The missing link: The role of finance in supplier management

Too often, responsibility for managing and monitoring supplier records and relationships is diluted across the organisation.

But if Finance and Procurement seize the initiative and drive through an automated strategy, a spectrum of instant and long term benefits will make themselves felt on the bottom-line.

Tough times require tough cost control measures. So your first, second and third response is probably to lose people. It feels like an instant saving and it shows up quickly where the board wants to see the consequences: on the bottom-line. But there could be a more logical place to start pruning costs, and that's your supplier database.

Who ‘owns’ supplier relationships?
Ask who owns the supplier relationships in your business and a number of contenders will jostle for management position. Operational staff who interact directly with suppliers; the legal department because it is responsible for contracts; governance gatekeepers because they oversee the compliance of suppliers' products and services in critical areas of the business; the sales team, because suppliers might contribute a vital element of a customer service or product.

The truth is that they might all have responsibility at key stages of the supplier management lifecycle. But there is no overall strategy to extract the efficiency and cost-saving benefits of proactive supplier management. Ultimately, supplier records are owned and run by a committee that never actually compares notes. And this lack of visibility is a constant drain on the business.

Proactively manage suppliers
The absence of centrali\ed records means that that the same supplier might be duplicated many times across the business, obscured by inconsistent terminology and different spellings. Irrelevant records clog systems up. Suppliers themselves have no actual interface with the business's core systems for invoicing or tracking purposes. The business is constantly reacting after the event rather than managing suppliers proactively. And this is driving up the cost of procurement at every stage.

So here is a radical thought. Why don't Finance and Procurement take ownership of the supplier relationship, and drive an automated system-based strategy across the organisation that will rationalise records and provide a platform for leveraging the cost and efficiency benefits of improved supplier relationship management?

This is the key to building a comprehensive cross-business picture of supplier management, which will impact positively at every level and deliver savings straight to the profit-line. It will crystallise the integrity of a single, accurate master vendor record. And it is a rapid, inexpensive option compared with cash-hungry alternatives: calling in costly consultants or initiating an unnecessarily grandiose supplier relationship management strategy.

The effect would be immediate. Administration costs are the biggest overhead for Accounts Payable (AP), for example, and one of the banes of the CFO's life. Rationalising the supplier database alone has the potential to reduce the administrative overhead by 80 percent, simply by cutting a swathe through the volume of enquiries about approval and invoice payment status. Cross-organisational spend can be cut by up to 15 percent.

Automate supplier management
Using an automated system to categorise suppliers and classify goods and services means that everybody in the procurement chain can find what they need, based on the right engagements with their required categories.

Automation also removes the need for manual supplier record maintenance - another daily cost that can be removed at a stroke. Some specialists estimate that the overhead associated with fielding supplier records in AP can be cut by 25 percent - and that the data integrity of supplier records passing into the finance system can be improved by an impressive 100 percent. The Accounts department is liberated from the paper chase to focus on invoicing and revenue gathering.

These are quick wins. The long term benefits of unified supplier data across finance and procurement are also invaluable in terms of reduced overhead and efficiency. According to a report from strategic advisory company The Hackett Group, companies who reduce supplier numbers can focus greater resources on managing relationships, develop purchasing leverage and reduce the cost of ongoing monitoring. If a company distributes 80 percent of its annual spend across 20 percent of its suppliers, says Hackett, each procurement dollar represents £2.10 of spend reduction.

Automation has the potential to deliver this level of ongoing savings in a way that penetrates the very heart of the business. It generates knowledge that informs negotiations with suppliers for better deals, helping to guard against price fluctuations and to model costs more accurately. And it can provide considerable improvements - as much as 65 percent - in the supplier accreditation process. For example, a typical business probably has numerous stationery suppliers in its database - even allowing for record duplication. These could be reduced and relationships with the selected few managed far more efficiently.

Rationalise suppliers
For Procurement, rationalisation also delivers considerable benefits on the risk management front - an increasingly pressing consideration, particularly for public sector organisations that typically engage with many thousands of suppliers and don't have the time and resources to undertake a comprehensive, largely manual review.

A supplier might be apparently low-value and low-volume, and hardly an obvious choice for management. But if they are supplying seemingly mundane food products to a school, for example, the potential risk of e-coli contamination should demand close monitoring. The knowledge generated by an automated system would help to identify, accommodate and categorise such specific requirements.

Pre-event risk management costs are notoriously hard to quantify, but in these circumstance, supplier knowledge is probably the most powerful tool to guard against potentially costly or disastrous events. Similarly, a system would enable administrative staff to see at a glance that criminal record checks have been carried out on all the drivers at a taxi company employed to ferry special-needs children to school. Or it would allow an accountable public sector authority to easily report on its suppliers' carbon emissions.

Commercial organisations face different but equally challenging rationalisation issues. They might typically have fewer suppliers but the logistics of running multiple sites, and growth often achieved by absorbing new businesses through merger and acquisition, raises the likelihood of supplier duplication on a potentially global scale - an issue that a best-in-class system could easily address.

Streamline supplier management
Then there are the rewards of streamlined supplier management. Automation means that the process of identification, adoption, approval, constant and consistent record updating, supported by a system that can manage supplier information regardless of the number of interfaces with the business's core financial systems, can be managed proactively.

Automation makes it much easier to request supplier information as an integral part of the relationship management, and for this information to be used internally to qualify and categorise the supplier. Questionaires can be designed for on-boarding different categories of supplier. The business can rank and score them according to their response to specific questions. If they are supplying hazardous products, do they have the necessary ISO accreditations, for example?

This might require a shift in your organisation's approach to supplier management at every level, but unless somebody gets a handle on the records and establishes a policy for cleaning them up, the hidden costs of poor or non-management will continue to eat away at the business's profit margins. It makes sense for the CFO, in tandem with Procurement, to take the initiative.

And once the system is in place, it opens up the potential for a host of further benefits. Departments with specialist knowledge, such as IT, can engage directly with the supplier approval process through the system. It becomes a platform for switching on a range of shared services that enhance the procurement process: self-billing, for example, driving purchase order compliance throughout the organisation, and gaining control of maverick spend.

Effective contract management and best-value sourcing - two goals at the heart of Finance and Procurement strategy - depend on good supplier relationships. Automation will eventually empower suppliers to manage their own profiles via exclusive portals, monitoring the progress of queries and invoice status. Smaller suppliers will benefit from being able to flip purchase orders back as invoices. And fat will be cut out of the process at every stage.

Gain full control of the supplier lifecycle.