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HomeMy WebLinkAbout1999-11-03 City Council (3)TO: City of Palo Alto City Manager’s Report HONORABLE CITY COUNCIL ATTN:FINANCE COMMITTEE FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE SERVICES DATE: SUBJECT: NOVEMBER 3, 1999 PURCHASING AUDIT STATUS UPDATE CMR: 405:99 BACKGROUND In 1995, the City Auditor completed the first in a series of three audits of the City’s purchasing function. The recommendations in this audit caused staff to re-examine the role of the Purchasing Section (Purchasing) in the City. At that time, the City’s purchasing functio~ was decentralized. Purchasing’s role was primarily to support the administrative steps in the purchasing process. The audit identified a number of internal control weaknesses with this decentralized purchasing process. The audit recommended a much more proactive role for Purchasing, which included more oversight and involvement in the process. In late 1995, staff hired a new Purchasing Manager and reviewed the costs and benefits associated with a more centralized purchasing function, concluding that there could be a net benefit. Staff formulated a plan to address the necessary organizational and process changes that would be required to transform the role of Purchasing. The plan included reorganization of the purchasing function; hiring two new contract managers; a process improvement study and the implementation of resulting improvements; the introduction of new purchasing policies and procedures; and purchasing training for departmental staff. A second purchasing audit was completed in early 1997. The findings in this audit" also reinforced the need to change the role of Purchasing in the City organization. Following the completion of the second audit, staff turned its attention to reshaping the City’s purchasing function. With the 1996-97 Adopted Budget, Council approved the addition of the two contract managers, bringing the number of contract managers to three. After the contract manager positions were filled, staff completed a reorganization of Purchasing. At the same time, a cross-departmental team was working to identify and begin to implement a number of significant process changes. These changes CMR: 405:99 Page 1 of 10 addressed the internal control concerns identified by the City Auditor and provided a quicker, simpler, and more cost effective purchasing process. The last audit of Purchasing was completed in September 1998, and was presented to the Council in January 1999. The timing of the audit overlapped the process improvement efforts that were underway in Purchasing. The Council referred the audit to the Finance Committee for review and comment. The audit was discussed at the July 20, 1999 Finance Committee meeting. At that meeting staff indicated that significant progress had been made since the end of 1998,. when the final purchasing audit was completed. The Finance Committee requested that it have an opportunity to review the current status of the audit findings. DISCUSSION This report is prepared to provide the Finance Committee with information on how staff has addressed each of the findings identified in the last purchasing audit. The report is divided into three sections: internal control issues related to purchase orders; internal control issues related to blanket orders; and operational effectiveness and efficiency opportunities. Internal Control Issues (Purchase Orders) Staff put significant effort into evaluating the internal control recommendations in the final purchasing audit. Since internal controls can prove to be costly, this evaluation included an assessment of the cost of adding the control versus the risk of loss in absence of the control. While staff did not implement all of the City Auditor’s internal control recommendations, all significant internal control concerns have been addressed. Recently, staff completed a new Purchasing Policy and Procedures Manual that includes the process changes implemented over the last several years and the associated internal controls. The City Auditor reviewed and provided input into this Manual. In addition, a number of key desk-level procedures have been developed to document requirements for Purchasing staff. The Purchasing Manager has spent a significant amount of time sharing the new procedures and requirements with Purchasing and departmental staff. In addition, formal training sessions have been developed and will be offered at the Cubberley Training Center in March and April 2000. There have been several important steps added to the process to ensure that purchasing activities are conducted in accordance with the new Purchasing Policies and Procedures and that the internal controls are working. A control checklist (Attachment A) is now utilized when processing orders to record compliance with the City’s purchasing requirements. All exceptions to the City’s purchasing requirements are documented, reviewed and approved by the Purchasing Manager. One-over-one approval is required for each order placed. For all orders over $25,000, the control checklist and all associated file documentation is reviewed by the City Manager’s Office. Before an CMR: 405:99 Page 2 of 10 order is mailed, an administrative staff person reviews the control checklist along with the associated file documentation for completeness. Periodically, the Assistant Director of Administrative Services reviews a sample of purchasing transactions for compliance with all associated purchasing requirements. Provided below is the current status of the each of the findings in the area of purchase order internal controls. Finding Number 2 4 Finding Description Price quotes were not obtained as required. Sole source purchases were not properly justified and were not properly approved. Purchase award amounts exceeded vendor submitted quotes and awards did not reflect the lowest prices. Current Status of Finding For all purchases over $3,000, a minimum of three quotes or bids are obtained whenever possible. The number of quotes/bids obtained is now documented on the control checklist with appropriate explanations when three quotes cannot be obtained.’ Vendors are contacted to provide "No Bid" statements for the file. Purchasing also verifies all department supplied quotes by contacting the vendor. All purchases over $5,000 have sole source justifications provided by originating departments or by the buyer when multiple departments are end-users (such as Stores product purchases). All sole source justifications are reviewed and approved by the buyer or Contract Manager, the Purchasing Manager, and the City Manager’s Office. Purchasing independently verifies the sole source condition on a sample basis and anytime there are questions as to whether or not competition exists for a sole source purchase. Purchasing award decisions are based on the lowest responsible bidder, which is not necessarily the low price bid. Files now document the reasons for awarding to other than the low price bidder (e.g. low price bid did not meet bid specifications). There are instances where verbal changes are made to a quote during the award process (e.g. vendor- recommended changes, departmental changes). Files now fully document the circumstances where quantities were adjusted before orders were placed. CMR: 405:99 Page 3 of 10 Finding Number 5 7 10 13 14 Finding Description ¯ Purchases were approved after receipt of goods or services. Purchase requisitions and purchase orders were not properly approved. Amounts and quantities were changed without explanation, justification,, or approval. Buyer assignments are not rotated. Standard material codes are not used for purchases. Current Status of Finding Purchasing monitors order and receipt dates and now contacts departments that place verbal orders before purchase orders are written and approved. Purchasing has spent time educating departments to ensure that they understand the risk faced by the City when verbal orders are placed. Purchasing now provides departments with purchase order numbers only when the purchase request is complete, including all required approvals. On an annual basis, Department heads designate certain staff to approve purchase requisitions. All purchase requisitions are screened for proper approvals by both buying and administrative staff. All purchase orders are reviewed by buying staff, the Purchasing Manager, and administrative staff to ensure proper approvals. To further improve controls, staff plans to automate approvals in the near future. Buying staff now fully documents all changes in requirements, including descriptions of additional items or services to be provided. Purchasing informs departmental staff regarding changes in purchase requests that substantially change the price or product. Requests for change orders are reviewed by the buying staff to ensure that they contain an explanation for the change. Commodity assignments were rotated in June 1999. Staff plans to rotate commodities on an ongoing basis with rotations occurring at least every three years. The City’s financial system cannot accommodate standard material codes without costly modifications. Commodity information is now gathered and collected manually and reports of purchases by commodity are generated as needed. This feature will be incorporated into specifications for the new financial system recommended in the IT CMR: 405:99 Page 4 of 10 Finding Finding Number Description 16 19 A mechanism for gathering vendor performance information has not been established. Comprehensive management reports not generated. are Files were missing. Written procedures have not been revised and distributed to departments. Purchase orders with term contracts are not properly reviewed. Current Status of Finding Strategic Plan. Vendor performance information is now collected on an informal basis. Although staff recognizes the value of establishing a vendor performance database, collecting and verifying the validity of the data on a more formal basis would be costly at this time. The number of marginal performers is too small to make this effort worthwhile on a routine basis. Staff will reassess this recommendation when a new financial system is in place that has the capability to automate vendor performance information. Management information reports have been generated and are used to monitor performance on a monthly basis. Examples include a Blanket Order Report that was designed to monitor blanket order activity, a Purchasing Transaction Report, and a Buyer Processing Report. Expanded reporting capabilities will be incorporated into specifications for the new financial system. To improve file organization and control, Purchasing files have been consolidated from four to two locations. In addition, staff has implemented the use of checkout cards to monitor files taken. A