th out of 180 countries with corruption levels that have a severe impact on the integrity of all areas of public life.
A 2018 report by the Special Investigation Unit (SIU) estimates that government-specific corruption amounts to as much as R25-R30 billion of the annual government procurement budget. This amount excludes COVID-19 government expenditure, of which R14.8 billion out of a total of R138.8 billion is currently under SIU investigation. These numbers are cause for alarm and beg the question, how did the country get here?
Before we can begin to find an answer, it is first important to understand how public procurement works, as well as the factors that influence it.
What is public procurement?
Public procurement is defined as the purchase of goods and services by a government entity using contracts that tightly manage the relationship between the government and the private sector.
If a country’s procurement practices are efficient and reliable, public funds are effectively used to maintain, and build, essential infrastructure such as roads, schools and hospitals. If these practices are not tightly managed, the funds are redirected corruptly and impossible to trace.
In a South African context, procurement processes are often caught up in unnecessary complexity or convoluted procedures. Many tend to be long, complicated and prone to manipulations that are hard to detect, and influenced by a lack of transparency resulting in millions of Rands in public resources being used for personal gain.
Corruption and the squandering of public funds poses a difficult challenge. South Africa desperately needs effective procurement management processes if business as a whole is to remain competitive and economically sustainable. There are key factors that play a pivotal role in optimised supply chain procurement processes.
Cost savings
Cost savings are critical to optimising business procurement processes. Developing a savings methodology provides a transparent baseline and savings calculation while also identifying the bottom-up savings targets found within the business that are not driven by external market forces.
Developing a business case for the trajectory of goods or services that constitute a basket procurement spend also enables a good business case which private or public entities can use to model an optimised cost saving framework.
Continuous monitoring and evaluation of cost saving initiatives is necessary once frameworks are in place so that efficiencies can be optimised further based on performance.
Demand management
Demand management forms part of strategic sourcing and rests on a cyclical, three phase process, namely:
- Data analysis;
- demand review; and
- approval and execution.
Effective management entails looking at consumption and spending data in order to establish end-user requirements using typical metrics such as product type, available market opportunity, complexity, and inventory levels, among others.
The process of demand review focuses on understanding and consolidating revenue plans based on historic demand and establishing future procurement requirements which align with market conditions, supplier availability and operations. These can then be measured against forecast accuracy, inventory, margin and profitability.
In practice, demand management is an iterative process that should occur across all levels of the organisation and the review, update and feedback cycle frequency should be agile and fluid enough to evolve should process steps change.
The key benefits of demand management include:
- Making project spend and volume transparent and visible;
- reducing the number of contracts that are either expired or out of value;
- lowering, and in some cases eliminating, investment in obsolete inventory;
- improving the efficient supply of goods and delivery against customer requirements;
- identifying opportunities to consolidate spend by aligning expectations between all stakeholders; and
- increasing the accuracy of financial planning.
Resource capability and accountability
There are several ways resources can be used to achieve optimised procurement functions while still promoting accountability. This is a key step in the journey towards sustainable, ethical and capable procurement as it ensures all engagements are built on a foundation of ethics, service and results.
When identifying key staff vacancies across different sourcing environments it is crucial to find individuals or teams who have been assessed for their ethical stance and who understand the particular segments, their function in the business, and the best way to extract savings where possible. Once these various roles have been identified and the right people recruited, a set of objectives must be put in place which are aligned to both the broader business and the procurement strategy to drive operational efficiencies.
Completing a skills audit and gap analysis also allows a business to measure its efficacy and success. This identifies what skills exist in the procurement function and what skills are lacking. Once identified, a skills development plan must be established to bridge any gaps, leading to more efficient operations.
Procurement process cannot function in isolation. Integrated systems that provide transparency and entrench trust result in a healthier procurement ecosystem, and in turn, a healthier economy.
Prevention is always better than cure and while the risk of corruption can never be fully eliminated, robust controls can substantially turn the tide.
