5 Basic Procurement Problems: How to Reduce Inefficiency and Fraud 

by Natia G

The objective of every single organization is to design internal systems that run processes smoothly, effectively and transparently. Procurement system is crucial part of internal systems that has strategic role for running the business efficiently. Systems are managed by human resource, which retains some level of risk. Therefore, managing human resource and internal systems are interrelated which leads to the necessity of efficient internal policies on processes and proceduresProcurement is strategic unit of every business and building proper systems will lead to optimization of business processes, costs, reduced risks of fraud, etc. So what are common mistakes and problems in procurement that has to be considered to avoid inefficient processes?

     1. Human-Error and Fraud Related Problems

Imagine a small company with no or limited functional software that creates paperwork and high level of workload that human has to do. You probably agree that such companies are against risk of mismanaging procurement processes, including poor quality of maintaining records, poor management of supplier payments, poor information management and cost analysis, etc. If some tasks are omitted or employee commits a fraud then there is a risk that relationships with suppliers might be damaged, or management cannot make correct decisions based on statistical information and so on. Even big companies are usually facing such problems, but if a one has a sound internal control systems, such risks are reduced. What can we do to reduce human-error or fraud?

a- Segregation of Duties – the more people are involved in process, the less is the risk that processes might be mismanaged due to human error or fraud, although the number of employees should be adequate to avoid waste of human resources and increased time per each transaction. Generally, for bigger companies, it is better to have several Purchasing Managers with different procurement directions, Procurement Assistants for managing paperwork and settling payments, Procurement Analyst for analyzing costs and benefits, Tender Managers and certainly, Head of the Procurement Unit.

b- Software for Receiving Proposals – especially during tenders, to make the process transparent and to avoid bribery, it is better to use internal control systems, like Tender Software for managing the proposals, requesting discounts, communicating with suppliers, summarizing the offers and results, etc.

c- Rotation of Employees – when a company has several purchasing managers with particular procurement directions, it is desirable to rotate them on different directions to avoid familiarity risks, which encounters ordering with same supplier due to long standing relationships.

2. Staff Qualification Update

Staff Qualification Update is usually necessary for all kinds of professions, but in procurement, besides the common skills, like arithmetical, software, negotiation, problem solving skills, etc., it is vital that Procurement Professionals should have different types of skills and knowledge that relates to particular categories and should be updated along with technologies, laws and regulations, market competition, etc. If the company or the employee doesn’t take care of advancing their skills in this direction, their knowledge might be outdated, leading to ineffective procurement, increased costs, lack of information and proper analysis.

3. Procurement Processes and Procedures

Many organizations are adopting procurement processes and procedures from mother companies or competitor companies, or even from best practices, although not always it can be a successful decision, as your organizational chart and hierarchy might be fundamentally different from your competitor or from your mother company, or you might have different team consistency with different task delegations. Procedures are the most crucial part of the organization to operate effectively and it should be implemented individually for every organization. We cannot just copy paste other companies’ processes only because they seem to be successful, it might not work for us.

Processes should be determined based on allocated human resources, delegation of duties, as well as financial resources, internal control systems, software, etc. Procedures should be updated periodically based on changes in organization or improving inefficiencies due to experience. It is very common for procurement professionals to have communication problems with other departments due to lack of procedures. Mostly many procurements are ineffective due to this reason. The best solution for solving communication-related problems are well-defined procurement rules and guidelines and proper sanctions if the procedures are breached.

4. Software Problems 

Procurement Professionals have to manage the costs of the company, transparency of the processes, transaction time and records. Accordingly, to make all these processes effective, company must adopt a software to have a good basis for cost-benefit analysis, budgetary controls, full information for good decision-making, reduced risk of fraud, etc. In 21st century, absence of procurement software leads to mismanagement, increased fraud and lack of analysis, therefore it is essential to implement a system that gathers all information and works as a tool for managing processes.

5. Urgent Procurement Requests – not a surprise for any Procurement Professional. Mostly, other departments do not realize the importance of organized procurement. If the initiator department does not deliver request reasonable time earlier, the quality of procurement becomes very poor as procurement professionals do not have enough time to go through details and search for proper suppliers, or due to rushed procurement, they might order something different. Another problem may be poor description of item provided in the request due to the rush. Initiator departments should have a clear action plan when they are preparing a budget, accordingly this budget should be shared with procurement department for planning procurement for the year. If the company has good procedures that reduces communication problems, it must not face rushed procurement problems, if something unforeseeable does not come up. This will also lead to less quality problems of received goods/services and higher level of internal customer satisfaction.

Procurement deals with many other problems as well, although if a company builds a system that solves above mentioned basic problems, it will be able to have good control over the processes, leading to increased transparency, reduced costs, reduced human-errors and fraud, high quality information and everything else that helps the company to achieve better results.

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