Skanderborg District Council puts purchase procedures under the microscope with SAS® for procurement and supply management

Inadequate oversight of procurement spending makes it impossible to prioritize supply areas and, with new control directives coming into place, could lead to fines against Denmark's Skanderborg District Council. A procurement and supply-management solution from SAS sheds light on the council's purchasing landscape, allowing the district to exercise tighter control over tender invitations.

According to the district's calculations, an average Danish district council can save close to DKK 60 million (US$11 million) solely through optimizing the management of procurement budgets. Through procurement savings and other cuts, Skanderborg District Council has resolved to save DKK 100 million in 2011. Going full speed ahead with a procurement solution developed in partnership with SAS and the Viborg District Council, Skanderborg created a central navigation tool to help achieve its goal.

The procurement solution provides unprecedented insight into the council's purchasing activities and has uncovered numerous unintended aberrations that have cost the council dearly in high prices. It also provides informed insight into the council's supply areas – a critical component of meeting the new control directives.

The key to improved supply management
"We have a procurement budget of DKK 1,100 million and spend DKK 800 million with private suppliers," says Søren Hvilsted, Skanderborg's Purchasing Manager. "Previously, we could not say what we were buying in terms of product categories, which posed a significant problem for those who manage tender processes and optimization."

The procurement solution analyzes the Skanderborg and Viborg councils' invoices down to product-line level and categorizes purchases in relation to product lines and services using universal codes. For example, if the solution spots product-line text that reads "green dry-wipe marker," it knows the product must be a whiteboard pen and thus categorizes the expense under "office supplies."

"It is this collection, organization and matching of data that is key to improved supply management," explains Hvilsted.

Invitations to tender based on facts
The control directive challenges the breadth and scope of the council's procurement procedures, and it hits two sore points: overview and economies of scale, says Hvilsted. In all, 100 institutions fall under the council's jurisdiction. Such widespread decentralization prevented the purchasing staff from having the levels of insight and facts required for compliance.

"It's an obvious problem, and it's not unique to Skanderborg District Council," Hvilsted says. "We didn't know how many employees were making purchases, what they were buying, and how much they were paying. We have that information today. The procurement solution feeds us with facts and supports the council's purchasing in a constructive way."

The procurement solution has shed light on the gray areas of Skanderborg's procurement landscape. As a result, the council found 123 European Union tender areas that Skanderborg must open to competitive bid to avoid fines and contract terminations.

"We can handle a maximum of 60 tenders in a four-year cycle with our current staff of three tender consultants, so we have to restrict tender invitations for small product areas and concentrate on large areas where the complexity in relation to the tender process and implementation creates the greatest possible value," Hvilsted says.

Previously, selection was ad hoc and decisions were made on rather frail grounds. Putting values on product groups required data from suppliers, and the council asked them to deliver statistics for its purchases.

"It was a huge task based on a guess," says Hvilsted. "The suppliers had taken over and we were totally dependent on their data. We have become significantly sharper in that field. If we want to know whether an area should be put out to tender, we can run a report of turnover for the product group broken down by product, units, prices and providers."

Intelligent processing power
In addition to the Skanderborg District Council, 30 other councils are connected to the supply solution's central database, which houses all invoices, product categories and supplier information. The database is equipped with an analytical engine that categorizes purchases. Rules are recalculated and applied nightly.

“There are about 22,000 danish UNSPSC codes, and it would  be humanly impossible to analyze all the data manually,” Hvilsted says. “The procurement solution is intelligent and gets smarter every time we or another district council feeds it information through SAS. In this way, it is never a static accounting system but a management tool to gain insight into what our consumption looks like and who we do business with.”

Expensive mats
The newly acquired information has resulted in several "aha!" moments in Skanderborg. For example, the council found out that it annually bought mats for DKK 544,000 from a wide range of suppliers. The discovery led to the area being put out to tender, and today the cost has tumbled to DKK 220,000, a 60 percent savings.

"There are many of these hidden surprises when we start digging," says Hvilsted, including:

• A survey of ink cartridges and toners expenditures revealed 25 different suppliers, even though only one selected supplier has a purchasing contract.
• One institution was paying for office supplies that were free from the contracted supplier.
• One institution was buying its hygiene items from an office supplier and paying 30 percent more than the offer from the contract supplier for hygiene.

"Figures like these are an eye-opener, both for us in the purchasing function and out in the institutions," says Hvilsted.

Compliance in a new light
According to Hvilsted, the district council has also taken a giant leap forward in compliance and contract fulfillment. This is an area where district councils traditionally are weak and dependent on suppliers' input.

"In most places, we monitor contractual compliance together with the suppliers. If the amount as featured in the tender corresponds more or less with the expenditure on the product group, we shake on it.

"But lots of products are sold outside the tender lists; here the supplier's gross margin is typically significantly higher and we are therefore often left with a misleading picture. The procurement solution collects data on all products purchased in a product group from a supplier and matches them with the tender lists. If a type of toilet paper is bought that is not covered by the purchase agreement, we see it right away and can act. It is a very powerful tool to identify the drift that typically occurs on the agreements."

Full-time grocery shopper
Besides the basic purchasing management, the procurement solution has revealed examples of inappropriate work practices. For example, a review of miscellaneous invoices revealed that, in a single year, employees made 2,700 purchasing trips to the Netto supermarket. Effectively, that's as if the council paid a full-time employee to do nothing but buy groceries all year round.

The results illustrated in this article are specific to the particular situations, business models, data input, and computing environments described herein. Each SAS customer’s experience is unique based on business and technical variables and all statements must be considered non-typical. Actual savings, results, and performance characteristics will vary depending on individual customer configurations and conditions. SAS does not guarantee or represent that every customer will achieve similar results. The only warranties for SAS products and services are those that are set forth in the express warranty statements in the written agreement for such products and services. Nothing herein should be construed as constituting an additional warranty. Customers have shared their successes with SAS as part of an agreed-upon contractual exchange or project success summarization following a successful implementation of SAS software. Brand and product names are trademarks of their respective companies.

Copyright © SAS Institute Inc. All Rights Reserved.