In this post, we provide definitions of various procurement-related terms as well as other terms that are related to sourcing and spend management.
Cost management can refer to the costs associated with individual projects, or cost management of an overall business. Here, we refer to cost management of an overall business as it relates to spend management. Cost management is an integral part of a company’s succes. When properly implemented, cost management will provide reduced costs of production for products and services resulting in increased value for the customer. Similar to collecting, cleansing, classifying and analyzing a company’s spend, cost management is the process of collecting, analyzing, evaluating, and reporting cost information used for budgeting, estimating, forecasting, and monitoring costs.
In general, in order to easily and systematically access important or often-used files, structures are put in place to classify or sort information. This way information is placed in expected locations so that users can better track and use the data. In the case of spend data, it is essential to supply chain management and spend management, to have a system in place that can accurately handle all of your spend data in such a way that you can track your company’s input, output and procurement. Spend data classification requires access to all spend data sources and a common classification schema. A typical classification schema is UNSPSC (see below for description of UNSPSC), however many companies use customized classification structures.
In some industries known as data scrubbing, this refers to the process of cleaning incorrect, out-of-date, redundant, duplicate, incomplete, or incorrectly formatted data. Similar to supplier normalization, you want your data to have a consistent look and feel, making it easier to read, as well as ensuring the accuracy of the analysis and reporting.
Many company’s, large and small, have implemented programs to support the growth of diverse suppliers to demonstrate their core values. And since the early 1950s, companies that supply the Federal government with goods and services have been required by law to have a supplier diversity program or initiative. In order to measure and report on the success of these programs, you need to be able to track the amount of spend with diverse suppliers as well as how and where it is being spent.
There’s a big difference between buyers picking up the phone and calling in an order, or faxing in an order, versus using eProcurement to make their purchases. It’s the same as the difference between mail and email. Until the day comes when we no longer use paper or “snail” mail, we will have to differentiate between that and electronic mail. And until all of procurement becomes electronic, we will have to differentiate between procurement and eProcurement – procuring goods and services through an electronic marketplace or electronic system.
ERP stands for Enterprise Resource Planning, which involves using an integrated system with access to a solid database. The basic platforms and software can be very expensive to implement and maintain, however, the premise of an ERP is a good one: it gives you insight into data at various levels, including your accounting department, human resources, supply chain management, project management, customer-relationship management and manufacturing. The end result is a platform that allows for an efficient flow of information about all the various business transactions within and without your organization.
Historic spend is often used to track, review and analyze past spending practices. By tracking trends, company’s hope to improve current and future spending practices. Here at Sourcing Force, we’re not convinced that this is the best spend management practice in an economy with high turnover and short product life-cycles. More real-time analysis and future forecasting is needed to consistently impact the bottom-line successfully.
Also known as “rogue spend” or “non-compliant spend”, this refers to the spend associated with any item or service that is purchased outside the preferred supplier list and/or outside the preferred process or system. According to a recent research report by American Express and AT Kearney, maverick spend accounts for up to €433 billion for European companies.
Enriching, improving, or adding complementary data to your existing supplier data is beneficial to your spend management initiatives. Additional data such as supplier risk, supplier diversity, producer price indexes, commodity pricing, freight information helps you make better, more informed decisions.
Along with the example of normalizing how the supplier Federal Express is depicted, you also need to group all of the different suppliers that are associated with Federal Express, such as grouping Kinko’s with Federal Express. This ensures that you are viewing the combined total spend with that supplier so that you can negotiate better contract terms. Supplier grouping and supplier normalization often go hand-in-hand.
As with any data, supplier names need to be entered consistently in order to produce accurate reports and analytics. When supplier names aren’t entered consistently, they need to be “normalized.” In other words, determine that the word “incorporated” will always be identified as “Inc.”, that a “limited liability company” will always be identified as “LLC”, all variations of the supplier FedEx will be identified as Federal Express, etc. Once these decisions have been made, rules can written (similar to a Find and Replace) that will ensure consistency with your supplier names.
UNSPSC is an acronym for the United Nations Standard Products and Services Code. It is an hierarchical classification system used to classify all products and services on five levels. The code is intended to efficiently identify your company’s spend by using a standardized classification code. You can then easily pull up records on products and suppliers. UNSPSC is a popular classification and is used in ERP systems, data classification systems, business intelligence, and in spend management.
More Procurement Definitions coming soon