Liquor Purchasing Process

SLGA, like most Canadian jurisdictions, buys primarily brand name liquor products for resale. In the Canadian liquor industry, certain companies are the only source for a

1. We recommend that Saskatchewan Liquor and Gaming Authority make its procurement and pricing policies public and provide a breakdown of liquor price (e.g., cost, taxes, markup, etc.).

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top selling products (approximately 20% of SLGA's product mix). Of the wines, coolers, and spirits liquor sales, 40% of liquor products sold come from the top five suppliers who conduct business with SLGA.

When SLGA selects a new product to list, it negotiates the retail and wholesale price at the same time with the supplier. SLGA will input the supplier’s retail price into the fixed mark-up model to determine the wholesale price it will pay for the liquor product. If the supplier does not agree with the resulting wholesale price then SLGA will negotiate the retail price until the supplier and SLGA are both satisfied. A similar negotiation will occur periodically when the supplier wants to change the retail price of listed product.

Suppliers are aware of the retail prices of competing products that SLGA stocks.

Suppliers want their products competitively priced to entice customers to purchase them over their competitor’s products.

When SLGA chooses to stock a product, it signs a purchase order agreement with the related supplier outlining each party’s responsibilities. SLGA continues to buy the product from the supplier as long as the product meets the minimum sales quotas as set out in policy. If the product falls below the quota, SLGA will delist the product. SLGA then asks the supplier to either buy back the remaining inventory or pay a rebate in the form of a 25% reduction of the retail price on the remaining inventory.

4.0 A UDIT O BJECTIVE , C RITERIA , AND C ONCLUSION

The objective of this audit was to assess the effectiveness of SLGA’s liquor procurement processes for the year ended February 29, 2012.

To conduct this audit, we followed theStandards for Assurance Engagementspublished in the CICA Handbook - Assurance. To evaluate SLGA’s processes, we used criteria based on the work of other auditors and current literature listed in the selected references. SLGA’s management agreed with the criteria (see Figure 2).

Figure 2—Audit Criteria

To have effective processes to procure liquor, SLGA should:

1. Define the need and specifications for products

1.1 Define the need in sufficient detail for understanding (e.g., customer demand, gross profits for liquor products, cost and SLGA’s plans)

1.2 Define specifications to encourage open and effective competition 1.3 Use specifications that support the law and government policy 2. Obtain supplier proposals fairly

2.1 Identify and document feasible sources of products needed 2.2 Obtain authorization to initiate proposals

2.3 Give equal and fair treatment to potential suppliers

2.4 Make available to all potential suppliers the procurement process, including timing 3. Select suppliers for products

3.1 Evaluate all proposals for new products against defined specifications established by SLGA in assessing best value

3.2 Evaluate change requests for continued best value and require all agreed upon changes in writing 3.3 Obtain appropriate approval to buy products

3.4 Document decision justification 3.5 Inform bidders of purchase decision 3.6 Obtain written contractual agreements

4. Monitor performance of products and suppliers

4.1 Obtain timely feedback and information on sales performance, purchase price and selling price 4.2 Monitor feedback against sales targets, contract terms and conditions, and any requirements under

law

4.3 Set and use guidelines on the nature and timing of action to be taken for an underperforming supplier or product

4.4 Conduct regular reviews and comparisons to other jurisdictions

4.5 Document and report problems to suppliers and apply for any remedy under the contract

We concluded that, for the year ended February 29, 2012, SLGA’s processes to procure liquor were effective except in the following areas. SLGA needs to:

Document what it uses and how it uses the information it has to ensure the product selection meets its customer needs

Develop written procedures for staff to use to objectively select all liquor purchases

Keep minutes for its Listing Committee to support the Committee’s decisions on product listings and delistings

Formally evaluate new liquor products and share written results of these evaluations with unsuccessful suppliers

Obtain formal assurance that liquor products sold in Saskatchewan are safe to drink and contain their stated alcohol content

Develop and use written procedures for monitoring performance regarding sales targets, quotas, and product quality

A documented proactive customer-focused procurement strategy will serve as a clear communication tool evidencing that the SLGA is aware of customers emerging tastes in Canada generally, and in Saskatchewan specifically. A documented procurement strategy will provide a source of reference for the listing and delisting of products and will provide both suppliers and customers with information on the direction SLGA is taking on product mix in the future. It is prudent for the SLGA to maintain documentation supporting their listing and delisting decisions so that their decisions can be defended if called into question. In addition, sales targets, quotas, and product quality can be assessed in comparison to a customer-focused procurement strategy and can provide timely information on product procurement decisions.

Obtaining formal assurance that liquor products sold in Saskatchewan are safe to drink and contain their stated alcohol content will reduce the risk that products may be either unsafe or misrepresented as to content.

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5.1 Needs Better Documentation of Procurement