new Purchasing. Policies and Procedures manual has been completed and is currently being reformatted for placement on the Intranet. Training has been conducted with key department staff to review and highlight changes in the purchasing process. Formal training sessions will be offered to City staff at the Cubberley Training Center in early 2000. Term contracts are reviewed and approved when the contract is established. Review of the term contract each time an order is placed against it would be duplicative and time consuming; however, the term contract may be ¯ CMR: 405:99 Page 5 of 10 Finding Finding Current Status Of Number Description Finding reviewed at any time upon request. Internal Control Issues (Blanket Orders) Blanket orders (or open purchase contracts) are for repetitive purchases of materials, supplies, equipment and services where the exact dollar amount and the exact quantity of the purchase is unknown. Blanket orders, are typically for small dollar value purchases. Approximately 60 percent of the City’s blanket orders were less than $3,000 and approximately 95 percent were less than $25,000. With a blanket order, the City is not making a purchase commitment with the vendor nor is the vendor committed to supply materials or services to the City. Blanket orders are used to establish price and billing terms with a vendor and expenditures are estimated. Vendor quotes are based on expected expenditures (volume) and are often stated as a percent of the list price. Examples of existing blanket orders include: Airtouch Paging, Kinko’s Copies, Lyon’s Restaurants, Fry’s Electronics, Peninsula Building Materials, and Batteries USA, Inc. The City has a number of low value blanket orders with vendors that are close to City locations (e.g., Diddams, Palo Alto Hardware, Palo Alto Bicycles, Radio Shack, and Wolf Camera), which the City considers convenience blankets and which are not competitively bid. During the audit period, all blankets were terminated at the end of the fiscal year and reissued the next fiscal year. Staff could not effectively handle both the high year-end purchasing volume and the renewal, of thousands of blanket orders at the end of the year. Since every order placed against a blanket order is reviewed and approved by authorized departmental staff, timely blanket order renewals were a lower priority for staff than were commitment procurements. Because of the process problems inherent with blanket orders, the Auditor identified a number of internal control issues during his review of the City’s blanket orders. These issues included: only a small number of blankets had been competitively bid; blanket orders were not in place (issued and approved) at the beginning of the fiscal year, yet departments were placing orders against them; and blanket orders did not specify the products and services being purchased. Today, the blanket order process has been completely redesigned. Blanket orders are no longer established on a fiscal year basis. Blanket order renewals are now staggered more uniformly throughout the year, with terms up to three years. This has reduced the nuNber of blanket orders that are processed at the same time, allowing the Purchasing staff to provide appropriate oversight based upon the value of the procurement. The current status of the blanket order internal control findings follows. CMR: 405:99 Page 6 of 10 Finding Number 1 2 5 6 7 Finding Description Blanket orders were not competitively bid. Price quotes were not obtained as required. Purchases were approved after the goods and services were received. Blanket orders were not presented to the City Council and approved as required. Purchase requisitions were not properly approved. Current Status of Finding In the last year, approximately 80 percent of the City’s non-convenience blanket orders have been competitively.bid as required. A minimum of three price quotes or bids are now obtained whenever possible. The number of quotes or bids is documented on a control checklist with appropriate explanations when three bids cannot be obtained. Every blanket order is reviewed and approved by the Purchasing Manager and by the City Manager’s Office when the amount exceeds $25K. In addition, multiple blanket orders with a single vendor are totaled to determine required approval levels. Now that the processing of blanket orders is spread throughout the year, Purchasing is able to ensure blanket orders are in place with proper approvals prior to the receipt of goods and services. In late 1997, following the redesign of the blanket order process, a report (Blanket Order Report) was created to provide a listing of blanket orders for Council review and approval. The report also facilitates the monitoring of blanket order activity. In March 1998, staff began reporting blanket order activity to Council. Since that time, blanket order reports have been issued to Council on a quarterly basis as required. Staff has also implemented the procedures recommended in the audit to ensure the information presented to Council is complete. Purchase requisitions are required for new blanket orders and not for blanket order renewals. Purchase requisitions are reviewed by buying staff, the Purchasing Manager, and administrative staff to ensure proper approvals. For higher dollar value blanket order renewals, Purchasing staff notifies departments before the blanket is renewed. To further improve controls, staff