Every A/P department has run into a time when they are hard pressed to answer the question “How much did we spend with ABC Supplier last year?” It is a deceptively simple question and one that, in this day and age of computers, ERP systems and automation, should be easily and accurately answered without hesitation. The reason that so many organizations struggle to answer this question is likely traced back to an unclean Vendor Master File.
When Vendor Master Files are created, there are innumerable ways that errors can happen. Most derive from a lack of standardization in the input of new vendors, including naming standards, address standards and TIN requirements which can result in vendor duplications.
Duplications have the greatest impact on the A/P department’s ability to answer the spend question. If duplicate or triplicate Vendor Master Files exist in the system and the A/P staffer is unaware, answering a spend inquiry will always result in inaccurate information.
Most times, when the Purchasing Department makes an inquiry regarding spend levels it is directly tied to a current or impending negotiation with the supplier. In the end, inaccurate spend analysis negatively impacts negotiations because the difference between the purchasing power of $10 million dollars a year is vastly different than $2 million a year.
Additionally, inaccurate spend analysis as a result of unclean Vendor Master Files also effects existing vendor agreements in the form of missed contract incentives, discount tiers and potential rebates. Something as tiny as the payment terms associated with a vendor can also muddy the waters. If the Vendor Master File has a payment term entered that doesn’t coincide with the invoice record term, payments are turned out up to 30 days earlier than required, resulting in millions of dollars in lost cash flow and investment potential. No matter the format, the end result is lost profits to the bottom line and lost cash flow.
Another way to ensure that your company enters vendor negotiations with as much information as possible is to understand how vendors are interrelated. A lot of companies have enlisted third-party classification services to source related vendors. While these are effective, they are also costly. From Dunn and Bradstreet to Equifax, these companies are able to pull data for SIC/NIAC classifications, mergers/acquisitions, parent/child relationships and divestitures. When applied against a database of suppliers, companies are able to see which are related entities, allowing them to see what their real spend is with a vendor.
Technology Insight Corporation (TIC) offers a lower-cost solution through the Related Vendors Analysis Service, which provides the same end-result by leveraging the client’s existing database. Rather than going out the third-party reports and comparing that to the client database, the Related Vendor Analysis is deployed directly into the Vendor Master Files and it searches for any number of connections between suppliers. By noting which suppliers have commonalities (addresses, names, TINs, domain names, phone numbers) many related vendors can be revealed within a database. Again, this information becomes very valuable during negotiations, when a true and accurate spend history is presented.
Answering the question, “How much did we spend with …” can become a simple one to answer, but the work to accomplish this begins with the Vendor Master File, illustrating why starting clean always makes things easier in the end.
To know more, join Karl Andersson, CEO of Technology Insight in a series of webinars dedicated to Best Practices in Accounts Payable. Click here to view the list of upcoming webinars.