Getting Procurement Right: Part 1

Many times, I’ve started working with an organization on a supplier diversity program only to realize that we have to start by improving their procurement process. After all, if you don’t know what you are buying, how frequently, from whom and at what cost, it’s pretty tough to set spending goals with diverse suppliers.

I’ve spent some time considering what an organization needs to do to put its procurement house in order and have developed a three-part fix. I present the first set of solutions here.

1. Improve the Quality of Your Data Integrity

It sounds elementary enough: Procurement professionals need to understand what a company is spending its money on and with what suppliers. Unfortunately, most financial systems are set up for reporting financial data, not procurement or sourcing data. Financial systems track accounts payable and accounts receivable. Procurement data is about classification by category and tracking those expenditures.99119403

Think of it like your credit card bill; there’s a $500 charge to Wal-Mart on this month’s bill. But what exactly did you buy? Did you bring home toys, a new goldfish, tools, paint and a video game system? How can you trim your spending if you don’t know what you are spending your money on?

Like your credit card statement, a financial system can report that the invoice from an Information technology supplier for $50,000 was received and paid. But did that supplier provide software, hardware or consulting? Did the supplier serve one department or the entire company?

What’s the solution? Categorize your expenditures.

Procurement needs to understand dollars spent by category and subcategory to manage a company’s spending. If you want a technology solution, there is middleware that will map your purchase category, the amount and the vendor by taking accounts payable data and turning it into procurement data. Or, you can request more detailed billing from your suppliers and create a more robust system internally for tracking that information.

No matter how you do it, it is a required first step to improve the integrity of your data.  As the folks in IT say, “garbage in, garbage out.”

Editor’s note: Coming soon on the Wharton Blog Network: three more critical procurement solutions.

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