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Cost data mining associated with procurement

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There are three main measures of the performance of the procurement function. The first measure relates to the quality of the goods, works or services acquired. If the quality of the products is acceptable, it is then necessary to evaluate if the products where delivered or projects completed on time. Lastly, there is a need to consider the costs associated with the project. The quality and schedule elements of each contract have implications on the costs. It is essential that costs are managed on projects. The bottom line is that one can only manage what they can measure.

PURCHASING & SUPPLY: NYASHA CHIZU

Many procurement systems do not have a means of measuring costs leading to a failure to manage it. For one to be in a position to measure something, it is essential that the data associated with the transaction is collected in an appropriate manner. Most systems use trend analysis to evaluate costs associated with procurement. A baseline is established and subsequent purchases are compared to the baseline to assess the trend whether it is positive or negative.

The problem associated with relying on the baseline alone is that it might be faulty. Procurement contracts are awarded after a competition and every competition has a winner regardless of the level of competences compared. This is why there are winners in all leagues, but rarely do we witness teams from lower leagues progressing to cup finals in competitions that are all encompassing. An analysis of market trends is essential if the monitoring of the baseline is to bring results.

This is against the background that most systems require the use of at least three competitive quotations for every purchase. The requirement has both quantitative and qualitative measures. It is easy to measure the availability of three quotations at every instance, but it is difficult to establish the competitiveness of the offers submitted.

Costs on a project can also be assessed in relation to the budget. Every procurement is tied or associated with a budget. Such measures may represent saving or overspending if the budget was inaccurate the same way a baseline can mislead an assessment of costs. Understating a budget leads to project cost overruns when overstating it portrays non-existing savings on a project. The competence of the accountants, engineers, quantity surveyors, architects and procurement personnel determines the accuracy of procurement budget.

Considerations of the performance of costs in a procurement process cannot be done in isolation. The quality levels required determine the level of the costs as well as the tightness of the schedules. The same product may have different grades and a comparison of the costs without regard of the associated quality will be very misleading. This is normally the strategy that many involved in the formulation of budget evoke. They budget using costs associated with a superior grade and implement the procurement with lower-end specifications to smokescreen effective procurement systems.

The outcome to the company may reflect two situations. In such instances, the competition might be based on high-end specifications when delivery is of a lower specification depriving the company of savings associated with a competition on the later. On the other hand, the actual performance of the contract may reflect a saving when the contract was awarded to a lower priced offer for a high-end product when it was prearranged that the products of an inferior quality would be accepted.

Schedules also contribute to additional costs. Producers establish the cost of production using ideal conditions and they actually stipulate maximum lead time in consideration of their production capacity. Tight schedules may be used at the time of procurement to increase input costs associated with additional shifts that may be required to meet customer needs.

With good procurement planning, such errors — be they deliberate of an oversight — may be eliminated. Schedules should take into account internal lead time as well as suppliers lead time, so that request for quotations stipulate practical time frames for suppliers to respond. On the other hand, tight schedules may be used to scheme the market with deserving offers being rejected on the basis of their failure to meet minimum delivery period requested when in actual fact, no one monitors the actual delivery period.

Given the dimensions around the establishment of costs, robust systems for procurement planning and monitoring are required if organisation are to manage costs effectively.

 Nyasha Chizu is a fellow of the Chartered Institute of Procurement and Supply writing in his personal capacity. Feedback: nya.chizu@gmail.com Skype: nyasha.chizu

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