Case study. Risk reduction in indirect purchasing.

Risks in indirect purchasing. Brief characteristics of the project

Industry: FMCG

Project Objective: risk reduction and process optimisation in indirect purchasing

Areas: investment, maintenance, logistics, trade and brand marketing, customer service

Duration: 3 weeks

Number of people in the project: 3

Estimated results of the project

Savings

Savings potential for indirect purchases 20%

Risks

Safeguarding the company's interests through a new contract structure

Process

Implement 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.

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, counter-risks, purchasing process steps and supplier cooperation planning may be treated neglectfully. 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.

Investment department

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 if it is not available.
• 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.

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 to systematise and record staff expertise in the system. Currently, every employee has a view of the competence of suppliers.
• Defined principles for the formation of a multidisciplinary project team and responsibilities of the 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 archiving the orders in the Investment Book.
• Mandatory offer at least three suppliers where possible.

Marketing department

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.

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

Customer service

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.

Proposed solutions:

• Analysis of responsibility for purchases - e.g. internet access and landline 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 request 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

Logistics department

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 in contract negotiations.

Proposed solutions:

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