Risk reduction in indirect purchasing

Smart purchasing starts with risk reduction, not the cost table.

Basic information

Industry

FMCG

Project objective

Risk reduction and process optimisation in indirect purchasing

Area

Investment, maintenance, logistics, trade and brand marketing, customer service

Duration

Three weeks

Industry

FMCG

Project objective

Risk reduction and process optimisation in indirect purchasing

Area

Investment, maintenance, logistics, trade and brand marketing, customer service

Duration

Three weeks

Estimated results of the project

Savings

savings potential for intermediate purchases 20%

Risks

safeguarding the company's interests through a new contract structure

Process

implementing a transparent process for indirect expenditure

How are purchasing organisations evaluating leaders in their industries?

While describing the case study from the FMCG industry, we would also like to refer to other industries and companies that are continuously improving their processes and organisations. As part of the initiative Why Shopping? we spoke to the Purchasing Director, Mr. Jacek Rybka of the company Pratt&Whitney from the aviation industry. He highlighted the challenges in generating savings and the risks faced by companies with a complex, international organisation. He also spoke about the need to transform the purchasing function in Poland and increase accountability for business performance. Watch the entire speech in the video opposite.

How does this relate to our case study?

Transforming the purchasing function and taking responsibility for the business locally are also important points for another of our clients. The CFO of a German group from the FMCG industry, which also has production facilities in Poland, asked us to review purchasing processes in the area of indirect purchasing. During initial discussions, he pointed out that the company was growing steadily in Poland and had opened, among other things, a second production location and a distribution centre. The CFO emphasised that direct production purchasing is well organised, centralised and coordinated by the head office in Germany. The situation is different for indirect purchasing. Indirect purchasing in the Polish branch is carried out directly in the business units. As he noted himself, he sees several risks at first glance:

the company takes over production lines from other plants, sometimes without proper documentation and start-up support
the accounting department receives a large number of invoices for services for which no purchase orders have been created, and the documents are difficult to decode
the recent warehouse expansion showed a lack of coordination between the logistics and investment departments

As part of the agreed scope of the project, the Eveneum team was responsible for mapping value streams in the departments implementing purchasing individually. The result of the collaboration was a report illustrating risks and improvements in the area of indirect purchasing. Below are some facts from the project that we can share with you.

This is important

How did we approach this? - Investment department

Part 1

Areas for improvement

The archived documents do not fully illustrate the purchasing procedure. The selection of suppliers is done in meetings with the head of the department, there is no documentation of the decisions made
Contracts are created on the basis of the model provided by the supplier but after consultation with the law firm
No rules for formalising specifications. It is presented in various forms: email, drawing, photo, sample, conversation. The investment department is responsible for establishing the specification in the absence of it.
Demands arise in different areas: technical department manager, shift manager in production, maintenance foremen, ERP (warehouse system), external service company. Demands are communicated in various forms without an approval procedure

Part 2

Proposed solutions

Transfer of responsibility for purchase of electricity and utilities to the purchasing department. These are purely commercial purchases and do not need to be handled by the technical department. The time saved in the technical department would allow demands and specifications to be systematised
Creation of supplier competence grids in order to systematise and record staff expertise in the system. Currently, each employee has a view of the competence of suppliers
Defined principles for the formation of a multidisciplinary project team and responsibilities of members
Clarification of the translated German a generic classification for fixed assets to facilitate the classification of fixed assets in Poland.
Developing your own standard and mandatory model contract, containing a standard set of bid performance parameters and the archiving of orders in the Investment Book
Mandatory offer at least three suppliers where possible

This is important

How did we approach this? - Marketing department

Part 1

Areas for improvement

Model framework and one-off contracts - no obligation to return and destroy confidential material in the event of termination or expiry of the contract
Lack of clearly defined the hierarchy of documents in the legal structure (general terms and conditions, framework agreement, procurement)
In defining the specifications and requirements for quantitative service providers no measurable indicators

Part 2

Proposed solutions

Development general terms and conditions (e.g. boundary conditions - payment terms, warranty period, contractual penalties, intellectual property) which must be accepted by the supplier when submitting a tender
Creation of supplier competence matrix (e.g. printing) built on staff expertise
Creation of a formal delegation matrix for contracts and agreements
Implementation document archiving policy

This is important

How did we approach this? - Customer service

Part 1

Areas for improvement

Lack of a structured method of process documentation and decisions taken
Lack of consolidation and standardisation for GSM services
No mandatory model contract, containing a standard set of bid performance parameters

Part 2

Proposed solutions

Analysis of responsibility for purchases - e.g. internet access and fixed-line telephone services are purchased by the IT department, mobile phones by the DOK department
Ad-hoc purchases should also be made by purchasing platform in the form of a purchase enquiry or electronic auction
Work out general contractual conditions (e.g. boundary conditions - payment terms, guarantee period, contractual penalties, intellectual property) that the supplier must accept when submitting a bid

This is important

How did we approach this? - Logistics department

Part 1

Areas for improvement

Clarification of the principle of application road subsidies
Some of the orders are fulfilled outside the system and no traceability of purchases
Lack of clearly defined authority to issue orders
Discretionary use of a law firm when negotiating contracts

Part 2

Proposed solutions

Ad hoc services should be implemented using a purchasing platform
Introduction a procedure specifying the rules for the receipt of materials and services
Opportunity to consolidate spending and increase bargaining power for combining investment and operational purchases in warehouses

Key competences developed in the project

Reducing operational risk

Identification and elimination of points prone to error, abuse and uncontrolled purchasing decisions

Standardisation of purchasing processes

Align rules, roles and decision-making pathways to increase control and transparency

Control and transparency of expenditure

Building full visibility of indirect purchasing based on data, not declarations

Strengthening oversight and accountability

Clear assignment of roles and controls to reduce the risk of non-compliance and losses

What do market trends say?

For employees in departments such as marketing or maintenance, strictly purchasing processes will always be a secondary or even tertiary concern. Due to a lack of time, contract risks, purchasing process steps and supplier planning may be treated as secondary. In line with market trends and best practices, managements of companies that achieve a certain scale of business create a dedicated department or dedicate expert buyers responsible for indirect production purchasing. A dedicated purchasing person can develop his or her competences in specific product groups and coordinate the purchasing process to deliver savings and minimise risks in supply chain collaboration.

Details of a case study in a manufacturing company in the FMCG sector

As part of the project, we mapped value streams across departments. We proposed process and organisational changes to reduce risk, speed up processes and generate savings.