Loading the supplier dice in the procurement process Claritum
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Contents

Introduction

The expression of loading the dice refers to the extra weight on the inside of a loaded die that causes the opposite side of the weighted side to come up more often.

In the case of procurement, loading the dice refers to taking actions that ensure a particular supplier is either always favoured, selected or is at least short listed.

This article avoids using the word fraud, in this context, as some of the methods to achieve this supplier loading could be deemed to be merely good competitive practice. Though most are definitely in the fraud basket and the rest would at best be termed controversial business practices. From a procurement perspective understanding all aspects of loading is important to counter possible unfair bias in a procurement process.

Four areas where supplier loading occurs are:

  • Eliminating or reducing competition
  • Biased supplier selection
  • Biased Contract negotiation or management
  • Low bid with knowledge that over or false payments can be extracted

1Eliminating or reducing competition

Here the intent is simply one of eliminating or reducing competition and competitive pressure. You can’t lose if you’re the only supplier right?

In this context of eliminating competition, there are some obvious signs that could indicate a bias towards a specific supplier. These should flag up a need to ask questions around potential bias:

  • Single tender
  • Extension of contracts
  • Tailored specifications
  • Companies not bidding
  • Suppliers included in the process who are ill-equipped to supply the goods or services

Single Tender

In the case of single tenders. The question is whether this has in some way been orchestrated by the suppliers engagement with your organisation. Why is only one company being invited to tender – does this significantly outweigh the benefits of a competitive tender? Where is the evidence that a single tender will produce the optimum value for your organisation?

Extension of contracts

In the case, where a current contract is being extended, questions can be asked in a number of areas. Is this merely to reduce workload on individuals within an organisation or are there other clear commercial benefits of extending a current contract? Was a competitive process completed and the extension resulted, as it offered the best value? Has a supplier made an unsolicited offer to extend a contract trying to avoid a competitive process? Has a supplier extended a current supply contract to include additional items, services or functionality, again to avoid a competitive process?

Tailored Specifications

Tailoring the specification. Often this is where a supplier has had undue influence over the specification and perhaps undue influence over an individual within an organisation who is specifying the requirements. This results in a particular bidder becoming the only supplier who can fully meet the specification and perhaps even the only supplier with certain mandatory functionality.

Companies not bidding

Discouraging other bidders from competing. This can be through inducements or verbal warnings to not bid on a particular project: either offering alternative projects to bid on or by implying that a supplier will not win the project even if they bid for this project.

ill-equipped suppliers

The inclusion of suppliers in a purchase process who will be unable to fulfil the requirements is another biasing method. This works well If the requirement is for a one off purchase, as it is possible for the requestor to provide ideas of possible suppliers knowing that only one of them will be able to respond well.

Possible ways to combat competition reduction practices:

Initially ensure that a number of suppliers have been pre-identified that can supply the required goods or services. Then align the process so that each supplier can bid. Central procurement oversight of all new supplier selection and processes that automatically introduce competition are areas to consider. Also, using automation can isolate the requesting party from the supplier community.

2Biased Supplier Selection

Once we get into the procurement process itself, there are further opportunities to distort the process and load the dice in favour of a specific supplier.

This can fall into a number of areas:

  • How the evaluation process is to be conducted
  • Providing Insider Information
  • How the bids are scored

The first of these, how the process is conducted, is affected by introducing a process of evaluation that by its nature will favour certain types of supplier or a specific supplier. Either reducing or totally eliminating competition. For example, if the process requires a supplier to complete a 100 page supplier questionnaire with many cross referenced standards and mandates a number of meetings prior to a decision, this might favour larger companies or companies that are already suppliers.

The second bias can be created by providing Inside Information. If a supplier has information that is not available to other suppliers this would place them in a more favourable position to make a successful bid. This knowledge could be financial – the budget level. It could be commercial, in that bids offering certain terms are more likely to win, or it could be technical in providing more details on functionality that is critical for a winning bid.

Finally bias can be achieved through how bids are marked. Marking a specific supplier more favourably over their competition, even though there is no evidence to suggest that they should be scored higher than the competition.

Possible ways to combat biased supplier selection practices:

Firstly the process has to be analysed as to its suitability for a range of supplier sizes – perhaps by the nature of the opportunity a supplier has to be large, however many purchasing processes are set up for strategic large supply contracts and when applied to other spend they “accidentally” select out SME organisations. Next, there have to be very clear rules for suppliers on how procurement processes will be undertaken and what supplier activity is acceptable during the process. Also, within the organisation itself, there has to be clear guidelines on processes and interactions with potential suppliers.  In the case of Indirect Spend these rules can be included in an automated fashion, as a process chain, with all supplier interactions through an automated process, significantly limiting direct supplier interactions.

