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 audit 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.
The Objectives of a Procurement Audit
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:
Janitorial, cleaning and sanitation products
Electrical and safety gear
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 processes and procedures surrounding indirect cost categories like those listed above, all without disrupting their product or service deliverables.
The result is a procurement audit checklist process that works as follows:
1. Identify a Business' Exact Procurement Challenges
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
2. Reduce Costs in 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.
3. Create Customized Processes and Procedures
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.
Example of This Type of External Procurement Audit in Action
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 examples and success stories like this, see our case studies.
Procurement Audit Process
While the indirect procurement audit procedures will vary depending on the organization and industry, it's generally made up of four primary stages:
- Review Purchases
- Evaluate Vendors
- Review Purchase Allocation Processes and Uses
- Report Findings and Make Recommendations
Together, these four phases create the template of improved procurement operations at your place of business. Let's explore each in-depth.
1. Review Purchases
Reviewing purchases is the first and foundational step in conducting this type of procurement audit.
A comprehensive purchase review can be a daunting task. Conducting one for your organization often means finding, aggregating and then manually examining years of purchase orders, looking out for the following:
Accurate SKU information
Accurate vendor information
Accurate pricing, product quantities and descriptions
Proper authorization signatures
Information cross-checked against packing lists and bills of sale
Matching final invoices
At a minimum, organizations tend to review sample purchase orders dating from the previous year. However, it's not uncommon for the purchase review phase to cover purchase orders, bills of sale and invoices over multiple years — even decades if processes are particularly concerning.
The goal of this comprehensive purchase history review is two-fold:
- Establish a clear record for all purchased indirect-spend inventory. This effort reveals possible billing inefficiencies and discrepancies and affords you a look at your spend and operational "big picture," seeing exactly what equipment, objects and services you're bringing into your facilities, how often and from where. Each of these inventory categories helps run your business as usual, and each could likely experience cost savings.
- Compare that inventory's costs against wider indirect category pricing data related to your industry. This effort uses up-to-date, data-rich market pricing databases to compare your spend with local, national and even competitors' averages.
Often, organizations don't have the capacity to initiate a complete purchasing history review internally. Procurement staff is often already inundated managing day-to-day purchasing operations. Tackling reviews for years of manual transactions may overburden these employees and even create potential conflicts of interest.
If this is the case for you, consider partnering with a spend analysis and procurement opportunity consultant specializing in these relevant domains, which include cost-containment and strategic spend management.
2. Evaluate Vendors
Next, indirect procurement audits will review the vendors themselves — namely, the suppliers and organizations you've selected to do business with through formal contracts.
There are many spend variables the audit will account for, including but not limited to the following:
Cash discounts or cash/trade discounts
Tax charges and percentage rates
Freight, transportation and delivery practices
Poor industry reputation
Vague contract language
Overall cost-price differentiation with other vendors offering similar service suites
Vendor evaluations are a particularly valuable part of the indirect procurement audit because they can reveal deals, discounts or discrepancies your organization wasn't privy to — or didn't even have on its radar.
Third-party auditors can also use proprietary vendor history databases and information to secure this knowledge. You get the most in-depth and accurate vendor insights possible, and can therefore select suppliers offering the best rates, programs and amenities while mitigating any vendor compliance concerns.
3. Review Purchase Allocation Processes and Uses
Procurement audits will additionally take a look at your internal purchasing operations. This step goes beyond the paperwork, revealing how your employees and leadership actually conduct their purchasing operations — and if they're doing so strategically, efficiently and cost-effectively.
Those exact purchasing patterns and habits will vary between companies, as will the kinds of materials or services being purchased. Conducting the internal purchasing review, though, will reveal critical indirect spend information such as:
Pros and cons of current purchasing workflows
Employee access and involvement in ordering supplies and making service purchase requests
Chains of command in approving purchase orders
Authorized signatures on purchasing orders and invoice approvals
Use of — or existence of — an approved supplier list to place orders with
Existence of receiving checklists and final accounts payable documentation
4. Report Findings and Make Recommendations
The fourth and final general stage of the procurement audit delivers recommendations for corrective procurement actions, each tailored for your organization's long-term purchasing effectiveness and cost savings.
These reports are actionable, synthesizing the information gleaned during the comprehensive purchase, vendor and internal process reviews completed beforehand. With procurement recommendations, your organization has its most useful and up-to-date data pointing toward money-savings opportunities internally as well as tools for securing its most optimal vendor contracts.
In short, organizations that undertake an indirect procurement audit end up knowing themselves better than ever, promising a more secure and sustainable overhead future.
Benefits of a Procurement Audit
Indirect procurement audits contain numerous benefits for the organizations spearheading them, both in the short and long term.
1. Reduces Costs
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.
2. Identifies Redundant and Outdated Processes
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.
3. Improves Supply Chain Operations and Vendor Management
Greater visibility into the overall supply chain means more strategic sourcing and vendor 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.
4. Reduces Errors and Increases Accountability
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
5. Makes Decisions Measurable
Procurement 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
A set of predetermined optimal contract terms and metrics
Knowledge of competitive marketplace pricing plus annual pricing reviews
Cataloged supplier information and price indexes
6. Complements Your Competitive Edge
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.
Is Your Business Spending Its Money Wisely?
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 and 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.