By Jeremiah Ndhlovu, CERM
“Run your business as if it’s in trouble. Because if you don’t it will be some day.” (Jack Miles)
Procurement is one of the key processes that have been ingrained in the mining value chain such that the risk mitigation measures therein are applied by the procurement personnel subconsciously. Having established processes is great in that the room for error is negligible as incumbents generally know their processes very well. The only danger is when people have the entrenched know-how with no understanding of the key risks being managed. In the dynamic operating environment, the usefulness of traditional procurement processes may be overtaken by events, thereby exposing the organisation to some avoidable risks.
It is, therefore, imperative that procurement practitioners get to know the key risks in procurement to proactively replace processes that are no longer effective as risk mitigation measures. Risks in procurement are replete and include expensive purchasing, unreliable suppliers, inconsistent delivery lead times, quality concerns, poor support services etc. The risks are numerous and the purpose of this discussion is to unpack some of these key risks.
Procurement is generally a costly function for mining enterprises, considering the level of investment needed for the enterprise resource planning (ERP) systems for managing the purchasing function and maintaining inventory records as well as the significant volumes of inventories purchased to sustain operations. In recent years procurement has evolved to be a strategic matter considering the materiality of the values of inventories purchased and stored. It will, therefore, be greatly uneconomical if an enterprise is overstocked since working capital, that would have been utilised for other operational needs, will be locked in inventories for a very long period of time. Personnel experience in this area is pertinent as a quest to minimise overstocking may result in stock outs which are also detrimental to the smooth operation of the organisation. Proper planning of re-order levels, order quantities as well as minimum and maximum inventory levels will bring the necessary balance between cost containment and operational efficiencies. Another driver of excessive costs is purchasing from too expensive vendors. Some of the expensive purchases are unavoidable, where the vendors are sole suppliers of the materials procured. It is, however, worthwhile for the procurement practitioners to conduct detailed market scans to determine whether there are no other vendors offering competitive products and services of the right quality.
Some suppliers are opportunists and will strike a once middle man role and will not be available to continue providing products or services. It is costly to engage such suppliers of products or services which require after sales services or require unique spare parts or consumables. In cases of inconsistent suppliers for specialised products and services, the organisation may be forced to change some assets before they reach their useful lives due to the supply constraints, and that is costly in the medium to long term. Wherever possible, shrewd organisations mainly engage established original equipment manufacturers (OEMs) with indelible track record in the sector. Such established OEMs are resilient and normally absorb operational shocks they are exposed to without significantly curtailing supply requirements of their customers.
Inventory quality cannot be overemphasised for mining enterprises. Mining is a specialised sector and not any person can establish whether technical materials delivered are of the right quality. It is imperative that mining organisations reserve receipt confirmation of technical materials to well qualified personnel to avoid acceptance of substandard products. Considering the cost materiality of mining materials, it will be a great drain of the profitability of the organisation if the procurement personnel are not judicious enough to flush out counterfeit materials.
The matter of delivery lead time is instrumental in inventory planning, especially for mining entities, more so as some materials are only manufactured upon receipt of an order by the vendors. This entails that delivery may be fulfilled a couple of months after an order has been placed. Failure of the vendor to stick to agreed lead time may result in stock outs, which will affect seamless mining processes. Use of reliable vendors is, therefore, of great importance for effective mining operations.
Poor support services will prove costly especially where some assets are specialised such that the support services will not be readily available in the market. Mining entities will, therefore, get value for money if they engage suppliers which provide impeccable support services.
It will be difficult to exhaust all procurement issues that mining entities need to deal with. It is, however, key to note as discussed above that, in as much as practitioners may view their processes and systems as unbreakable, it is key for practitioners to appreciate the risks that are managed by their systems to ensure that they timely identify any system deficiencies as they creep in. The operating environment is dynamic.
About the Author
Jeremiah Ndhlovu is a Certified Expert in Risk Management (CERM). He has acquired extensive risk management insights in the mining sector through outsource projects including enterprise risk management, combined assurance, process and controls standardisation, internal auditing and external auditing.