I am referring to Competitive Bidding as a part of Procurement Process. Procurement may be of goods or services. Procurement being one of the important processes in a business organization, knowledge of best practices relating to this process can help young and budding Chartered Accountants, in being more effective in their roles, be it as a Finance Manager in an organization, to introduce a robust procurement process, or as an Internal Auditor or Statutory Auditor to review procurement from Internal Financial Control perspective. Even for students of CA, whether a part of curriculum or not, awareness of such a process would be useful in their career progressing well, after they qualify.
Once, I met a building material supplier, who appeared to have done well, quite early in his business. I asked him what was the secret of his success. He said “I buy the buyer!”. What it means is that he offers a cut or kickback to the buyers in organizations, loads that additional cost and even more on the price of his goods or services. For the organizations buying his materials, it will be additional hidden cost, which may be very difficult to make out from its financial processes or statements. All this is for a personal gain to the procurement head, the buyer. In business organizations, among all types of frauds, procurement related frauds are considered the highest. Realising this potential, public sector and Govt. organizations in India generally prescribe elaborate guidelines in procurement process, while in private sector organizations it is relatively less emphasized. Equally important is how effectively the prescribed procedures are followed.
How can we prevent or minimise procurement related frauds?
Genuine competition amongst vendors gets the best price to the organization, which is handled through what we call the “Competitive Bidding Process”. This is also popularly known as the 3 quotation process. In procurement related frauds, it is this process which is most commonly misused. I was amused by the endorsement of an MD, on a vendor quotation – “we may award the contract to this vendor, but after following the usual 3 quotation process”. Many times we see quotations obtained for just record purposes throw up signals like, either telephone numbers or address related details could be common among the quotations. Of course these days frauds are committed in a more fool-proof way, and would be difficult to spot. More than what you find on record, process needs to be robust, to be effective as a deterrent against procurement related manipulations.
Controls associated with Competitive Bidding Process
1. Requirements to come from actual users: It should not happen that a vendor approaches the buyer and requests for an order, and the buyer is able to place an order, independent of the user requirement for such goods or services. We need to have an Indenting document in place, emanating from the user, on the basis of which, the buyer is required to act.
2. Vendor population should be as large as feasible: One should ensure that adequate coverage of different vendors in the market takes place with enquiries and Requests for Quotation. This is a good starting point.
3. Clear terms should be provided in an unambiguous manner for vendors to quote. It should not leave scope for misinterpretations and subsequent need to change the bid, after the bids are opened.
4. Ensuring secrecy of prices, while obtaining bids: Usually sealed bids are invited, retained with a trusted employee, and are opened at one go, in the presence of representatives from different department connected with the requirement, apart from Procurement department. Usually, finance department witnesses the bid opening and endorses the bids as evidence. Number of bids also is noted by endorsing, for example, 2/5 on a bid where it is the second bid out of five bids received.
5. Technical & Price Bids: In the case of complex products or projects, it may be necessary to bring at par all the vendors’ bids technically. In such a case, two bids, one technical and the second price bids are separately obtained. The latter is opened, only after technical evaluation of all the bids.
6. Quotation Comparison Statement: All bids received are analysed and are compared in one tabular form. It is here that the L1, L2, L3 and so on status is determined, where L1 represents the lowest quotation and L3 or greater, the highest quotation.
7. Negotiations: Potential for misuse in this process is significant. Sequence of calling vendors for negotiation is important. Original L1 vendor should always be the last to be called. This is to avoid leakage of Original L1’s final price to other bidders. If L1 & L2 positions before negotiation, get reversed after the negotiation, it needs to be enquired further to ensure that no manipulation has crept in. Similarly, if a vendor regrets to give further price reduction, it should be obtained in writing.
8. Repeated rounds of negotiations should be avoided. They are generally resorted to, only to favour some vendors.
9. Single-bid Purchases: Some time we may have to procure services from only one source. While it is fine in the case of OEMs (Original Equipment Manufacturers) or their Authorised Dealers, it would be problematic if the vendor is a local service provider, and we are required to finalise a purchase on one quotation (single bid). One possible way to ensure that unduly high price is not paid in such an instance, is to do a cost analysis. We assess the cost to the vendor with details gathered and finalise a price which gives a fair margin but not an undue margin to the vendor.
Is it necessary to go for sealed quotations everytime an item is required and for every purchase?
Not necessary. If a procurement has been finalized after proper Competitive Bidding Process, it could be used for placing “Repeat Orders” say for a period of six months. Similarly, for high-value purchases this process is necessary, while for low-value items, where annual value of procurement is not significant, procurement function may make enquiries and release purchase orders.
Procurement of goods and services constitutes a major cost in many organizations. Adequate and appropriate attention to the procurement process can mean significant savings to the organization, directly improving the profitability.
For more articles from me, please read my book “Translating Operations into Money” a collection of my actual work experiences over 3+ decades, narrated as business case studies. The book is available for online purchase at Amazon and at Flipkart. Please visit www.operationstomoney.com to know about the book.