Effective procurement practices aligned to asset management can save you millions

Andre Jordaan: Partner Consultant, Pragma

In a world where examples of inappropriate expenditure are widespread, it is easy to justify extensive procurement practices as a means of improving governance. However, it would be best if you deliberated whether such practices are meeting your intended objectives, and at what cost.

In any company or organisation, procurement should be seen as a strategic function working to improve its profitability or efficiency. It should help to streamline your processes, improve response times, reduce material costs, and identify better sources of supply. In essence, it should lower your expenditure and improve your margins.

Most often, procurement needs to achieve multiple, albeit sometimes opposing objectives. These include fair procurement practices, the avoidance of reckless expenditure, support of BEE initiatives, managing contracts effectively, risk management, the achievement of service levels, and, ultimately, saving money year on year.

Asset management, in turn, has a specific set of objectives. This function needs to acquire, operate, maintain and dispose of assets while balancing the assets’ performance (opportunities), costs and risks, to achieve the organisation’s objectives. As a measure of the success of asset management, the key performance indicator of asset availability is very effective and widely in use.

Asset management is very much dependent on procurement, not only to acquire and dispose of assets but to obtain spares and services to improve availability. Availability is influenced by proactive (a service) and reactive (breakdown repair) maintenance and the inherent reliability of the asset when it is acquired. Procurement affects all three of these factors.

In both proactive and reactive maintenance, the objective is always to reduce downtime, while using good quality services and spares, which will improve the reliability of the assets, all at minimum cost.

Proactive maintenance requires spares and contractors to be ready for action when needed, to minimise the time that the asset will be out of service. Understandably, the duration of the maintenance work could take longer than the minimum expected time, typically where inspections reveal follow-on work. However, where follow-on work leads to excessive downtime, it has been found that failures in the procurement process are a significant cause.

Examples of where procurement processes/rules unduly lengthen the process include:

Example 1
A new tax clearance certificate may only be applied for once the current certificate has expired. Five vehicles had to go for a service. The client’s tax certificate expired before all the vehicles were finished. During this time, the service provider was blocked on the system and could not receive a PO for the work. In applying this rule, inevitably, the client will be out of certificate for some time. In this case, two vehicles had a two-week loss in availability.

Example 2
Procurement rule: Companies may not be informed of upcoming tenders over and above the official website and newspaper. The client’s tyre tender came up for renewal. Unbeknownst to most of its competitors, the current supplier was going under and was not in the financial position to reapply. Only one company tendered, the rest didn’t bother assuming that the current supplier would be re-awarded the contract. The city was forced to accept the single tender, 50% more expensive than industry benchmarks.

The analysis can be extended to determine how much the reduced availability costs in monetary terms. In the case of an organisation that operates fleets of vehicles, this is done by looking at the required increase in fleet numbers to compensate for the longer repair time duration and lower availability. We have two examples that demonstrate this.

Example 1
The organisation requires a fleet of 900 light vehicles and trucks. The duration of services (proactive maintenance done annually or more frequently) increased by an average of 13 days per year more than the expected time, resulting in a 5% reduction in availability. To compensate for this, the fleet needs to be 5% bigger, at an additional capital cost of R32 million.

Example 2
The organisation requires a compactor fleet of 126 vehicles. Similar to the previous example, having the service durations (multiples per annum) increase by an average of 13 days per year more than the expected time, again means a 5% reduction in availability. To compensate for this, the fleet needs to be enlarged by 5% at an additional capital cost of R45 million.

In the quest for managing procurement effectiveness, we recommend that both the procurement and asset management functions in your organisation have a service level agreement (SLA) with their internal clients. Such an SLA should enable the client’s experience to be measured objectively, with measures between that could include:

• timeliness of procured items (or difference between expected and actual delivery times),
• accuracy (quantity and quality vs the expected delivery), and
• price reduction and cost savings.

It is essential to realise that your internal client’s performance reflects your performance. Your function’s expense may be insignificant, considering the overall cost to the organisation. In mining, the cost of reduced availability is often orders of magnitude more than the value of the new spare part or repair that you had to provide.

Procurement and asset management would do well to visualise and report in monetary terms on any loss (or gain) in availability due to procurement practices. This will support informed decision-making by procurement and help you to strike the optimal balance between opposing objectives.

The conclusion is that it is vital to measure your internal client’s experience, get the balance and focus of our measures and objectives right and move from only a compliance culture towards a service and performance-orientated culture.