Supply Chain
Management
Challenges
IMFO - Public Sector Finance Seminar
14 July 2015
Similo Mbongwe
CONTENT
1. Introduction
2. Legislation/Regulation
3. 13/14 Audit Outcomes
4. Lessons learnt
5. CPO’s Observations
6. Recommendations
7. Conclusion
INTRODUCTION
• The little research done in Supply Chain Management (SCM)
processes in local government suggests that there is a lack of internal
control
• This has led to increased cases fraud and corruption in SCM processes
• Linked to the poor controls is inadequate monitoring and evaluation
of SCM processes
• Hence some deviations or non-compliance issues have gone by
undetected in the past
• However, the Auditor-General has highlighted a number of internal
control deficiencies in most municipalities
• Accordingly, there has been a lot of improvement in terms of reducing
irregular expenditure and improving controls, but more work still
needs to be done
SCM OVERVIEW
Constitution
of SA
Systems Act ,
MFMA and its
Regulations,
BBBEEA,
PPPFA
Municipal IDP
Service
Delivery
Control Activities (SCM Policy, Procedures, processes, etc)
(Human
Settlements,
infrastructure,
basic services,
etc)
SCM forms a critical part of service delivery for municipalities and
for Government as a whole
4
SCM OBJECTIVES
Ensuring timeous delivery of goods and services at the right time, cost
and quality in line with the requirements of Section 217 of the
Constitution of South Africa (Fair, equitable, transparent, competitive
and cost-effective)
KEY SCM RISKS
• Fraud & Corruption;
• Delivery of inferior goods or rendering of services of poor standards;
• Late/no delivery/rendering of goods or services; and
• Inflated costs.
INTERNAL
CONTROLS
OVERVIEW
INTERNAL CONTROLS
• Components
• Control environment
• Risk Assessment (CSA & Operational)
• Information and communication
• Control activities (Policies and procedures)
• Monitoring (IA’s and EA’s)
• Responsibilities
• Council - Policy
• Management – Implementation of policies
• Auditors (Internal & External) – Assurance Providers 2nd and 3rd
line.
LEGISLATION/REGULATIONS
• South African Constitution, S217;
• Municipal Finance Management Act, S111, S112, S116, S168, S32,
S170 etc;
• Preferential Procurement Policy Framework Act;
• Municipal Systems Act, Code of conduct;
• Broad Based Black Economic Empowerment Act;
• MFMA Supply Chain Management Regulations, Reg 32, 36, 38, 41, 42,
44 and 45.
“The best supply chains aren’t just fast and cost
effective. They are also agile and adaptable, and they
ensure that all their companies’ interests stay
aligned” – Hau L Lee
2012/2013 AUDIT OUTCOMES
13/14 AUDIT OUTCOMES
IRREGULAR EXPENDITURE IN BILLIONS
14
12,228
12
11.473
10
9.323
8
6.768
6
4
2
0
2010/2011
2011/2012
2012/2013
2013/2014
• In 2013/2014, irregular expenditure for municipalities amounted to 11.473 billion when
compared to R12.228 billion in 2012/2013
• 81% of municipalities incurred irregular expenditure (Metros and Districts included)
• Major contributing factor to irregular expenditure is Non-compliance with SCM Legislation
and Regulations
IRREGULAR EXPENDITURE
• 58% (R6,598 billion) of the irregular expenditure transactions
audited, revealed that goods and services were received
• Non compliance issues included:
- 39% (R4.397 billion) Competitive procurement processes not followed
- 53% (R5.981 billion) Non compliance with procurement process
requirements
- 9% (R972 million) Contract management issues
• Recurring transgressions indicate that inadequate measures have been
taken by municipalities to prevent irregular expenditure
• There was Limitation of Scope on 73 Auditees in 2013/14 amounting R1.3
billion who could not produce evidence of SCM processes followed. In
2012/13 it was 98 Auditees with an amount of R2.8 billion
AWARDS TO EMPLOYEES, COUNCILLORS, STATE OFFICIALS
• 72 auditees awarded work to employees and councilors worth R 60
million
• 221 auditees awarded work to State Officials worth R 3.731 billion
• 47 auditees where councilors and officials failed to declare their
interest in transactions worth R 31 million
• 181 auditees failed to obtain declaration from suppliers/contractors
for transactions worth R 3.526 billion
“Operation excellence remains a greater imperative
than most companies and most executives
acknowledge” – Gene Tyndall, Supercharging Supply
Chains
AWARDS TO CLOSE FAMILY MEMBERS
• 100 municipalities awarded work to close family members of
employees and councilors to the value of R 781 million
• 31% of these municipalities failed to declare these awards in their
Annual Financial Statements as required by SCM Reg 45
UNCOMPETITIVE PROCUREMENT PROCESS
• 58% of municipalities had material findings
• Common findings:
- Three written quotations not invited for contracts under R200 000
and deviation not approved (45% of municipalities)
- Suppliers did not have their tax affairs in order (25% of
municipalities)
- Competitive bids not invited for contracts over R200 000 and
deviation not approved (21% of municipalities)
- Preference points system not applied (15% of municipalities)
- Declarations of interest not submitted (7% of municipalities)
INADEQUATE CONTRACT MANAGEMENT
• 34% of municipalities had material findings
• Common findings:
- Performance of contractors not monitored on a monthly basis (13%
of municipalities)
- No or inadequate contract performance measures and monitoring
(14% of municipalities)
- Contracts amended of extended with approval (10% of
municipalities)
INTERNAL CONTROL DEFICIENCIES
• 66% municipalities had inadequate controls
• Common findings:
- Inadequate controls to ensure interests were declared (21% of
municipalities)
- No plan for addressing audit findings on SCM (16% of
municipalities)
- No or inadequate record keeping (15% of municipalities)
- SCM officials not adequately trained (14% of municipalities)
- No or inadequate actions taken to address SCM risks (11% of
municipalities)
CHIEF PROCUREMENT OFFICER
Chief Procurement Officer has raised the following issues:
• Are we getting value for money on our procurement activities?
