Procurement Audits

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Details of the innovative procurement audit service, provided in association with our expert local partner, are outlined below. Please contact us for details of how we can tailor the service to your needs.

China’s exports grew by 35.4% in 2004. With typical savings of 25%-50% compared to traditional sources, it is easy to explain the continuing attraction of Chinese goods. However, overseas buyers face many risks despite the seemingly positive results. With companies like Wal-Mart buying US$10-15 billion in 2004 (and almost double that by 2007), the impact of successful supply chain and risk management on company profits can be huge.

However, despite the work that goes into setting up procurement systems, very few companies have permanent or independent procurement audit functions. As a result, companies are incurring substantial damages because of inefficiencies in the procurement process. Some of the problems that are often encountered include:

  • Agents charge high commissions for poor services.

  • Buyers place orders with their favored suppliers in return for kickbacks. Anecdotal evidence suggests that illicit commissions can amount to 5%-10% of FOB prices.
  • Merchandisers become complacent and do not do their utmost to achieve the best cost price.
  • Contractual arrangements do not adequately protect buying organizations.

A procurement audit is primarily concerned with how a company sources from China (not what it sources, or where it sources from), and aims to assist buyers to maximize profits by achieving the best prices for its purchases.

A procurement audit involves review of documentation, and interviews with company managers, agents, procurement staff, suppliers, and related parties. On the conclusion of the audit a full report, with recommendations, is submitted to the client. Key processes include:

  • Review of sourcing activity in China in order to assure compliance with best practice relating to buyers and agents responsibilities.

  • Identification of key risks pertaining to sourcing in China.
  • Assessment of the efficiency and effectiveness of key operational controls.
  • Audit implementation
  • Report & recommendations

Design of audit structure to prevent or diminish internal fraud and collusion, and to ensure best purchase prices. The audit function will identify any existing problems, and will address future issues by adopting a pro-active approach.

Procurement audits do not include advising on what to buy, or where to buy. Nor does the service involve credit analysis or investigation into qualification of suppliers. These services, which include full procurement planning and support, are available on request.

Please email us for further information.

Case Study: A completed audit for a mjaor multinational found that: 3 divisions of the same company were buying the same items and that cnsolidation would reduce prices; The 3 divisions were buying from same agent but paying different commissions; Purchasing contracts did not offer any protection to the buyer in terms of exposure to child labour, patent infringement, quality guarantees, etc.; Operational weaknesses resulted in risk of abuse by local buyers/merchandisers.

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