What is a Procurement Audit?
Last updated: July 12, 2019
Where exactly is your money going in the office?
Direct expenditures like employee salaries, benefits, insurance and production costs are obvious answers. Organizations can cite these like their own company slogans, diving into their allocations as well as the structures and justifications for each.
But what about indirect expenditures, those ongoing expenses that might not be calculated into immediate labor or production costs? Who oversees these purchasing decisions — and how often are they reviewed?
Enter the indirect procurement audit. With the goal of implementing holistic visibility across your complete spend portfolios, this is a type of procurement audit pivotal for maximum profits but performed by few.
This article will walk you through procurement auditing procedures, explaining what makes an external indirect procurement audit such a valuable tool for the contemporary purchasing, supply chain or sourcing manager, plus how to establish one for your company's spend competitive edge.
Indirect procurement audits provide unprecedented visibility into your expenditures so you can better manage your entire indirect spend portfolio.
This category of costs can easily fall to the peripherals. Traditionally, indirect spend categories for businesses have included items such as:
- Office products and technology
- Professional services
- Lab supplies
- Janitorial, cleaning and sanitation products
- Electrical and safety gear
- Workplace furniture
- Paper, document management and shredding processes
- Company travel and transportation in non-production or service-related situations
- Maintenance, repair and operation (MRO) in non-production or service-reliant situations
When implemented successfully, procurement audits create strategic long-term cost savings for organizations. Those long-term savings don't happen overnight, though. Through incremental, tracked and measured recommendations, businesses trim their purchasing processes and procedures surrounding indirect cost categories like those listed above, all without disrupting their product or service deliverables.
The result is a procurement auditing process checklist that works as follows:
The average business dedicates over 50 percent of its annual purchases to indirect spend.
What's more, industry research indicates that most organizations rely on "dark purchasing", or ad-hoc ordering processes, to obtain indirect items (e.g., random decentralized ordering of paper for printers) - processes that circumnavigate any formal purchasing supply processes or teams.
Unorganized or unstrategized purchasing routines lead to common procurement challenges for organizations, regardless of industry. It's a primary objective of an external procurement audit to identify these process and protocol challenges, which include:
- Vague or incompliant contract terms or information
- Slow or rushed vendor lead times and cycles
- Poor indirect item inventory management
- Missed vendor rebates, credits and bulk discount opportunities
- Discounts and credits applied at the wrong due dates or on the wrong orders
- Invoice price discrepancies
- Poor vendor performance management
- Contractual indirect spend
Once redundancies, inconsistencies and procurement errors are identified, audits can launch into their proactive goals — trimming wasteful expenditures.
Seasoned auditors do this meticulously, reviewing months of contracts, invoices, line items and SKUs for key information into how, when and why spending takes place. They can identify far more optimal overall contract terms, as well as internal granular practices to better manage and use indirect office resources even after a supplier has been selected.
The best indirect procurement audits provide more than just cookie-cutter suggestions. They tailor cost-reduction recommendations to the exact organizations under review, merging the supply contracts and vendors used with actionable ideas for streamlining indirect expenses and then managing the materials once they arrive onsite.
It's critical for organizations to receive this kind of one-on-one attention. New indirect infrastructure, equipment and processes must reflect the culture and environment they exist in — otherwise, they risk becoming details employees might possibly forget or ignore.
XYZ, Inc. is a major cosmetics brand with several flagship research and development (R&D) and production facilities sprinkled nationwide. However, the organization has maintained the same network of vendors outfitting its lab supplies for years, letting each facility re-up its contracts without requesting or evaluating new proposals or researching indirect spend budgets compared to their competitors.
An indirect procurement audit grants XYZ, Inc. access to industry spend statistics as well as a history of direct vendor records. The findings of each reveal significant bulk discounts and order quantity credits not being capitalized on by XYZ's disparate facility ordering schedules. As a result of this audit, XYZ establishes a new, consolidated lab supply and distribution process managed by one centralized purchasing team — and saves thousands annually by doing so.
For more indirect external procurement process examples and success stories like this, see our case studies.
Indirect procurement audits contain numerous benefits for the organizations spearheading them, both in the short and long term.
A successful procurement audit will trim bloated, antiquated or otherwise unnecessary office spending. It does so creatively yet strategically, taking a microscope to internal and external variables alike.
The results are a new set of "business as usual" procurement practices across departments — and even entire offices — that support lean bottom lines, particularly on overhead expenditures once considered immutable.
Operational redundancies create chokepoints, frustrate employees and slow down the entire production cycle of whatever task is at hand. In addition, they can increase costs.
Take the organization that, for example, orders cleaning supplies from disparate vendors for all of its retail storefronts and offices. At a minimum, that company is likely losing out on bulk order discounts and similar customer credits — and lacking visibility over something as "simple" as the ordering of cleaning supplies.
Indirect spend audits are designed to identify problematic processes and practices like this one. Once organizations are aware of actions that are costly or irrelevant industry anomalies, they can leverage audit insights to create change models. At the very least, old and redundant activities get streamlined, appropriate requisition and purchasing steps are automated and the business implements a standardized purchasing procedure for all to use regardless of location.
Greater visibility into the overall supply chain means more strategic sourcing and vendor management partnerships. Organizations with a firm grasp on who they're working with, when and why assert control over their supply chain ecosystem in efficient and empowering ways.
