Author: Canda Rozier, Former SVP & CPO with First Data Corporation (see full bio)

Does Your Purchasing Policy Work?

You probably have a purchasing policy, most companies do.  But is it effective?  If your company is like most, the honest answer is “not really” or “not always”.  Purchasing managers are always quick to say they have policies, and tout how good they are.  But the reality is that many policies are not effect, and are not enforced, or are enforced inconsistently.  However, the failures are usually something a purchasing manager can control.

Why do purchasing policies fail?

• It’s unpopular – you have to tell co-workers that they can’t buy something they want.  And, it’s not popular to tell people “no”.  (There’s a whole separate discussion to have about companies today not wanting to do the hard or unpopular things in their business.)  The path of least resistance is to look the other way, to say that a few exceptions “won’t hurt”, and not to risk making your business associates mad at procurement.  The problem is, this is like letting a child disobey your rules, or letting a puppy wet the floor – once the behavior becomes habit, it’s hard to break.
• Frequently, senior management doesn’t support the policy – exceptions to policy get approved, or certain employees are exempted from following the policy.  Before you know it, the exceptions spread and become the rule.  You need for management to “walk the talk”.
• Your policy may be unreasonable, draconian or maybe just impractical.  Don’t always assume that the reason it’s hard to enforce a policy is someone else’s fault.  You have to ensure that your purchasing policy meets the needs of your business, and fits with your company’s culture.  If your company is entrepreneurial, embraces risk taking, and has empowered employees at various levels of the organization to make decisions, you can’t have a purchasing policy that restricts this.  People will just find ways around the policy, management will endorse this, and your policy will be a paper tiger.  If you want a purchasing policy to be enforceable, it will need to support the business’ goals and the corporate culture.
• You don’t have good, integrated purchasing systems and tools, so you aren’t able to catch exceptions to the procurement policy until after the fact.  Your policy has to require that the bulk of purchases come through procurement’s systems/tools in order for you to know they are “in policy”.  Otherwise, you simply don’t know what you don’t know.

This doesn’t mean you have to issue purchase orders (PO’s) for every purchase – and, in fact, you shouldn’t.  But you need to have the right systems and tools in place to manage the spend that comes through PO’s, purchasing cards (pCards), company issued credit cards, direct billings, etc.  You wouldn’t drive a car at night with no head lights, or no dashboard indicators – and you shouldn’t drive your purchasing policy without adequate data and control points.  Driving blind is a sure way to end up in a ditch – literally and figuratively!

• Accounts Payable (A/P) doesn’t help you enforce the policy.  No matter how good your purchasing process and systems are, you have to be able to count on A/P to catch outliers to the policy.  A/P and Purchasing need to be integrated by a strong Procure to Pay (P2P) process.  As the “Pay” point of that process, A/P must trap spend that goes outside of the policy.  If A/P isn’t partnered with Purchasing, this after the fact control point for enforcement is lost.  Remember, Procurement “doesn’t know what it doesn’t know”, but A/P does.
• Your purchasing policy doesn’t mesh with your other corporate policies such as travel expense (T&E), corporate card, approval levels, cash disbursement, funds wire, etc.  These policies all affect, and are affected by, the purchasing policy.  If your policies aren’t coordinated and complimentary, and aren’t tested in conjunction with each other, there will be gaps.  Maverick spend thrives in the gaps, and maverick spenders (you all know who they are) look for gaps to exploit.  A coordinated approach to your various financial policies is a key foundation to enforcing your purchasing policy.

OK, so yes, it’s hard to enforce a purchasing policy.  But it is not impossible.  And, like any habit, once you get started, it gets easier.  More importantly – don’t have a policy, purchasing or other, that you can’t or won’t enforce.  (Ask your internal audit department about this too.  They will tell you that having a policy you don’t enforce is sometimes worse than not having a policy.  And if you have SOX requirements, it’s critical that you enforce your policies.)

If your purchasing policy isn’t working, ask yourself some questions:

• Have you actually read your purchasing policy lately?  Do you really know what’s in it?
• How often does senior management tell you to make exceptions?  If you’re being over-ridden, your policy’s ineffective!
• What’s the relationship with A/P?  Do you even have a P2P process?
• Is your purchasing policy tested by Internal Audit?  When’s the last time you asked them to review your process?

If you want a successful purchasing policy, take responsibility, make the hard decisions, and get it done.

Related Posts

• Sept – Will the real procurement/VMS integrated platform please stand up?
• 7 Steps to Procurement Transformation, Tim Houghton
• June – Indirect Services Successfully Managed with a Rate Comparison Tool – Kimberly Smokey

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Tags: collaborative nature, indirect procurement, indirect procurement services, indirect services, policy exceptions, procurement, procurement consulting services, procurement services, purchasing manager, purchasing managers, purchasing policy, strategic decisions, strategic procurement,

6 Comments »

1. 

   As a Sales guy, my concern with purchasing policies has not been the restriction that they sometimes represent, its been the rigidity. If they are developed from only a procurement perspective then the rigidity is there from the beginning in a way that is not logical or productive. If the rigidity is developed over time because the Procurement dept does not re-visit the policy and practice then it ends up having the negative effect that ineffective policies always generate.

   Comment by Mike Cleary — July 7, 2010 @ 9:20 pm

2. 

