World Class Operational Procurement: What is compliant spend?

“Typically this is just the beginning of
the internal processes to set up the operational aspects of the
contract to enable the agreed goods and services to be procured.
Depending on the contracted commodity, this will usually require system
development, some change management and various other processes to be
put in place”, Peter Alkema, Head of Purchase to Pay at ABSA told SmartProcurement. Generally speaking, after contract signature, a company
will be at the beginning of its “Purchase to Pay” value chain, the
exact definition of which differs between industries, but there are
broadly accepted ways in which this value chain operates.

Through this series, we will cover key Purchase to Pay (PTP) topics that comprise an “Operational Procurement 101” manual:

The need to drive compliant spend in an organisation is the fundamental rationale behind an efficient PTP process. Unless every cent of 3rd party spend can be accounted for in the right way with the right supplier, you are losing money. If the operational terms and conditions of the contract can be put in place through proper PTP purchasing, then the hard work and benefits of excellent sourcing can flow downstream to the rest of the organisation. There are two dimensions to compliant spend: channel and supplier. Channel compliance defines the authorised processes in which a company spends its money, and supplier compliance defines the framework for approving with which vendors that money can be spent.

Supplier compliance should be no more complicated than simply the list of those suppliers for which there are valid contracts in place. There may be levels of supplier compliance, such as preferred suppliers or operational and strategic suppliers, but for the purposes of this discussion, if an invoice is received from a supplier that does not have a contract in place, then the payment on that invoice is supplier non-compliant. Defining channel compliance is less simple, mainly because of the operational limitations within some companies. The most preferable form of channel compliant spend is where a purchase order (PO) precedes delivery and payment. This PO could have been automatically generated after an approval workflow, following the submission of a basket of goods and / or services by a user of the company’s procurement system. Agreed channels for spend could also be purchasing cards, electronic invoicing and automated PO / invoice exchange mechanisms. These will be dealt with in subsequent articles, but for the purposes of this discussion, channel non-compliant spend is generally non-purchase order, or non-contract-driven spend.

Rigorous analysis of a company’s spend patterns in the dimensions of channel and supplier compliance informs the operational procurement strategies that should be in place. In the example above, each bubble represents a business unit’s spend for a given period where the size of the bubbles represents the number of transactions in a given period for which the two axes measure the amount of that spend. The degree of non-compliance in each dimension can quickly be ascertained to evaluate the quality of PTP in the organisation. Consider business units W, X, Y and Z – the most delinquent is X, being both supplier and channel non-compliant. A high number of transactions (large bubble) will point to patterns of spend that are systemically and consistently non-compliant (though probably low value), while low numbers indicate less repetitive, and more once-off, random examples of spend behaviour (usually higher value). Y is fully compliant, and the operational procurement processes are working well in this business unit. The hand-off between the sourcing effort and the PTP process is said to be optimal.

W is spending money with the right suppliers, but in the wrong way. Typical causes of this are a lack of operational discipline in the day-to-day purchasing behaviours of buyers in that area. Lack of training on procurement systems is generally cited as the main reason for this trend. Business Unit Z’s spend pattern will typically be a low number of transactions, since for spend to be channel-compliant it would have to go through an approval process, for which it should be assumed that the supplier compliance would be checked. However, there can be cases where the supplier database on a system still has active vendors that do not have contracts in place. All three non-compliant quadrants of the spend cube given above for this company requires very specific correctional action, which, in turn, will require involvement by all stakeholders.

An equally important dimension to the spend analysis above is that of commodity, which is often excluded for clarity. There is usually a strong correlation between supplier and commodity, so that this generally does not obscure the data significantly and most commodity-specific spend patterns can be derived from the supplier-compliance data. Furthermore, BEE classification of suppliers could be either another level of supplier compliance, or a fully fledged factor for analysis. The last article in this series deals specifically with Management Information, but as in this case, this will be a very prominent and topical issue in most other articles. Ensuring consistent definitions of compliance and the approaches to analysing spend in light of the above is one of the first and most important jobs of the operational procurement manager.