• Are we optimizing the use of national tenders (transversal contracting
system) for vehicles, medical supplies, computers, cellphones, plant
& equipment rentals, uniforms, etc?
• Are we standardizing design, contracting models, and SCM
documentation with regard to housing, IRPTN, etc?
• Are our procurement officials fully competent specialists?
• Is the use of ICT and data management being optimized – eprocurement solutions with a centralized database?
• What are we doing to improve efficiency and visibility across the
value chain?
• Are we paying fair value for our commodities?
LESSONS FROM MUNICIPLAITIES
WITH CLEAN AUDITS
• Commitment and single-minded intention of their leadership to lead
and set the right tone
• Basic internal controls and systems are in place
• Implement and monitor action plans to remedy deficiencies
highlighted in previous year’s audit findings
• Produce reliable reports – supported by documentary evidence
• Legislated duties being performed effectively
• Staff are fully trained on SCM Regulations
• Consequence management is in place
• Effective risk management process,
internal audit and performance management
Recommendations to improve SCM
Internal Controls weaknesses
SCM STRIVING FOR EXCELLENCE –
6 ENABLERS OF EXCELLENCE
Focused teams with clearly defined responsibility, authority &
accountability for all Supply Chain Management activities
Organization
& Structure
Supply Chain
Processes
Technology
Use of best-in-class spend analysis,
demand planning, inventory
optimization, e-sourcing /eprocurement (Source2Pay),
warehousing and measurement tools.
Strategic Sourcing teams using
category management and
deconstructing price methodologies,
transactional teams automated
ordering & decision support tools and
warehousing teams working within
advanced warehouse management
systems using inventory optimization
tools. Educated key stakeholders.
Best-in-class Supply Chain
Management processes with
standardised item/service
codification and the application of
management methodologies
relevant to item or category
characteristics.
6 Enablers to
Achieve SCM
Excellence
Strategic
Sourcing &
Warehouse
Processes
People
Right people in the right position,
empowered and driven by
accountability with a common and
comprehensive understanding of
the policies, processes and
procedures.
Learning /
Skills
Significant value resulting from lower supplier
prices, risk minimisation, reliable supplier
delivery and optimized inventory.
NON-COMPLIANCE WITH SCM REGULATIONS, POLICY &
PROCESSES
• Improved SCM Oversight – Council and its Committees (MPAC, F & P,
etc) and newly established CPO in National Treasury;
• Alignment of SCM Structures to the requirements of SCM elements;
• Constant review and updating of SCM Policy in line with any changes
in Legislation (if any);
• Adequate Training of SCM staff (including Bid Committee members
and officials outside of SCM Unit)
• Development of Standard Operating procedures for Supply Chain
Management processes with templates
• Sharing of good SCM practices amongst municipalities
• Implementation of ISO 9001 standards
• Effective monitoring of all Audit queries (to avoid recurring findings)
NON-COMPLIANCE WITH SCM REGULATIONS, POLICY &
PROCESSES
• Introduction of an online Quotation Management System in order to
eliminate human elements
• Implementation of effective controls Regulation 36 awards (centralizing the
process to SCM Unit)
• Internal Audit Unit to render more advisory services when it comes to
auditing of SCM
• Improved procedures for Demand & Contract Management
• Introduction of Pro-active Risk Management processes and embedding Risk
Management processes on day to day SCM activities:
• Development of SCM checklists for transactions under R200k and over
R200k
• Improved pre-screening processes using above mentioned checklist
NON-COMPLIANCE WITH SCM REGULATIONS, POLICY &
PROCESSES
• Declaration of Conflict of Interest by contractors or service
providers to be covered on both checklists;
• Register to be maintained for awards to close family members;
• Reporting of awards ito Regulation 45 to be reported to Council on
a monthly basis;
• Financial System to be configured in such a manner that it is
compulsory for a supplier registration number to be captured on
the system;
• Considering requesting Internal Audit to conduct audits on all
tenders above a certain value threshold before awards are made
public or finalized
• SCM unit to conduct workshops with unit who encounter
continuous SCM issues
NON-COMPLIANCE WITH SCM REGULATIONS, POLICY &
PROCESSES
“The best supply chains aren’t just fast and cost
effective. They are also agile and adaptable, and they
ensure that all their companies’ interests stay
aligned” – Hau L Lee
“If you cannot describe
what you are doing as a
process, you do not know
what you are doing.” – W.
