21 July 2015
Public sector procurement is riddled with poor practices and mismanagement of the supply chain – at a cost to the public purse
The public sector has always been the subject of intense scrutiny and criticism from all sides on how to make best use of the public purse. Though there are many instances of good practice, it is always the failures resulting from bad practice that make the news and highlight procurement issues once again.
The NHS has been the latest to be scrutinised regarding its practices. According to the Carter review, up to £5 billion could be saved every year by getting better value from the huge number of products it buys, using medicines more effectively and making better use of staff.
Many organisations already understand the value good procurement can bring, but there is still much the public sector can do to minimise the number of headline stories. Scrutinising the supply chain is a start.
Supply chains are getting longer and more global in their nature. Sourcing from the other side of the world is often less costly and can offer more flexibility than sourcing locally. This need can only be understood through a thorough grasp of organisational and departmental strategy, as procurement strategy should follow closely behind.
Involving all key stakeholders makes sense. From departmental heads, throughout the organisational structure, getting the support of colleagues and line managers makes it likely procurement will be more cost efficient and more productive. A recent CIPS survey of supply chain managers found that a third of chief executives were disengaged with their supply chain. The 'Time to Take Stock' report highlighted the lack of focus placed on supply chains by board members, CEOs and shareholders, and how evidence of this lack of attention has resulted in the recent food chain disasters and factory collapses.
Procurement and supply chain management is predicated on finance and hard facts, but best practice also requires a thorough understanding of who your suppliers are and how to get the best out of the relationship. Worst case scenarios are a supplier not delivering essential services or goods, or discovering slavery or exploitative working conditions in the supply chain.
Many buyers may be confident they have this understanding, but this knowledge must stretch all the way along the supply chain – beyond first and second tier suppliers and to the very end – in order to prevent nasty surprises later on. Good communication, supplier audits and supportive working partnerships are all good approaches to best practice.
Risk does not always have a negative impact on an organisation. It can be a source of innovation and change for the better when creative solutions need to be found to address challenges. Risk is only a threat when it is unexpected and unmitigated.
Supply chain approaches such as outsourcing, low cost country sourcing and lean supply have exposed us to new risks. Using the four areas of risk management – risk recognition (identification of potential risk); risk analysis (probability of risk); risk assessment (likely impact); and risk mitigation (reducing impact) will give any procurement professional the skills and tools needed to look at risk clearly and comprehensively.
The collection and management of data is key to making informed decisions on commodity prices or manufacturing capacity of suppliers, competitor analysis and regional risk. In the ‘age of digitalisation’ this is likely to increase at an alarming rate. Understanding data, both its collection and use, gives the procurement professional a competitive edge.
Procurement departments can hold many millions of pounds in spending and doing it right can make huge savings and keep an organisation in the black. As CIPS calls for a licence for the profession to make good use of taxpayers’ money, for example, or to remove slavery or malpractice in supply chains, it soon becomes obvious that this is more than just ‘buying’. It is having the full range of competencies and skills, from understanding tendering processes to creating and managing contracts with suppliers.
The job of procurement is often allocated to lower levels in departments, for example where the contracts are managed. The focus is often on the call for competition to contract award rather than the whole procurement cycle, which includes pre-contract and contract/supplier management, and this is where more experienced and talented professionals can add their expertise.
Sustainability is no longer about green supply chains, but ensuring supply chains are moving and working effectively, and supplies get to their intended recipients. Sustainable procurement involves a range of social, economic, regulatory and environmental considerations. A good sustainable environment in public contracting offers improved efficiency, effectiveness and transparency, resulting in saved money, saved lives in the health sector, improved reputation, minimal waste and increased competency in the management of supply chains.
The London Organising Committee of the Olympic and Paralympic Games (LOCOG) drove a sustainable approach to procurement, saving £114 million in the process and revolutionised the way supply management is conducted for sports events.
According to 2012 UK Government figures, procurement fraud costs the taxpayer a staggering £2.3 billion each year. This figure is likely to be underdiscovered and under-reported.
Any professional worth their salt will conduct a detailed risk assessment of the likelihood of fraud. Fraudsters often plan their activities with great precision and will exploit any perceived weaknesses so all possible routes should be uncovered. Planned mitigation strategies are worthless if there is no strict defined ownership and responsibility for those plans in place. Each area of spend should be considered, highlighted or eliminated. The first line of traceability and responsibility will prevent fraudsters taking the very first step. A common type of fraud is the use of ‘ghost workers’ – departments are billed for work on projects that never happen. Often to save embarrassment or publicity, companies or departments will quietly remove the perpetrator, who can then go on to commit the fraud somewhere else – prevention is a better course
There are plenty of examples where central or local government does not exploit the volume of their buying power to make good use of the opportunity for savings. This approach can be compounded by ineffective governance structures, unrealistic targets, incomplete data, inadequate consultation with key stakeholders and unclear specifications. If all these elements are pulled together with a collaborative and knowledge-sharing approach, public sector procurement could be a leading light for all to follow.
David Noble is Group CEO at the Chartered Institute of Procurement and Supply (CIPS)