This presentation is a case study on process validation for cost reduction. It highlights erroneous procedures and suggests corrective measures to remedy the process, whereby making it more efficient.

2. Background:
• No review of P2P process since inception.
• Top Management suspected collusion between suppliers and its own employees
responsible for P2P functions for packing material.
• Management asked us for recomendations to improve P2P process that should lead
to cost reduction.

3. Process Flow
Critical Observations
R&D
•
Release of original specs
& its modifications
Purchase
•
•
•
•
Receive quotations
Cost comparison
Selection of vendor
Raising of PO on vendor
PO
Specs
Indent/
Stores/
QC
•
•
Prepare Indent
Receive & confirm
quantity/quality as per
PO & vendor Invoice
Prepare GRN
PO
Specs
•
Finance
•
•
Verify Invoice with PO &
GRN
Payment to Vendor
Specs document for items not in
order. Specs are modified by
purchase/ store (unauthorized)
Specs
GRN
PO
Invoice
GRN
Payment
No criteria for vendor
selection/evaluation and PO terms &
conditions not clear (e.g: absence of
conversion rate for U.O.M.)
No Segregation of duty to perform
different function and no check to
confirm quality /quantity at receipt
stage itself
No reference to vendor category leads
to preferential payments to ineligible
vendors
One man show / Maker checker method not followed  High risk for collusion with vendor
Acronyms: R&D = Research & Development | Specs = Specifications | PO = Purchase Order | GRN = Goods Receipt Note | UOM = Unit Of Measurement | QC = Quality Control

4. R&D
Purchase
•
•
Verify specification document control
Verify specification maker/revision/modification authorization control
document
•
•
Review of vendor selection & evaluation process
Review and verify records of vendor quotation, cost comparison document,
vendor master, purchase orders
Joint visit to vendor with purchase department personnel
•
Indent/
Store/
QC
Finance
•
•
•
•
•
Verify indent, GRN and rejection documents
Physical verification of material at receipt, main store, dispatch area and
finished goods store
Study of Job responsibility with authorization matrix
Review of bill passing/payment process
Verify record of documents (Invoice, PO, GRN) to release payment with
authorization level
Challenges faced  Non co-operation from related staff for access to records/critical
information/vendor
Acronyms: R&D = Research & Development | PO = Purchase Order | GRN = Goods Receipt Note | QC = Quality Control

5. High rejection cost
R&D
Poor handling of specs documents  Receipt of material of different specs &
inferior quality  Transit damages to finished goods  High rejection cost
High cost & inferior quality
Purchase
Indent/
Store/
QC
No criteria for vendor selection  No periodic vendor evaluation  Selection of
wrong vendor Vendor monopoly/inconsistent deliveries  High cost & inferior
quality
Excess payment to vendor
No segregation of duty  No “Maker- Checker Control”  Collusion with vendor
 Acceptance of inferior quality/short qty  Excess payment to vendor
Interest loss
Finance
No reference to vendor category  Non-utilization of credit period 
Preferential payments to ineligible vendors  Interest loss
Auditee’s comment  It has shaken us!
Acronyms: R&D = Research & Development | PO = Purchase Order | GRN = Goods Receipt Note | QC = Quality Control

6. •
Introduce strict control on specs document specifically with reference to
modification - Must be only by authorized person of R&D
•
•
R&D
Establish vendor selection criteria and introduce periodic evaluation process
of vendor
Make clear PO terms for correct judgement by Stores , QC and Finance
•
•
•
Define job responsibility to ensure “Maker- Checker ” principle
Identify rejection before release of GRN
Training of personnel for quality inspection
•
Strictly follow 3-Way matching principle (Verify Invoice > PO > GRN) for
payments
Purchase
Indent/
Store/
QC
Finance
Recommendations appreciated and implemented by Management;
Disciplinary action taken against concerned employees
Acronyms: R&D = Research & Development | PO = Purchase Order | GRN = Goods Receipt Note | QC = Quality Control

7. Excess outflow of 19% of total packing
material procurement cost on account
of inferior quality of material.
19%
(Packing material forming 4% of total
procurement cost)
81%
Total packing material cost
Loss due to inferior quality
7%
Excess outflow of 7% of total packing
material procurement cost
on account of non-availability of
conversion rate for U.O.M.
93%
Total packing material cost
Acronyms: U.O.M = Unit Of Measurement
Excess outflow