Buying is a vital but unglamorous discipline in almost every business. These days it is known by the slightly posher title of procurement, but the nature of the job remains the same: to source goods and services used by a company. Buying spend can represent up to 70% of a business’s total revenues, so it is critical that it is a well-managed function. Yet so often it goes wrong.
A new book highlights many of the pitfalls and solutions, and should be required reading for every buyer who is serious about their career. Bad Buying by Peter Smith, a procurement veteran, has the subtitle “How organisations waste billions through failures, frauds and f***-ups”. While it is a manual for professional buyers, it is also a fascinating litany of the mistakes that can happen when buyers get it wrong.
The Bribery Act means the damage inflicted on companies that permit fraud is not just financial — there can be a high reputational cost too. Rolls-Royce, Glaxo Smith Kline, Glencore and BAE Systems (all members of the FTSE 100) have suffered Serious Fraud Office investigations and some of them have paid significant penalties.
Two ways in which companies avoid their buyers being tempted into accepting bribes is to pay them well and to change their roles often, so they cannot get too cosy with particular suppliers. Supermarkets tend to adopt these practices.
Smith discusses all the stages in a rigorous buying process: specifying the products correctly; choosing which suppliers to shortlist; conducting tenders; negotiating terms and contracts; and managing supplier relationships. He gives many examples of catastrophic buying decisions, from the Malaysian crook known as Fat Leonard who cheated the US Navy out of tens of millions of dollars, to Berlin Brandenburg airport, which will be €5bn over budget and nearly a decade late when it finally opens on Saturday.
The author emphasises that expert buyers really understand the product they are ordering, so they must be extremely familiar with the various market players and the quality needed. They’ll also know when to be suspicious.
Sadly, fraud is endemic within procurement — not just bent buyers, but dishonest suppliers selling under-par goods. Companies get the basics wrong: they do not have proper authorisations for expenditure; they do not verify suppliers that receive money; supplier selection and pricing is not transparent; and fraudulent buyers do not suffer proportionate punishment.
This year, various large government contracts to supply items such as masks, gloves and gowns for NHS staff have been won by companies with no track record in these products. One wonders how seemingly unqualified organisations landed these lucrative deals when there appear to have been no competitive tenders. Apparently, more than £10bn has been spent on personal protective equipment by the government since the pandemic began. In several cases there are accusations of cronyism. I hope subsequent inquiries reveal if any of the buying was corrupt.
It reminds me of the NHS National Programme for IT, which the National Audit Office estimated wasted almost £4bn of taxpayers’ money — perhaps the biggest technology failure ever seen in the UK public sector.
Mind you, according to McKinsey, large IT projects on average run 45% over budget and deliver 56% less value than promised. I’m afraid this is exactly my experience with major enterprise resource planning and customer relationship management systems — every time they turn out to be more expensive than planned, take longer to install, and don’t really produce the benefits predicted. Big construction schemes are similarly cursed — although buildings can last for 50 years or more, and overspend in that context tends to get lost in the sands of time.
One of the common errors in buying is to always choose the cheapest supplier. Unfortunately, online auctions — an increasingly common device for B2B sourcing — emphasise price above other issues. There are many other factors that should also be considered: reliability, loyalty, quality, flexibility, innovation, exclusivity, logistics and so forth. Even apparently fungible services such as insurance vary, as policyholders making business interruption claims because of Covid-19 are discovering. Some underwriters are more honourable than others.
Long-term relationships with suppliers can mean that you are the preferred customer during crises. The benefit of this has been demonstrated to me this year with two manufacturing operations that were able to keep producing throughout lockdown, while others suffered disruptions. However, companies must never become too dependent on specific suppliers, otherwise they can be held to ransom.
Buying professionally is an important skill, and well-managed organisations understand how it is done.