plans to automate approvals in CMR: 405:99 Page 7 of 10 Finding Number 8 9 I0 II 12 20 Finding Description Individual blanket orders are not combined in determining reporting and approval requirements. Blanket orders did not describe what was being purchased and the related unit cost. Amounts and quantities were changed without explanation, justification, or approval. Blanket orders were improperly used. City expenditures exceeded blanket order amounts. More multi-year blanket orders should be negotiated. Current Status of Finding the near future. The Blanket Order Report is now utilized to combine multiple blanket orders to the same vendor for reporting and approval requirements. Each time a blanket is competitively bid, all items or services that can be identified are fully described in the bid request. Buying staff now fully documents all changes in requirements including descriptions of additional items or services to be provided. Purchasing informs departments regarding changes in purchase requests that substantially change price or product. Proper training is an ongoing process as blanket orders are renewed. This will also be covered in the formal purchasing and contracting classes to be conducted in 2000. Blanket orders are used to establish pricing and billing terms with a vendor and blanket expenditures are estimated. As such, it is possible that the estimated value will be exceeded. To control activity, each order against a blanket must be reviewed and approved by authorized departmental staff. In addition, each buyer/contract manager is responsible for monitoring activity on blankets and pursuing better pricing or discounts when values exceed estimates. In addition, procedures have been established to control expenditures exceeding $25K and $65K, where additional approvals may be required. Approximately 10 percent of the City’s blanket orders are now established on a multi-year basis. Whenever it is to the City’s economic CMR: 405:99 Page 8 of 10 Finding Finding Number Description Purchasing does not issue citywide blanket orders. Current Status of Finding advantage, multi-year blanket orders are established. Economic advantages include: firm pricing for the period; favorable discounts for longer agreements; or some assurance that a standardized product would be kept available for the period. Although. staff understands the merits of citywide blanket orders, staff has determined they would not be cost effective at this time. Although some process improvement would be gained when issuing the consolidated order, this improvement would be more than offset by the additional administrative efforts involved in the area of receiving and invoice payment. Operational Effectiveness and Efficiency Opportunities A cross-departmental team invested a great deal of time in reviewing purchasing processes, critiquing them and recommending changes that would improve service to the departments. Staff was well underway in implementing improvements as the final audit of purchasing began. With significant change already underway, the recommendations from the City Auditor were welcomed, as was his support in implementing them. The following gives the current status of the operational effectiveness and efficiency opportunities identified by the City Auditor. Finding Number 22 23 Finding Description Buyer performance measures have not been established. A vendor list is not maintained. Current Status of Finding Impact measures that track buyer performance (cost savings, length of time for purchase order processing) have been incorporated into the budget. Additional measures, such as volume of purchase orders processed, change order production, and the backlog of assigned orders, are also used to monitor and evaluate buyer performance. Staff has developed an improved vendor list by commodity code. Enhancements, which will facilitate ongoing maintenance of the list, have been suspended pending Y2K projects underway. CMR: 405:99 Page 9 of 10 Finding Number 24 25 26 Finding Description Current price quote requirements are too restrictive. Purchasing should expand and expedite the testing of procurement cards. Purchasing is utilizing Internet capabilities. not Current Status of Finding Staff has eliminated the requirement to obtain three price quotes for purchases under $3,000. Purchasing has developed procedures which allow departments to handle purchases under $3,000. During 1999-00, purchasing staff will be offering training courses to departmental staff at the Cubberley Training Center. The procurement card pilot program has been completed and an assessment of the program will be conducted by the end of 1999-00. Recommendations for the expansion of the program will be reviewed with the City Auditor’s Office. Since 1994, Purchasing has posted bids on the Internet through the Association of Bay Area Governments. In August 1999, Purchasing introduced its own web site which can be accessed on the City of Palo Alto home page (click on the button "ePost, Doing Business with the City"). ATTACHMENTS: Attachment A: PREPARED BY: REVIEWED BY: Control Checklist Melissa Cavallo, Assistant Director, Administrative Services M. Howard Edwards, Manager, Purchasing & Contract Administration William Vinson, City Auditor DEPARTMENT HEAD APPROVAL: CITY MANAGER APPROVAL: CARL YEATS Director, Admini:Services Manager CMR: 405:99 Page 10 of 10 ATTACHMEN T A Z ZIii 0 CONTROLCHECKLIST o 0 000