Procurement Policy Best Practices: Benchmarking for Improvement

Larry Berglund, SCMP, MBA, FSCMA

Author | Good Planets are Hard to Buy  Principal | Presentations Plus Training and Consulting Inc.

Admittedly, procurement policies may not sound exciting but they are critical to drive value in any organization. Policies are the means used by the organization to convey their values and aspirations to stakeholders and staff.

Policies need to be revised and should be seen as a “living document.” Necessity to update can be driven by legislation, leadership principles, community values, international agreements, or technical advancements. One of the key responsibilities of senior management is to update policies and ensure practices are aligned. This could refer to ethical values, environment considerations, total cost of ownership, local sourcing, or quality of materials on any number of goods or service which are required.

There are many common factors which can undermine the intended purposes of policies. Whenever a policy does not meet the operational or administrative needs of a department, decisions will be made based on good intentions which may compromise the organization’s interests. Scheduling regular policy reviews and updating bid and / or contract templates mitigates these occurrences.

In most instances where repercussions for unauthorized deviation from policy are not embedded, staff may take liberties with the policy. People like to make decisions which demonstrate their resourcefulness or innovation. For the most part it works – however, allowing decisions to be made outside of policy condones the practice and encourages similar behaviours. Rewarding deviance always invites an element of risk.

Tying procurement performance to measurable outcomes is one of the tools organizations use to assess how effectively policies are meeting stakeholder needs. Matching metrics to the practices which arise from a policy is an important part of organizational strategy. If you can measure it you can manage it. And certainly what gets measured with a bonus gets managed really well!

Ensuring vendor performance assessment is formalized in policy and implemented in practice are keys to ensuring and demonstrating value for money. The absence of a requirement for vendor performance evaluations as a part of contract management is one of the more common deficiencies in many organizational policies. This is especially relevant where spending authority is decentralized. Anecdotal information is inadequate to provide feedback to a vendor; and “no news is good news” is not a basis for good contract management. Vendor performance should be a part of comprehensive procurement policy, be evident in contractual agreements, and be well documented by contract managers.

Quality can be specified and measured against engineering-based or internationally recognized standards. Vendor performance on service contracts is where leading organizations are making advancements. Many companies are using past performance as an indicator of future performance during the proposal evaluation process.

Areas such as social and economic development are gaining traction in strategic policy development. Front line staff who are motivated largely by budget limits, need clear policy language in order for them to make an informed decision as to which product or service meets the organization’s definition of value.

Benchmarking between divisions of an industrial company or between various municipalities or health care operations is often done on financial factors. This is certainly a reasonable step to take and determining what accounts for the differences in the financial variance should follow. Financial differences are often linked to the definition of value adopted by a specific organization. An example could be that Org A pays .05% more on its COGS than Org B due to a policy by the latter of only sourcing conflict-free minerals. Therefore policy clauses which address non-financial criteria do affect the financial outcomes.

Policies which support the FIAT principles (fairness, integrity, accountability, transparency) contribute to vendor reassurance that their responses to competitive bid opportunities will be assessed objectively. Consistently using policy to affect practice leads to competitive tension which is good for all players in any market sector. Conversely, where a policy implies a strong commitment to non-financial values yet evaluations are skewed to favour financial interests, this detracts from credibility of the process and may diminish the level of competitive tension.

Policies represent the values and ultimately the brand built by the organization, and help to ensure that decisions are not made arbitrarily or based upon the personal interests or values of an individual. Policies are not platitudes nor should they be seen as ultimatums. Effective policies provide guidance and good governance across an organization to contribute to its success and to receiving value for money.

Wondering how your organization stacks up with its procurement policy? Join us online October 24 for an interactive eSeminar that explores Procurement Policy Best Practices: Benchmarking for Improvement.

Larry has been in the supply chain management field as an author, manager, business trainer, academia, and consultant for many years. Larry has worked in both the private and public sectors. Recently he has been co-facilitating NECI eSeminars, classroom sessions, and online modules. His new book, Good Planets are Hard to Buy, was released in the fall of 2015.


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