Root out purchasing greed: "Knowing is not easy, doing it is not difficult"

It is often said that it is easier said than done, but often the opposite is true. If you can find the root cause of the company's supply chain problems and ensure that resources are invested in the right place, the company can always do better, so "doing it" is not difficult. But often companies do not know what the root cause is and respond in the wrong way, wasting resources and the problem remains.

The chairman approves the purchase order, right?

Shanghai has a multi-billion-scale enterprise with factories in many parts of the country. Due to years of rapid development, the system and process construction cannot keep up with the needs of the business, resulting in constant corruption problems in procurement. The chairman first changed the purchasing staff once a year, and then centralized all purchasing rights to the headquarters, and personally reviewed the contract and signed the purchase order. After centralized procurement, trivial matters have to be handled by the headquarters, which is severely understaffed. Not long after the concentration, the factory didn't know who to call for some matters, and a phone call was made to the vice president of procurement.

Procurement is changed every year, which is destined to be unable to form a long-term strategy at the supplier level. The selection, management and performance of suppliers are not in place, which affects the management of the entire supply chain, and has limited anti-corrosion effect. Centralized procurement does more harm than good, and cannot respond to business needs in a timely and effective manner, affecting the flexibility of local branches and factories. Enterprises with extensive management focus on purchasing and manufacturing more problems than they solve. The chairman's hands-on process, reviewing contracts and signing orders, will inevitably become the biggest bottleneck, making the response speed slower. Why did the chairman take these extreme measures?

The reason is simple: urgent medical treatment. The chairman did not know where the root cause of the problem was, and the measures he took were naturally not in place. This is a typical "not easy to know, messy behavior" problem.

What is the source of the problem?

On the surface, the problem is corruption in employee procurement. In fact, it is because the company's procurement capacity is insufficient, and it cannot effectively restrain employee behavior and control the risk of corruption.

Why are the more backward countries and regions and the more extensive the management of enterprises, the more serious the corruption problem? Everyone's organizational measures are similar. The more backward, the weaker the system and process, and the more limited the effect achieved by the same organizational measures. This is why the same organizational measures work in some global companies but not in some local ones. People are accustomed to blaming the culture and the environment, rather than finding the root cause from the insufficiency of systems and processes.

The lack of system and process capability can only be compensated by organizational measures. Organizational measures are widely adopted and even abused because they are inexpensive to implement. As a result, the procurement is changed every year, and the procurement can only be done by local people (“the monk can’t run away from the temple”), and measures such as centralized procurement rights have been introduced one by one. But the shortcoming of capability is not the organization, but the system and the process. The capabilities of systems and processes do not change, and the marginal returns of organizational measures are limited. Problems are destined to continue to occur. It just happens to different people, from the branch to the headquarters, and from the operation layer to the management.

As the boss, what do you do?

Decentralization and checks and balances

To eradicate procurement corruption, we must start with decentralization and checks and balances. To change behavior, you have to change ability. Capability should be improved from the perspective of the trinity of organization, process and system.

Sound systems and improving their capabilities are a large part of the solution. On the basis of the system, strengthen the process. For example, the buyer strictly collects data for each item number and each line of each order according to the process, and maintains the accuracy of the data. Just like some multinational companies do, improve the data. quality, increase objective factors in decision-making, and be able to constrain employee behavior through results.

For example, well-established companies in North America often decentralize sourcing, procurement and payment to three different departments: the sourcing department is responsible for finding suitable suppliers, formulating a qualified supplier list (AVL), However, it does not decide to give a specific business to a certain supplier; in the specific procurement business, the procurement department inquires from a number of qualified suppliers, compares them, and selects the best ones, but has no right to adjust the qualified supplier list (AVL), Increase or decrease suppliers; and the payment belongs to the financial department, ensuring that the requisition, acceptance and supplier invoices match the three orders before payment, but has neither the right to select suppliers, nor the right to grant any supplier business. Some companies' needs are determined by customers or user departments. Procurement does not have the right to decide the purchase amount. Procurement can only be executed to meet the established needs. Further checks and balances on the authority of the purchasing department reduce the risk of corruption.

The core of sourcing is supplier evaluation, which is to systematically evaluate suppliers' technology, production, quality and material management systems. On-site evaluation is generally a three-person team: the quality engineer is responsible for evaluating the supplier's quality management system, the production engineer is responsible for evaluating the supplier's production control system, and the sourcing manager is responsible for evaluating the supplier's material management system. Each piece has a detailed evaluation list and clear scoring standards. First, let the suppliers score by themselves, and then the evaluation team will score each item on the spot, and finally summarize the scores of each piece. For the columns that do not meet the standard, there will be further gap analysis to determine whether to continue to improve the supplier or find a new supplier.

The evaluation of this kind of system is time-consuming and labor-intensive. In a well-managed company, low-quality suppliers, even if they enter the business through improper means, cannot hide under effective supplier performance management. For example, the supplier's million reject rate should be lower than 300, and the actual performance of a low-quality supplier is 5,000. These problems will be exposed when reviewing the supplier's performance for the past week. If the supplier's on-time delivery rate and quality pass rate fail to meet the standard, the buyer has to stand in front of the boss to explain the reason and submit an improvement plan. If the problem is not resolved within two months, the buyer will be fired.

However, in many local enterprises, the system is often not perfect, and it is impossible to effectively, objectively and timely count performance. The chairman in the case mainly relied on organizational measures to deal with it. In fact, the shortcoming of supply chain capabilities is the system and process: the system cannot effectively count the results, and the enterprise cannot control employees through the results, so it can only use organizational measures and processes. Monitoring to make up for it, such as frequent job rotation, separation of powers, man-to-man, etc.

Many local companies cannot provide objective and transparent performance indicators in terms of quality, delivery and service, and cannot form a closed-loop supplier management. How much did you spend on your largest supplier last year? How is the supplier's on-time delivery rate calculated? If you can't even answer these two questions, performance management generally lacks objectivity and transparency, and procurement can only stubbornly struggle on price. Everyone fights the price, giving bad suppliers an opportunity: when the indicators are difficult to objectively count, the price can always be lower. Procurement corruption, in fact, is often not price manipulation, but lower quality standards.

So, procurement corruption is not only an institutional problem, but also a management problem. Organizational decentralization is only a necessary condition. Without changing extensive management, especially sourcing and supplier performance management, it is impossible for Chinese local companies to eradicate procurement corruption.