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The (invisible) cost of supplier data inaccuracy

, by Thierry Jaffry
We are pleased to share this great article that explains how companies should leverage supplier data management.

Supplier data accuracy is the basis of every buyer decision. It is also the foundation of all Source-to-Pay processes.
Our previous article: Let’s get over with flawed supplier data! provided some tips to improve supplier data management.
But what are the real hidden costs and consequences of inaccurate supplier data?

1 – A poor vision of Spend

Spend Analysis is the central to support procurement strategic decisions. We use to say that it is the glasses of every category manager. Thus, if the data is not consistent, it’s like looking at your spend through dirty glasses, and take strategic decisions based on incorrect assumptions. This is the famous “Garbage in – Garbage out“. The impact can be huge. A buyer might lose negotiating power on a contract because his dashboard is not showing that in addition to a $3 million spend with “IBM”, there is also a $ 5 million spend associated to “I.B.M.” in another division.

And what about predictive analytics ? (which will be key in the next 5 years, but we’ll talk about it in another article). How can we predict future behaviors if we don’t have the right information on the past activities?

2 –  Duplicates = double payments

According to a research from Concur in 2015 amongst 500 AP clerks, 33% have already paid an invoice twice.

The main reason of these errors is the lack of control of the supplier creation and modification process. Indeed, data fragmentation between ERPs or “on the fly” creation without unicity check in a central system facilitate data duplicates.

It is therefore essential to cleanse and centralize the supplier repository, while controlling the creation and modification process (standardization, segregation of roles, etc …). An additional benefit is also to substantially reduce the risk of fraud (see below).

3 – Procurement Fraud

The cost of procurement fraud is estimated around 3 trillion dollars per year worldwide.

As we have highlighted in: “How to minimize procurement fraud?”, procurement fraud is mainly due to rogue employees linking their own banking account information with the  supplier record to redirect payments towards their personal accounts.

Example :

In June, an accounting expert admitted diversion of 3.2 million euros from his french employer. She performed 40 transfers between 2011 and 2016 on her personal account after recording her banking data in the accounting system of the company: An accountant admits diverting 3.2 million euros (Article in French).

Procurement fraud cases also include scammers pretending to be a supplier and asking for banking information modification (phone, email..). From a study by the Association of Finance Professionals, 29% of victims of fraud have lost more than $ 250 000. Mitigate this risk requires to control supplier modification process with validation workflow for instance.

4 – An inefficient sourcing

A good sourcing strategy rests on a good supplier selection, based on several criteria: innovation, market analysis, financial health, products or services quality, price, performance, risk… The quality of this analysis depends on supplier data integrity across the systems. For instance, a bad supplier categorization, due to fragmented and inaccurate data, might lead to miss some opportunities.
Another example is the risk. If suppliers are not deduplicated and not organized in a hierarchical tree, a buyer might not assess the risk of being exposed by contracting with a supplier (such as dependency risk). His decision to award a tender could be badly affected.

5 – A supplier compliance issue

It is critical for buyers to ensure supplier compliance. In France, the law called “Rana Plaza” – named after the building that collapsed in Bangladesh – makes French companies , with more than 5,000 employees, legally responsible for their suppliers and subcontractors. Therefore, deficient management of supplier accreditations, certifications and other insurance policies, represents a high risk exposure.

The CEO of one of the Aeronautics Leader recently created an “Expert Team” in order to challenge and guide them as they’re suspected of corruption about aircraft exportations. The company is committed to establish greater transparency between suppliers, subcontractors and consultants to gain visibility and reduce this risk.

As a conclusion, the five key points above demonstrate the impact of supplier data on the procurement performance and risk management, two major concerns of CPOs (Chief Procurement Officers)

The relationship between these topics and the cost for the company is obvious and there  are many other examples. It is time, if it’s not already done, to invest in a master data management tool (SIM type) and to define target processes. Unfortunately, this is a subject that companies are aware of but for which they are not willing to invest, underestimating the negative impacts on their finances

Are you looking to improve your supplier data management ?