Businesses are faced with varying forms of risk everyday. We take steps to mitigate that risk using a number of tools at our disposal including experts such as accountants, lawyers and the like. We take steps to mitigate risk through processes, policies, controls, and tools that tell us when performance is going astray or out of compliance.
In the area of spend management, there are a number of risks that cost an unsuspecting business considerable dollars and wasted time if those risks are not managed appropriately.
Examples of spend management risks might include the following:
Internal processes that contribute to risk
- Automatic contract renewals
- Supplier overlap
- Policies and approval limits not established or unknown
- Improper use of purchase orders
- Purchase order that lacks terms and conditions
- Poor invoice approval processes
- Supplier invoice add-ons
- Price creep
Impact of risk on spend management risk
- Automatic contract renewals – Contracts are not known or managed, and automatically renew with built-in price increases and penalties for early termination are a common problem. Most dealers don’t know where contracts are and if they do know, they don’t have a mechanism to monitor and manage those agreements. A poor or non-existent contract management process can create thousands of dollars in costs to an organization annually.
- Supplier overlap – Paying multiple suppliers for services that are not utilized or under utilized is a common problem as well in dealerships. Chances are that today, you are paying for DMS functionality that your organization does not use, while you pay another supplier for some functionality that you do use. This problem is exacerbated when purchasing is decentralized and there are multiple locations and multiple decision makers involved with that service. A review of supplier services including all functionality required should be annual event for businesses. This problem is most apparent in advertising, marketing services, DMS, and sometimes in professional services.
- Unauthorized signers of contracts – If approval limits are not established or known, employees will commit the organization to long-term agreements that may not be favorable and cost the organization in time, money and frustration.
- Misuse of purchase orders – Purchase orders that are used internally to track commitments, but that are not sent to suppliers, pose a risk to the buying organization. The written purchase order is “an offer” to a seller. The response or shipment, execution of the order is the acceptance to the offer and completes a legal transaction – offer and acceptance. Using verbal P.O.s without a written P.O. tendered to a supplier can cause problems down the road when performance issues arise.
- Incomplete purchase orders – Just like dealership sales contract with your customers, a purchase order should have a set of terms and conditions tied to the document. Those terms and conditions outline payment terms, returns process, warranty considerations and more. The lack of Terms and Conditions (Ts and Cs) in the purchase order process exposes the dealership to potentially wasted dollars, wasted management time and even legal costs if a resolution can not be obtained with the supplier.
- Invoice match process – Invoices paid based on a purchase order, matched to a copy of the packing slip, and then finally matched to an invoice is the best process to prevent fraud and abuse. This is referred to as a three-way match. Some businesses use a simpler two-way match…P.O. and invoice and some businesses pay directly from an invoice. The simpler the match process the greater the risk. A three-way match process is the best solution to mitigate risk.
- Supplier add-ons – Chances are, if you look at your invoices, you will find fuel surcharges, new items added to uniform invoices, new services added to your phone bill and items added to your DMS bill that was never contracted for originally. Fuel prices are going down, yet fuel surcharges remain at higher levels. Phone bills frequently have over-charges and scam related fees that get embedded into your invoices. Other suppliers add services and functionality that may have been approved by someone in your organization, and in many cases, those add-ons were not authorized. Invoice audits or supplier audits are the only known way to combat these costs.
- Price creep – An organization selects a supplier based on a great price…today. In two to three months, that pricing is adjusted upward based on “market conditions.” Pretty soon that “loss leader” that got a supplier in the door now becomes a net cost increase as they begin to spread higher costs across a broader set of supplies and services.
Strategies to reduce risk and reduce costs
For every challenge or problem there should be a viable solution. The following strategies, once employed and followed, will reduce your risk and reduce your costs as well. Additionally, the peace of mind that comes from knowing your organization is managed using common best practices is a benefit that is hard to quantify, but certainly appreciated.
- Contract management – All supplier contracts should be identified, collected and stored in one location within the organization….preferably within finance (CFO or controller). A tracking device should be created to manage the expiration and renewal process such that your organization is aware of upcoming renewals at least 180 days in advance of the date.
- Supplier review – Most dealers or dealer groups will find that they have 400-plus suppliers supporting their organization. A top down review of the largest suppliers should be conducted with the management team to clearly identify the purpose of the supplier and ensure that those services do not overlap with other suppliers. Once an overlap is identified, optimize and shrink the supplier base and improve your cost structure.
- Purchasing policies – An effective purchasing policy must address process, intent and authority levels. Contracting authority, P.O. authority and invoice approval authority limits should be set by position and dollar amount. Purchasing policies should be updated, communicated and enforced to reduce process and control issues.
- Purchase orders – Purchase orders (P.O.s) should be sent to the supplier confirming a verbal commitment or an e-mail commitment. The P.O. should be received by the recipient and acknowledged. The purchase order is an external commitment tool, not an internal tracking tool.
- Terms and conditions – A well defined set of terms and conditions should guide each purchase in an organization to reduce risk. The terms and conditions could be printed on the front or back of the purchase order, which is the most common approach. Another approach is to create the terms and conditions (Ts and Cs) and post it to your website and reference same on the P.O. Yet another strategy is to send a hard copy set of Ts and Cs to your supplier annually via U.S. mail or e-mail. In either event, your organization will be much better protected with the inclusion of a well crafted set of Ts and Cs attached to your purchase orders and contracts.
- Payment process – A three-way match process should be the expectation within a business. The three-way match consists of a P.O., a packing slip and an invoice before payment is authorized. If that process is not practical, a two-way match should be accomplished at a minimum.
- Invoice reviews – Supplier invoices should be reviewed frequently to look for and catch add-ons such as surcharges, or additional charges that were not expected or authorized in a contract or quote.
- Price compliance audits – Supplier pricing should be audited against the contract or the quote to prevent price creep and overcharges. Having the contracts or copies of contracts and agreements close to the payables team can make this process much simpler and much more efficient. Once suppliers know that audits are conducted, compliance will improve pretty quickly.
An organization focused on risk mitigation and cost reduction should start with a good hard look at their internal processes and controls. This is especially important when the group consists of multiple locations where unique process seem to take on a life of their own….interpreted by many and followed by few. While this part of management is not the most interesting or gratifying use of a leaders time, the investment today in these key process improvements will pay significant dividends next week, next month, next year and beyond in terms of reduced risk and reduced costs.
If you are interested in receiving the spend management risk assessment tool, please send me an e-mail at: firstname.lastname@example.org requesting same. If you would be interested in receiving a jump drive with all of the previously offered Strategic Source tools and related spend management articles published by Dealer magazine, please contact me via e-mail and provide your contact information including address, city, state and zip.