Internal controls: by the buy

with KPMG

In association with KPMG

Procurement has historically been a process that few people know much about,
and even fewer understand. Worse still, company boards have rarely had to focus
so heavily on this aspect of the business at a strategic level.

But a series of events and economic circumstances means procurement is, or at
least should be, a boardroom topic, and one which the finance director will tout
as the best way forward.

The reality is, most companies are still failing to unlock the value in their
supply chains, warn experts, with companies losing millions to wasted processes,
duplication and poor research. ‘Procurement can provide an excellent opportunity
to unlock tangible value in many organisations. It never ceases to amaze me how
many organisations have failed to address this opportunity – much of which can
be realised within a relatively short timeframe,’ says Bill O’Reilly, head of
procurement at KPMG.

Experts say that FDs’ lack of procurement knowledge means they are not doing
enough to extract value from their procurement strategy – for example, by
improving efficiency and reducing costs. ‘FDs can play a leading role in
realising this potential, since many are responsible for the procurement
function,’ O’Reilly says. Even when they aren’t directly responsible, FDs should
be challenging its performance. It is not unusual to identify opportunities to
be able to reduce buy-in costs by up to 40%.

With most companies continuing to ‘fail to unlock the value in procurement’,
O’Reilly warns that many will lose their competitive edge in the increasingly
tough economic environment, unless they review their sourcing methods and

An insurance company KPMG recently
worked with to overhaul its procurement process has already saved £5m in the
first 12 months since a new strategy was put in place. Over the next three
years, the company hopes to make cost savings of £15m a year.

The impetus for businesses to review their procurement strategies is
three-fold. The marketplace for almost all goods is now global, so strategies
should be global. Price and quality are vital to the equation, especially for
retailers and manufacturers. In a tightly knit world economy, business is much
tougher, meaning the procurement department should always be on the lookout for
better deals. Lastly, software and technology solutions for procurement are now
available to take the process to a more sophisticated level.

Increased competition means FDs have to turn to their procurement teams to
cut costs. Since most departments consist of just one specialist, reducing
headcount isn’t a solution, but changing the way the department works does offer
the possibility for savings.

With between 40% and 75% of costs to organisations (as much as 75% in
manufacturing) relating to the purchase of goods and services, boards should
certainly be probing the possibilities for change.

Estimates of cost savings should serve to concentrate the minds of most.
Experts suggest that businesses can reduce indirect operating costs by 15%, and
even as much as 25% – the exact amount depends on the point at which they start
to review their procurement.

Companies with a dual listing in the US have had to review their procurement
process because of Sarbanes-Oxley legislation. Section 404 requires complete
standardisation and full documentation of all aspects of the procurement
process. Although time-consuming and arduous, the process lends itself to
improved control, transparency and accountability because it offers visibility
and an audit trail.

‘Sarbanes-Oxley requires an organisation to understand where it has material
contracts and who they are with. It must be easy to see that information, and
someone must own it,’ says Paul Bakstad, senior manager in business advisory
services at Ernst & Young.

Until Sarbox came along, many businesses didn’t understand, let alone know
of, all the material contracts they had around the world with different service
providers, Bakstad says. Once a business has this information at its fingertips
it can conduct a ‘spend analysis’ to see to whom, and on what, the budget is
spent. Although a very basic exercise, and one which many non-business people
would assume organisations already had in place, experts are repeatedly
surprised at how little is understood about the supply chain.

Just giving staff information on previous negotiations, bidding processes and
prices brings benefits. ‘There is real value in understanding your supply chain
so you can get better judgements in contract negotiations and de-risk the
process,’ says Bakstad.

The possibility of maverick purchases, Bakstad says, can almost be wiped out
of the process because you know exactly what your money is doing and where. The
result, he says, is low prices, less risky vendors or purchases, compliance and

On the back of the
process, many businesses are looking to place the transactional part of
procurement in a shared service centre. O’Reilly advises businesses against
making any decision before they understand what the costs relate to, whether
they are core or non-core, and differentiate between the transactional and core
aspects of procurement.

KPMG foresees a rise in the number of companies adding aspects of procurement
to a shared service centre. ‘There is an increasing trend towards the
transactional elements of procurement being taken into shared service centres.
If this transfer of process is undertaken successfully it can not only deliver
process-related cost savings, but also improve the quality of spend information
available for decision-making,’ O’Reilly says.

Experts argue that now is the time, whatever your current situation, to
review procurement and supply chain processes. There are, however, more
auspicious times than others. For example, if a company’s sales are slipping,
procurement changes could help.

Ethical supply chains are hip. Everyone’s doing it – from household names
such as Marks & Spencer to Cadbury Schweppes, which bought organic chocolate
brand Green & Blacks last year.

Since the reputation and profits of multinational companies such as Nike took
a nose dive following the discovery that its suppliers’ working practices in
South-East Asia were dubious, companies have begun, albeit slowly, to pay more
attention to their supply chains.

When companies review their sourcing strategies, the initial goal isn’t
always to go ethical, but businesses are realising that ethical procurement in
the long term can cut costs by avoiding risk. Marks & Spencer is a good
example of how to turn around a beleaguered business by applying clear supply
chain principles to a fusty old business, viewed as out of touch with the
British public.

A change in business structure due to a merger or acquisition can also be a
useful trigger and perfect opportunity to review procurement. The high street
chemist Boots, which merged to become Alliance Boots in July, is another company
that has been on a ‘journey of enlightenment’ with respect to its procurement
process, centralising stock sorting, which has already delivered savings in
labour and stockholding, according to the company.

Alliance Boots plans to ‘further centralise operations to deliver greater
efficiency’ through the development of a centralised, automated order-picking
warehouse in Nottingham. With the application of new and proven supply chain
technology, the company will also replace 17 existing regional warehouses with a
similar number of simpler cross-docking facilities.

Outsourcing is another possibility, but it must be done for reasons of saving
money and not avoiding the task in hand. ‘Some organisations have sought to
realise this opportunity by outsourcing the function. However, this decision
should only be taken after careful consideration and evaluation of all options.
Otherwise, there is a risk that significant potential value could be lost,’
O’Reilly says.

Procurement strategies should be at the top of the boardroom agenda today,
with board members understanding the intricacies of the supply chain; in other
words, where the money is going, to whom and what the risks are. By knowing
this, companies are already adding value. Whether directors are astute enough to
pick up the gauntlet on this matter remains to be seen.


Marks & Spencer and Sainsbury are sending senior managers on a training
course that aims to teach mainstream business leaders about the ethics of
product sourcing.

The Ethical Trading
(ETI), an organisation comprising trade unions, companies and
non-government organisations, has put together the course in a bid to improve
supply chain relations. A total of 36 companies are already enrolled in the
scheme, aimed at encouraging UK companies to have better relations with primary

Capitalising on the growing public awareness of fair trade issues, the ETI
course offers practical advice and training for retailers wishing to change
their sourcing practices. With the food industry coming under pressure to
recognise their responsibilities in sourcing products, the opportunity to learn
more about sourcing is timely for the industry.

The ETI was formed to promote the implementation of corporate codes of
practice in supply chain working conditions. It requires all corporate members
to submit annual progress reports on their code implementation activities. These
reports show that significant activity has taken place in this area, and that
members’ suppliers are making concrete improvements to labour practices. It is
funded primarily by membership fees (about 60%of the funding base).The remainder
comes from a grant from the Department for International Development. Corporate
members include M&S, Boots, Chiquita International Brands, Gap, Levi
Strauss, Mothercare, Typhoo Tea and WHSmith.

For a full list of members, go to

Related reading