3Biased Contract negotiation or supplier management

During contract negotiation and management it is also possible to introduce supply arrangements that are biased towards the specific supplier. It usually involves collusion, with the buyer and supplier agreeing terms, conditions or payments that are not truly competitive and therefore provide some unfair advantage.

This can happen even where the supplier selection has been free of any bias. The following are examples of bias in this context:

  • Introduction of specific T&Cs: terms that are not truly competitive
  • Applying eased contract terms: terms that apply only for this specific supplier that make it more likely that they will win future business
  • Contract change: agreeing changes to the contract that again favour this specific supplier.
  • Contract extension: Either in scope, volume or time, again where this is against the best interests of the buyer.
Possible ways to combat biased negotiation or supplier management practices:

Standard terms and conditions is one approach, however with larger suppliers negotiation of these terms is inevitable. It is therefore essential that there is some overseeing of changes to contract and that any terms agreed with one supplier are open for consideration for other suppliers to enable truly competitive quotations: if favourable terms are always applied for a specific supplier then of course this supplier will be able to make offers based on these favourable terms.

5Low bid with knowledge that over or false payments can be extracted

Another common concern involves over-payment or additional payments being extracted. In these cases often payments are received that are not reflecting the actual goods or services provided. This usually requires collusion with someone within the contracting organisation, though this can also occur where a supplier knows that invoice checking is flawed within an organisation.

A supplier, with prior knowledge that they will receive additional payments, can of course make a low initial offer for goods and services to ensure they win the contract.

Where do we typically see these issues:

  • Invoicing for more than the actual amount provided for goods or services: for example quantities do not match or more professional service days are billed for than were delivered. Plus, invoicing when nothing was delivered, if there are no checks made against goods received.
  • Over-charging for goods or services: Invoicing at prices that are higher than those that were agreed in the supplier contract. This is more common in the Indirect spend domain, as references back to contracts are often manual processes: for example there may be price breaks on volume that are not picked up and larger volumes are purchased at higher prices than contracted.
  • Over-buying of goods or services. Where a supplier has undue influence over an employee to encourage additional purchases or buying to achieve volume discounts of goods or services that are not actually required. The purchasing organisation for example ending up with stocks of purchased items that will last for months.
  • False invoices can also be received from companies, in some cases that are not actually suppliers. If these are processed and paid then this encourages continued and regular invoicing for goods or services that are never provided and were never requested.
  • Payment diversion can also occur, where an individual within an organisation arranges for payment to made to an account that is not the suppliers account. These payments could be payments that the supplier was not expecting or they could be expected payments and payments are duplicated.
Possible ways to combat over or false payment practices:

Automation in the area of Indirect Spend is the most critical in this regard: often on indirect spend orders, invoices and receipts are manually checked and processed and this is prone to errors and loss of critical paperwork, resulting in opportunities to elicit false payments or for overpayments to be made. Automation of the process, including matching of all documents (specifications, goods received, orders, invoices…) minimises any possibility to over or false invoice for goods or services.

6Does that capture the problem?

Loading the supplier dice in the procurement process Claritum
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This article has over simplified a very complex problem, focusing on only 4 aspects. Primarily to highlight some of the domains within which issues can occur. The supplier dice can be loaded in incredibly complex ways and to try to cover all possibilities and highlight all methods of loading the dice would make for a very long article.

The article has, for example, not focused on issues of bribery and corruption within the supply chain, which in certain parts of the world is significant and the major issue associated with supplier bias.

Also, we have not included examples of supply where social responsibility factors are broken: perhaps supplying goods from factories where slave labour is used, or where environmental requirements are not met, to enable the supplier to make higher profits on supplied goods or offer lowest price bids when they are not meeting the organisations expectations of a socially responsible supplier.

These other factors, and the fact that the areas highlighted in this article can be more complex, highlights how difficult this supplier bias can be to counter in supply chains.

Because of this complexity, Claritum does not claim to remove supplier bias, however we do claim to significantly reduce the opportunities for supplier bias. Addressing supplier bias through automation of the procure to pay process and providing configurable process mechanisms to minimise supplier bias opportunities.

Perhaps we could claim that we introduce processes and automated checks that make it significantly harder to load those dice!

Don’t gamble with your suppliers – give Claritum a call.

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