   Mike – yes, sometimes purchasing policies are rigid. If the rigidity is due to purchasing “always doing what they’ve always done”, that’s not good. Policies should evolve as a company’s objectives, culture and processes change. It’s the responsibility of the owner of the policy (purchasing leadership in most cases) to revisit the policy periodically and test for appropriateness and make changes to the policy. But at the end of the day, each company has to decide how rigid or flexible a policy they want to have.

   Comment by Canda Rozier — July 7, 2010 @ 9:38 pm

3. 

   Hi Canda. Nice wrap of those hurdles we all witness while providing expertise as internal team members or as contractors.

   I just finished an assignment with a client (mid-size entreneureial biomed/pharma) where the policy was seen merely as a hurdle to the buyer, and – due to the the required contracting and PO initiation of that policy – was stealing every single second from the procurement team members. The procurement team was able to provide no strategic sourcing services to its internal customers: no supplier mgmt, very little supplier selection and rationalization strategies, no spend consolidation planning, etc. They wrote contracts, amendments, change orders, and opened PO’s. A clear instance of good intentions working against progress – and painful for everyone!

   Your “culture” remark above is spot on. An effective policy has to fit the company. In my example above, though the policy may have been sensible for a more mature firm and seasoned procurement and A/P partnership, it didn’t work for a young firm that empowered its employees – most of whom were given great latitude in everyday decisions.

   I think you’re right: Once company culture is identified and a policy that fits is developed, then comes leadership buy-in, process/automation improvements, and yes – sorry to all buyers – “consequence” for rogue behavior. Then things start cooking…..

   Comment by John Northrop — July 19, 2010 @ 11:06 pm

4. 

   John, thanks for your comments.

   Your conclusion “Once company culture is identified and a policy that fits is developed, then comes leadership buy-in, process/automation improvements, and yes – sorry to all buyers – “consequence” for rogue behavior” is a great summary of the ingredients that need to be in place for a successful policy.

   My one observation is that I don’t think there’s an apology due to buyers (“sorry to all buyers”). Policies are for the benefit of the company – its shareholders, bottom line, corporate outcomes. But, shame on companies which don’t clearly communicate those goals and the policy’s role to employees.

   And, here we are, it’s back to culture again!

   Comment by Canda Rozier — July 20, 2010 @ 8:45 am

5. 

   Canda, thanks for presenting an interesting post, on a subject I was just discussing with a client just yesterday. A couple of things I might add:

   First, I will admit to being an overall cynic when it comes to the value of policies in shaping behavior, categorizing them as slightly more effective than mission statements and the like, but not a lot more effective than those, but I do understand their necessity. I would say your list of policy failures hits on many of the common causes, but misses one of the major ones I have seen in my travels. And that is, and this may be hard to admit for those in procurement, that in the buyer’s eyes, they may not be providing any perceived value-add to the business, and thus the end-run. I have found that this perception can be rooted in a wide range of factors, ranging from category/domain expertise, effective engagement, process capabilities, ability to execute, etc. When people in the business think they can do it better and faster without you, having a policy saying you ‘use me anyway’ will face a non-stop stream of challenges. I have found that environments where procurement has proven ability to execute: the ability to act swiftly, having undisputed market knowledge and expertise, and known to have the processes and tools to produce savings and mitigate real risk, then policy becomes redundant. I think of a case where some ‘maverick buyers’ had selected a facility to convert to a major new data center, and were more or less looking for a speedy clerical rubber stamp from procurement. Howls of deadlines, lost opportunities, and project failure rang everywhere when the Real Estate category manager insisted on going through even just the due-diligence portion of his sourcing process. But when 4 days later, a structural assessment of the building surfaced that the building was unfit for data center floor loads, and averted a very high-profile failure, the project team adopted an attitude toward procurement that was 180° different. It was procurement’s value add that converted the ‘Mavericks’ to advocates of procurement.

   My second comment comes on the role of AP in enforcing policy. I totally agree with you the best approach is an integrated P2P landscape, and that Procurement and Finance share many common goals. I typically advise folks that, in the absence of a highly effective P2P environment, you have to be sympathetic to the fact that AP, by it’s very nature, is at the end P2P process, and that is not the optimal place to control buyer behavior. Without integrated P2P, AP’s primary job is the processing of invoices for payment. But if the ‘maverick’ buyer commissioned the supplier to do the work, the supplier has performed the work, and now wants to be paid, AP’s hands are more or less tied, and it is a liability that must be paid, regardless of policy. It is just too late in the process to prevent the problem. So I agree that AP can help in detecting maverick spend, but using them as a control point can present some pretty big challenges. I have found that better processes for requisition/sourcing/ordering on the front end, combined with a no PO, no Pay AP policy (card programs, etc excepted) is the two-part equation needed to bring proper control.

   Thanks again for the thought provoking post….

   Comment by Jim Holbel — July 20, 2010 @ 2:09 pm

6. 

   Jim, I completely agree with you on both points.

   If procurement doesn’t add value, then even if a company has all the other “ingredients” right, it’s a moot issue. But, value isn’t only what the end-user may want. True value is a combination of price, terms and conditions, over-all risk mitigation, delivery speed, etc. End users often look at price and delivery, and ignore the impact of Ts & Cs and risk management. When procurement does its job correctly, all of these are addressed in a balanced fashion – again, underpinned by the company’s culture and corporate objectives.

   You are absolutely right that a robust P2P process isn’t just having A/P as the “trap” at the end of the process. It’s the full procure to pay process encompassing requisition, approval, sourcing, contracting, and ultimately payment.

   Thanks for your insights.

   Comment by Canda Rozier — July 20, 2010 @ 3:37 pm

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