War Dogs or a cautionary #Procurement tale

Procurement Fraud SME Supplier Diversity

On a recent long-distance flight, I came across the movie War Dogs on the entertainment system menu. I had no idea I was in for a “Procurement movie” of sorts. Can you imagine someone successfully pitching a movie about a procurement project gone wrong to a studio boss in Hollywood? I could not… But this was indeed quite a spectacular real-life case, it made for an entertaining flight and contained some close to life truth about procurement short-sightedness and risks.

The two main characters, barely out of school, understand that there is an opportunity to bid for small US government contracts which large suppliers are not interested in. They start off bidding for small ammunition supplies and successfully fill the orders. With the war in Afghanistan in full blow, they see that many larger opportunities are available and eventually bid for them.

Tapping sketchy sources of supply in Eastern Europe, they bid for a Department of Defence tender to supply 300m worth of supplies to the Afghan military in 2007. In the movie you see them come to present their proposal to a room full of decision makers in Procurement. The obvious, that the two presenters are very obviously quite green, is ignored for the excitement of having saved a huge amount compared to the next best bidder. The government’s intent to provide more access to opportunities to SME suppliers seemed to have added to the willingness to forego proper due diligence and overlook a number of red flags, including the ability of such a small outfit to supply a contract that size or the incredible price gap.

Certainly dramatized for Hollywood, it is nevertheless a real life story, incredible as it is. But it also rings close to life for many in Procurement and has some good learnings in it:

  • Savings are such a strong component of Procurement performance evaluation in many organizations that a supplier who can bid aggressively has a big advantage and Procurement may be prone to brush over other deficiencies to justify their selection. Who hasn’t seen the aggressive savings numbers achieved in a category project become none or even an extra cost later on when another supplier (or in-house resource) have to clean up the mess caused by poor quality services/products? More often than not, the Procurement “hero” in charge has left the organization by then or conveniently moved into another area.
  • Many organizations look to foster entrepreneurs and SMEs now. But making sure, the opportunities are a realistic project for the organization is part of the job and not just blind enthusiasm for start-ups. You also need to responsibly build up their capacity and ensure you don’t become a bulk risk customer. As much as the SME may want to please you or be keen to do bigger and bigger, it’s important that they scale up capacity sustainably, develop a customer portfolio and not just cultivate one key relationship.
  • Due diligence is tedious, but for both large suppliers and less established ones important. Ensuring that they are financially stable to support you throughout the deal and beyond, that their supply chain is legit and that you are not falling prey to a fraudulent set up as in this case can’t fall by the wayside. The due diligence needed is also a function of the industry you operate in and the category sourced. The more risk, operational, financial and reputational is involved, the more due diligence needs to be applied. And more so for product categories that are challenged from a CSR perspective (arms, minerals and such).

Being an advocate of SME suppliers and in favour of more agile Procurement processes, this is a reminder that both still need to be done smartly and without dropping risk considerations. And an illustration of how wrong the single-minded focus on impressive savings numbers, all too common still, can lead to very detrimental outcomes.

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