Poor procurement data is often the invisible fiend. It lurks everywhere, sucking money out of your business. There are countless examples of how incorrect vendor master or material master data can cost your organisation dearly.
Poor procurement data: Your roll call of avoidable expenses
Here are 7 popular examples of how poor procurement data can result in either additional costs or missed opportunities.
1. Outdated or incomplete material master data
Material master data can be costly due to 2 issues:
- Data not being updated, which can lead to obsolescence issues;
- And materials not having a minimum level of data entered into the master data record. This enables the material or part in question to be freely sourced from other suppliers.
The bare minimum needed is manufacturer, manufacturer part number and drawing or issue number. Purity / grade and tolerance are also important for raw materials and purchased parts for production.
If you don’t have this, it makes switching from one vendor to another much more difficult. If you don’t know the specification, then alternative vendors can’t read your mind!
If a generic specification rather than a specific brand is acceptable, then specify this too in the data record. Otherwise, you could be unnecessarily purchasing an expensive OEM part, or an over-engineered specification.
2. Incorrect lead times
Is the lead time in your system is shorter than the actual lead time your supplier is working to? This can lead to supply chain disruption caused by storeroom stock-outs of critical spare parts.
On the other hand, when your supplier is able to produce in a shorter span of time, you’re losing out on inventory optimisation potential. This could positively improve cash flow if your master data reflects this.
It’s vital that lead times from your suppliers are documented. If you don’t have supply contracts (and many SMEs don’t – that’s fine) then the lead time should be included in the price list or contract. The delivery date should also be confirmed or acknowledged from the purchase order.
3. Inaccurate transport costs or incoterms
Incoterms in general can be a can of worms, so we won’t go into detail here. Suffice to say, you need to know who is responsible for paying the freight. Have this clearly specified in any pricing, contractual agreements, or master data records.
Incorrect incoterms are also one of the most common causes of supply chain disruption. If you suddenly need to scramble to find a customs broker because you realise it’s your responsibility, this will cause you additional cost and delays.
For companies who don’t manage this properly, it’s easy for ambiguity and invoice disputes to arise. Transport costs are something that’s rarely checked properly by accounts payable. If you don’t manage this correctly in pricing and data records, this can easily be exploited on invoices by your suppliers.
It’s usually a worthwhile exercise to understand the terms of delivery for key raw materials and operating supplies. Do an audit of what’s being invoiced versus what’s been agreed in the contract or price list. You’ll be surprised what you find.
It often throws up discrepancies which allow you to ask the right questions of your supply base. For example, should someone in planning or stores be involved in the invoice authorisation process.
4. Duplicate vendors
This one is such an easy one that I often wonder why companies are so bad at checking this. If several people within your organisation have permissions to create new vendor records, you’ve probably got duplicates.
- WH Smith
- W.H. Smith
- WH Smith Ltd.
All the same vendor but 3 potential vendor records. Other than this being bad housekeeping, you may ask “OK, so what?”
Stop and think for a second. You could potentially have the same material or service being purchased (and invoiced) at 3 different prices, and with 3 different payment terms.
Just imagine if a large percentage of the business you do with this vendor is being ordered with more expensive pricing and incorrect payment terms than what’s been agreed. You’re leaking money without even knowing it.
It can also have an impact on any rebate or bonus agreements that you may have negotiated with a supplier.
Getting this cleaned up is absolutely vital before you run a spend analysis report.
5. Payment terms discrepancies
Payment terms discrepancies usually crop up with tail spend vendors who are not core suppliers. Often these differences occur because your standard T&Cs stipulate a certain payment term, e.g. 60 days net. But then their terms on their official quote or documentation stipulate something different e.g. 30 days net.
Without a contract or any officially negotiated price list (which you’re probably not going to have for occasional purchases from non-core suppliers), you’re at the mercy of “the battle of the forms”. Who was the last to communicate their official terms?
The reality: you’re unlikely to end up in court over a payment terms dispute on a PO for a relatively minor amount. You’ll come to an agreement and pay under duress most likely.
The cost usually comes in administrative work caused by wasted time taken up resolving these payment and invoicing disputes. Additionally, paying bank or interest charges as a result of these clerical oversights is another hidden cost.
6. Out-of-date contact data
Why were companies so hamstrung when COVID hit? They needed to quickly contact their suppliers to understand any impending impacts or threats. And in many cases, they quickly realised that suppliers’ emails and phone numbers hadn’t been regularly maintained.
Vendor master data is usually much more poorly maintained than customer data. If we take the typical Pareto principle of 80% of spend being through the top 20% of suppliers, then data is going to be clean for those frequently used vendors. But what about the long tail spend, where 80% of the vendors are sitting?
These suppliers are rarely being actively managed by procurement. Who owns the vendor master data? What are the consequences of this not being updated?