Edwards Deming
“All we are doing is looking at the
time line from the moment the
customer gives us the order to the
point when we collect the cash. And
we reduce that time line by
removing non-value-added wastes.”
– Taiichi Ohno, the father of the
Toyota Production System
CONTRACT MANAGEMENT
• Developing effective procedures for Contract Management, incl:
• Clearly defining the role of SCM ito of awarding of contracts;
• Whose responsibility it is to monitor suppliers/contractors
• What information line departments are suppose to submit to
SCM to indicate performance of suppliers/contractors
• Development of a Supplier or Contractor Performance Management
Policy/procedures
• Centralizing Management of the Municipal Contract Register to SCM
Unit
• Linking the Central Contract Register with municipal Accounting
System with users having restricted functions on the contract register
• Only SCM officials with access to amend data on the register, other
officials have viewing rights only
CONTRACT MANAGEMENT
• Monitoring of contracts on a monthly basis by SCM Unit liaising with
relevant Heads of Departments
• Improved processes for Blacklisting:
• Appointment of officials with relevant skills in the Blacklisting
Committee;
• Ensuring that the Committee is multi skilled (Legal, SCM, Risk
Management & Finance, Engineers, etc)
• Development of SOP’s for blacklisting;
• Blacklisting procedures circulated municipal wide
• List of Blacklisted entities publicized on the Municipal Intranet
and used when awarding contracts
• Legal Unit to be involved in crafting of SLA’s to protect the interests
municipality
CONTRACT MANAGEMENT
• Consideration of ERP system in long-term
• Consideration of introducing Electronic filing system (Document
Management System)
IRREGULAR EXPENDITURE
• Refine processes to identify and report on irregular expenditure (eg
utilizing S71 report, monthly expenditure certificates, etc)
• Development of Standard Operating procedures for Supply Chain
Management processes, updated whenever there are SCM Policy
changes
• Ensuring that Municipal SCM Procedures differentiate between major
and minor deviations
• Improved processes for Procurement Scheduling which also links with
Contract Management
• Close Monitoring of Big Capital Projects which accounts for a huge
percentage of Municipal Capex
IRREGULAR EXPENDITURE
• Proper Screening of reports for Irregular Expenditure by Internal
Control, Internal Audit, CIIU & MPAC;
• Access to contract management system restricted to avoid variation
orders
• Disciplinary action instituted against all perpetrators of any wrong
doing
• SCM office to offer SCM training for non SCM officials to present
salient features of the MSCMP and training can be used to discuss
irregular expenditure issues for the departments
• Obtain clarity from National Treasury and Auditor-General on any
issues and this helps to avoid qualification issues.
CONFLICT OF INTEREST
• Updated declarations of interest - annually
• Introduction of processes for Verification of supplier information
against PERSAL data
• Establishment COI Task Team and register of awards ito SCM Reg 45
• Disciplinary action taken in all cases were officials were found guilty
after following requirement of S32
• Blacklisting of conflicted entities
VALUE-FOR-MONEY
• Benchmarking of prices – fair value
• Establishing a relationship with SABS for development of standards
for normal commodities with no standards
• Using National/Provincial tenders
• Optimise the use of ICT – E-procurement, Centralized Contract
Register, Online QMS
• Reduce turnaround times for SCM process by eliminating
inefficiencies in the process.
OTHER
• SCM Portal on the intranet – Bid Committee decisions, SCM Report
templates, SCM Circulars, etc
• Ensuring that all SCM Practitioners sign acknowledgment of receipt of
the SCM Code of Delegations
• Develop relationship with Auditor-General, Audit Committee, Internal
Audit and National Treasury SCM Office to assist with internal
controls and monitoring and evaluation relating to the SCM function
• Training of non SCM Staff and councilors and ensuring that they all
sign attendance registers.
OFFICE OF CHIEF PROCUREMENT
OFFICER
• National Treasury has issued several circulars and practice notes
around the issue of internal control and enhancing compliance and
accountability
• National Treasury must issue guidelines in dealing with irregular
expenditure and the process of regularisation/condoning process
• National Treasury to issue a guideline regarding the interpretation of
Regulation 44 (Principal Shareholder issue)
• This Office can be off assistance to municipalities score some quick
wins in turning around SCM process in municipalities
"If you don't have time to do it right you must have time
to do it over." – Unknown
CONCLUSION
• We all have a role to play
• Nothing is impossible to achieve
• We are all Public servants, let us always remember what is our role….which is serve serve
the Public
• It is now time to get BACK TO BASICS.
THE END
“I’m tired of high policy. I want to focus on nuts and bolts” – Dave
Freudenthal