This heightened control is also a risk management best practice. Administrative deficiencies or errors are far more likely to be spotted and then remediated internally during the audit rather than getting put into practice. In addition, such an effort can signal to your suppliers that you are paying attention to their practices. When they know your business is watching, they'll be more likely to cross their Ts and dot their Is in their contract negotiations and service executions.
Systematizing purchasing and requisition activities create clear boundaries that cut radical spend and rein in departments. These activities establish clear processes for ordering in-house supplies and create chains of command with appropriate escalation practices if questions do arise.
Such institutionalized protocol increases the spend control environment for your organization. In your processes, you'll note reductions in areas such as:
- Duplicate or erroneous payments
- Credits not taken
- Contract misbillings or misclassifications
- Compliance reviews
Procurement practices should be process dependent, not personnel dependent. Leveraging indirect spend audits creates repeatable templates backed by proven cost-savings and contract success metrics. Your organization can track and analyze procurement processes with a new focus, implementing structures such as:
- Approved supplier lists
- Master vendor reviews
- IT cost optimization principles
- A set of predetermined optimal contract terms and metrics
- Knowledge of competitive marketplace pricing plus annual pricing reviews
- Cataloged supplier information and price indexes
The results of a successful indirect spend procurement audit save organizations money. That money can be immediately reallocated and invested into value-generating operations, the ones traditionally associated with creating a brand's competitive edge.
The freedom to redirect funds in this manner is a goal for many businesses but a reality for few. In today's ever competitive production environments — particularly in industrial and manufacturing industries — every "little" liberated allocation goes a long way. Indirect procurement audits are powerful tools adding strategic fluidity into supply chain and vendor management, ensuring businesses are putting their hard-won money where it's most effective — and not wasting it where it isn't.
The process can vary depending on the organization and industry, but the audit process includes six primary steps, each essential to improving procurement operations.
Supplier selection is the procurement audit process's first and most crucial step. The audit team will review the selection criteria used to evaluate suppliers, ensure the supplier evaluation process is fair and transparent, and assess compliance with procurement policies and procedures.
Additionally, the audit team will evaluate risk management strategies during the supplier selection process and prepare a report summarizing the findings and recommendations. By reviewing supplier selection processes and documentation, the audit team can identify areas for improvement and help improve the overall effectiveness and efficiency of the procurement process.
Data gathering enables the audit team to assess the efficiency and effectiveness of the procurement process and identify areas that need improvement. The audit team will prepare an audit plan outlining the scope and objectives, methodology and data-gathering techniques to be used.
The team will collect data from various sources, such as procurement policies, contract documents, supplier proposals and supplier performance reports. The data is analyzed to identify issues and trends affecting the procurement process's efficiency and compliance with policies and procedures.
Once the audit is complete, a report is generated summarizing the findings and recommendations for improvement. This information helps to improve the procurement process, reduce costs and achieve better outcomes.
Audit analysis involves interpreting and reviewing the data collected during the audit to assess the effectiveness and efficiency of the procurement process. The audit team reviews the data collected, identifies issues and uses various techniques, such as statistical analysis, to analyze the data.
They evaluate compliance with procurement policies and procedures and develop recommendations for improvement. A report is prepared to summarize the findings and recommendations for improvement, which informs senior management and other stakeholders about the status of the procurement process and the issues identified.
The presentation of results is a crucial component of the procurement audit process. It involves communicating the audit findings to stakeholders, such as senior management, procurement staff and external auditors.
The process includes preparing a report summarizing the audit findings and recommendations, identifying the stakeholders and tailoring the presentation to their needs, determining the best format for the presentation, delivering the presentation using visual aids, allowing for a Q&A session, and taking follow-up actions based on the feedback received.
Overall, the presentation of results promotes transparency and accountability in the procurement process and facilitates the implementation of recommended improvements.
Reconciliation verifies that financial transactions related to procurement activities are properly recorded. The audit team reviews procurement data and compares it to other sources to identify discrepancies, then uses techniques to reconcile it and evaluate compliance with financial policies and procedures.
Based on the findings, recommendations for improvement are developed, and a report is prepared to summarize the findings and recommendations. Reconciliation helps ensure accurate financial records and compliance with policies and procedures, reduces the risk of fraud or errors, and achieves better financial outcomes.
On-going optimization and monitoring involve continuously evaluating and improving procurement practices over time. The process starts with a post-audit review to assess the effectiveness of the initial audit recommendations and identify ongoing risks. A monitoring plan is then developed and implemented, including periodic reviews of procurement policies, ongoing monitoring of procurement activities and regular reporting to stakeholders.
On-going optimization and monitoring promote better procurement outcomes, reduce the risk of fraud or errors, and ensure continuous evaluation and improvement of procurement practices.
Better yet, what if you could be in a place where you didn't have to ask this question at all?
Dryden has been in the business of indirect procurement audits for over a decade. And for over a decade, we've been presenting actionable procurement-improving checklists for clients across industries so they can exert greater control over their indirect spend — and build stronger bottom lines.
Our procurement audits focus on two core indirect spend areas, SKU-based and service-based, with a range of service suites, our procurement department has offerings tailored to each. Reach out to one of our representatives to learn more, and see how we make your bottom line our top priority today.