It doesn’t matter whether it’s a key raw material you order every week, or a spare part you order once every two years. Both have the potential to stop your production line or grind your services to a halt. If a vendor can’t be contacted when you urgently need to reach them, you’re at risk of disruption.
7. Expired certification
Certain records and certificates from suppliers must be kept on record due to necessary regulatory requirements or internal processes and procedures.
Some examples:
- Maintaining a valid liability insurance certificate
- Quality or environmental standards
- Records of supplier diversity e.g. minority owned businesses.
Industry specific requirements in certain sectors and categories often necessitate holding more certification from suppliers. Keeping this up-to-date can be a huge task.
Similar to the argument for contact data, using technology to facilitate this can usually lead to significant gains in accuracy and compliance. If you enable suppliers to self-update and review these in an accessible portal, you’re half way there.
Mot having these up-to-date and accurate could ultimately lead to legal issues, or fines resulting from non-compliance to certain standards.
So, how much cash is your organisation leaving on the table?
It’s impossible to say how much exactly poor data is costing your organisation. However, it’s a pretty fair bet that it’s significantly greater than zero.
That in itself warrants a closer look. What gets measured gets managed.
If your data is letting you down, it’s time to take action. Savings, cost avoidance, supplier risk management and value-driven opportunities can be more easily discovered and acted upon. It will also help reduce the number of accounts payable issues.
Think of a data cleanup as an investment, in a similar vein as governments would consider new infrastructure spending. It won’t necessarily give you a clean, 12 month payback calculation that your CFO wants to see. But the alternative option of doing nothing will cause a drag on your P&L over years to come. Your organisation will lag behind your competitors.
For a deeper dive into this problem, and how to go about solving it, my interview with Susan Walsh, The Classification Guru back on one of the first episodes of The Procuretech Podcast will definitely help you!
How can digital procurement technology help with keeping data clean?
There is a diverse and rapidly expanding portfolio of procuretech catering to the data management space. However, the solutions they offer and the scale and complexity of purchase data management they are pitching to are vastly different.
With that being said, there is generally a pretty neat split we can make between the three different types of solutions:
- Material data cleansing solutions
- Vendor master data management
- Automated / guided tail spend management systems
Material master data cleansing
These solutions are aimed at manufacturing businesses who need to keep their material master and BOM data clean and up-to-date. Failure to do so can result in obsolescence, quality problems or even the risk of causing breakdowns to production machinery.
Different ways of assisting in master data cleanups can be:
- The utilisation of AI to clean and classify data for raw materials, spare parts and operating supplies to assist with keeping taxonomies accurate, as per the solution offered by Creactives.
- The solution developed by Sparetech. OEMs provide their spare parts lists and the software can check against a company’s material master data. This ensures the recommended spares are in their ERP system and include the most up-to-date technical specs.
Vendor intake and management solutions
One of the easiest ways to drive improvement to the quality of your vendor master data is to make this data accessible in a cloud-based platform. If this has open access for suppliers, it can act as one single source of truth. Suppliers themselves can enter and complete their own data records at the point of onboarding.
Adding new vendors shouldn’t be a bureaucratic monster that takes weeks, and requires endless form filling.
Similar to the concept of self-service procurement, transferring the accountability for this away from procurement can free up time. It also improves the user experience for the supplier too. If they know exactly the status of their application, and they can also update any changes to their data themselves.
We’re all about the win-win here!
There are numerous solutions out there according to budget and level of automation. So, regardless of your size and requirements, you’ll almost certainly be able to find a suitable solution.
Tail spend management platforms
So, we’ve looked at material master and vendor master data. The final piece of the puzzle comes with managing tail spend. This is where the noise tends to be when it comes to dirty data. It’s simply due to the size and magnitude of the problem procurement teams have when trying to manage this spend.
Imagine how many wrong emails, phone numbers and payment terms are lurking in here. Remember, these are vendors that you as a Procurement team never speak to or actively negotiate with.
Enter the knight in shining armour: the tail spend management solution.
In more simple solutions, it can help with guided buying, to ensure that your stakeholders buy from existing, approved vendor lists. This avoids the need to continuously add to the number of suppliers in your vendor database. Going one step further, technology can leverage AI from other customers’ data to provide potential alternative suppliers, or automatically refresh contact data.
The most advances solutions can actually source products and services for non-complex and non-strategic spend. This avoids the need for a Buyer or the stakeholder having to contact the vendor at all. Instead, all they need to do is guide and monitor any automated sourcing and negotiation process.
If these suppliers are being contacted by a digital solution, their vendor records are automatically updated as an aggregated database managed by the tech company.
Both manual solutions and technology are necessary
So, to conclude, you need a mix of a manual approach to cleaning data, while utilising the technology which can help. It’s not possible to do one without the other in most cases. Data is a complex problem, and there’s no easy fix. However, if you choose to just ignore it, then the problem is only going to get worse over time!
