Procurement compliance refers to the percentage of purchases that are contracted and approved based on a set of rules.
Compliance is a critical component of any risk management approach. It protects your company from fraud, corruption, and rogue spending by ensuring that suppliers, purchasers, and workers adhere to the terms of their contracts.
What exactly is Procurement compliance?
In most cases, compliance simply means adhering to pre-determined guidelines. Bringing the compliance and procurement functions together involves treating the latter as the executor of the former in procurement teams. Simply put, compliance establishes the criteria that must be fulfilled, and the procurement process aids in reaching those requirements through cost savings, supplier management, contract compliance, risk management, and internal technology, policy, and procedure implementation.
Through improved internal controls, better financial recording and reporting, smart supply chain management, and identifying and exploiting opportunities for process improvement and relationship building, procurement leaders can help improve competitiveness, support business strategies, and add lasting value to build a strong bottom line.
What are the Metrics for Procurement Compliance?
If your procurement department is underperforming or you are not sure of what’s going on behind the scenes, several measures can help you identify issues and begin making improvements. However, keep in mind that metrics are only one part of a comprehensive contract management approach.
Following are some of the most important guiding metrics for Procurement compliance:
- Contract compliance
From risk mitigation to relationship management, procurement managers have a lot on their plates. Unfortunately, keeping track of anything that has the potential to affect the company’s bottom line is difficult. Contract compliance is one area that needs continuous review.
This metric will assist you in determining how well providers adhere to the terms and conditions you agreed to when the partnership was formalized. This indicator displays the percentage of contracts that have been completely fulfilled, meaning that all agreed-upon parameters have been met. Your purchase procedure will squander more if your compliance rate is low.
According to Aberdeen Group supply chain analyst Bryan Ball, top firms can save up to 80% more by properly outlining a contract compliance policy. This involves increasing vendor communication, enforcing non-compliance policies, and immediately following up on issues.
- Spend Under Management
The percentage of spend that is actively under the control of the procurement department, as compared to the total expenditure of the business, is known as Spend Under Management, or SUM.
Having more visibility and control over an organization’s spending can go a long way toward assisting procurement in identifying potential hazards that may arise as a result of a lack of visibility and control. As a result, any procurement organization’s Spend Under Management statistic is critical. Having a higher SUM can also help you get more value out of your procurement efforts, whether it’s through cost savings or strategic supply chain management.
- Supplier Consolidation
How many vendors do you have on your “approved” list? In the case of a delay, shortage, or sudden closure, having too few suppliers puts your firm in danger. On the other hand, overspending is a danger with too many suppliers, and you may miss out on discounts and strategic collaborations that provide value to your company.
- Availability of Suppliers
Are your vendors ready to take on last-minute orders? Are you looking for a way to mail a large number of items in a short amount of time? As your company’s needs change, this metric assesses your vendors’ ability to meet your quality, quantity, and delivery criteria. Understanding supplier availability can also assist teams in deciding where to route crucial orders for the best possible results.
- Cost Savings
According to a recent research by The Hackett Group, world-class procurement companies spend 22% less on average than mediocre procurement businesses. Cost savings are all about finding practical ways to save money, such as negotiating the lowest price on raw materials, cutting expenditure on third-party services, or lowering the cost of training new employees.
- Avoidance of Cost
The word “cost avoidance” refers to activities taken to minimize future costs. Whereas cost savings is all about cutting costs in a measurable way, cost avoidance is all about avoiding them in the first place. These savings may not appear on a balance sheet, but they are nevertheless an important part of any compliance strategy.
Preventative maintenance checks, for example, can help avoid costly breakdowns that disrupt productivity. Alternatively, it could mean moving vendors to prevent a price increase.
- Purchase Order Cycle Time
It is more difficult to deliver on time the longer it takes to reach an agreement. Companies that keep a close eye on their procurement cycles can focus on establishing ways to make the process go more smoothly. Internal bottlenecks can be reduced by using methods like electronic signatures, automatic notifications, and fewer departmental sign-offs.
- Invoice-to-PO Matching
According to Gartner, top-performing organizations say that, on average, 5% of their invoices are not accompanied by a purchase order. In addition, according to the firm, anything under 25% is deemed strong performance, while anything beyond 40% indicates that improvements are required.
It’s easier to link POs to invoices and have payments approved faster using digital P2P solutions. P2P matching that is automated allows businesses to take advantage of early pay incentives and avoid late payment penalties. Additionally, it means that businesses will have access to more advanced expenditure analytics, compliance assessment tools, and other tools, resulting in additional data that can be utilized to improve forecasting accuracy.
How Technology Supports Procurement Compliance
Organizations must move their compliance metrics and ordering procedures to the cloud in order to improve procurement performance. Here are a few of the primary advantages of automating the buying process:
- Tracking Performance
Compliance is greatly facilitated by digitizing the procurement process. Procurement teams can rapidly evaluate whether suppliers satisfy performance criteria and discover any problems with lead times, quality control, billing, and other difficulties.
Digital procurement aids teams in streamlining the supplier evaluation process, tracking purchase orders, and continuously monitoring cost-cutting efforts. This allows for a more effective procedure for tracking procurement compliance, which leads to higher productivity and cost savings.
- Routing of Approval
Electronic procurement solutions aid in the standardization of workflows and the reduction of the risk of departing from the standard procedure. You may reduce the risk of rogue spending and guarantee that transactions go through the correct provider by routing transactions to the right person and delivering automated warnings anytime someone submits a purchase order.
- Centralized Contract Repository
All contracts should be stored in a centralized, worldwide database that allows all key decision-makers fast access to any vendor’s terms, conditions, and purchase history. The biggest advantage is that procurement employees will save time by not having to search through data to get the information they require.
This allows businesses to guarantee that pricing, delivery, and payment terms have all been met. If necessary, it also makes it simple to undertake third-party audits or system assessments.
- Spending Visibility in Real-Time
It is impossible to assure that spend information is available on a daily basis rather than at predetermined (monthly, quarterly, or annual) intervals without total visibility. Furthermore, real-time visibility across all systems guarantees that any expenditure outside of contracted or preferred suppliers is rapidly discovered, allowing approvers to remedy the problem before it worsens.
Benefits of Effective Procurement Compliance
Role of Procurement compliance can range from ensuring your employees follow set protocols for ordering and approvals to as complex as ensuring that your suppliers obey the federal, state, and local purchasing requirements when it comes to the raw materials you use to make the things you sell.
Bringing compliance and procurement together can benefit your firm in a variety of ways, regardless of your industry or ambitions.
1. Technology-Driven Procurement
Organizations must move their compliance metrics and ordering procedures to the cloud to improve procurement performance. The following are some of the major advantages of digitizing the procurement process:
- Data Management and Analysis with Transparency
The procure-to-pay (P2P) procedure is substantially simplified by capturing every piece of data connected to all of your company’s transactions.
Management and staff can collect, analyze, and transform data to create rock-solid audit trails, accurate financial reports, forecasts, and even target areas within the procurement function. However, compliance isn’t quite up to snuff with a connected, centralized document repository and accessibility (including mobile devices) for key stakeholders at all levels.
- Automation Empowering Spend, Supplier, and Contract Compliance
It’s pointless to develop better procedures if they’re difficult to put into place, easy to avoid, or impossible to track. Instead, you may create internal controls for every step of the procurement process, from purchase orders to payments, using a dedicated software solution, and track authorizations in a clear, easily accessible manner.
It’s simple to provide approved team members with intuitive and user-friendly catalogs for purchases from just recommended suppliers who meet legal, financial, and internal standards once your supply chain is connected to your document library.
Procurement’s ability to link with other departments in support of broader cost-cutting and value-building initiatives has improved, as has its accountability and access.
Spend compliance is a term used to describe this type of management. Rogue expenditures must be curtailed in order to improve compliance and performance. For example, as you explore growing markets, spend compliance can include purchases that need to be brought into the procurement workflow, as well as new materials, goods, or services introduced to your supply chain that need to be integrated with your compliance controls.
Internally, supplier compliance can refer to a policy of engaging only selected suppliers as part of your company’s spend compliance objectives. On the other hand, it refers to how you analyze and evaluate vendor performance as well as compliance with your own policies and contract conditions (a.k.a. contract compliance) as well as government-imposed legal obligations.
Risk management is a part of supplier management. Metrics like sustainability, operational support levels, and Service-Level-Agreements (SLAs) that define quality, safety, data security, and customer service are all critical components in monitoring supplier and contract compliance.
You’ll have real insight into what’s working, what isn’t, and places where you may be exposed to undue risk due to a supplier’s noncompliance using AI-assisted automation and consolidated documentation, in addition to vendor evaluation.
2. Maximizing Procurement ROI
While a procurement software solution can help your business and supply chain enhance compliance across the board, it can also be used to evaluate your procurement department.
How well does your procurement department achieve the objectives and best practices it sets for your company? Is it meeting process improvement and value generation benchmarks? How effectively does it adhere to payment-on-time guidelines?
Asking these questions—in effect, assessing the evaluator—will provide valuable insights and point you in the direction of a procurement function that can lead by example while identifying new potential for increased compliance, savings, and relationship building.
3. Procurement Compliance helps you save money and add value
In the first instance, it may look hard to deal with procurement compliance. However, you can master compliance and turn your procurement department into a dynamo of savings, continuous improvement, and value if you take the time to identify the metrics you need to measure, use technology and tools to simplify and streamline the process and ensure your procurement department follows its own standards and practices.
Procurement compliance affects practically every department, so making it a collaborative effort will benefit everyone, from the CEO to the accounting team to the sales staff tracking travel expenses.
When the procurement sector adheres to a set of rules and regulations, it ensures the credibility of a business and overcomes the challenges faced.