November 2, 2012

Supplier Master Data Management 101

If you think about it, how can an organization be effective without knowing their suppliers? Improving insights into suppliers is critical to all activities related to them that includes sourcing, category management, procurement, contracts, and payment. As a result one would think that most organizations would consider improving the processes for supplier (or vendor)  “master data” management as a high priority.

Just consider the definition of “master data management”  –

“Master Data Management (MDM) is a framework of processes and technologies aimed at creating and maintaining an authoritative, reliable, sustainable, accurate, and secure data environment that represents a single version of truth, an accepted system of record used both intra- and inter-enterprise across a diverse set of application systems, lines of business, and user communities.” (Alex Berson and Larry Dubov, Master Data Management and Customer Data Integration for a Global Enterprise. McGraw Hill, 2007)

Establishing a “single version of truth” is fundamental for managing supplier relationships.  However, many organizations have little to no ability for creating an accepted system of record for their suppliers, resulting in wasted time and increased exposure to supplier risk.  Consider some of evidence for this –

  • According to The Accounts Payable Networking benchmarking data, just 48 percent of companies regularly report on vendor master file activity – inactivity suggests that organizations are not actively monitoring their supplier base.
  • Studies generally indicate that 40 percent of suppliers are actually inactive in a vendor master – essentially showing an organization’s inability to remove suppliers that are no longer applicable like one time suppliers or suppliers that may even be out of business, that results in time and money wasted managing them.
  • According to a recent study by Hackett, the bottom quartile of companies spend 60 percent of their category manager’s time compiling (supplier) data, where the top quartile spend less than 30 percent. This equates to $5 million per year in value lost per every billion in spend.

It is clear that improving supplier master data is essential to improving supplier management, but it is not a light undertaking, especially considering the inability of most IT infrastructures at handling multi-dimensional and dynamic supplier relationships. For instance –

  • Most companies typically have complex data quality issues with master data, especially with primary supplier identifiers and address data from various legacy systems such as ERP.
  • There is often a high degree of overlap in master data, especially with large companies storing supplier data across many systems in the enterprise
  • Most companies lack an approach or methodology for defining primary masters, secondary masters and slaves of master data and making integration of supplier master data a complex process
  • Poor governance on information (i.e. stewardship, ownership, policies) around master data leads to confusion in identifying critical supplier attributes across the organization

To alleviate and ultimately fix these issues suggests implementing a formal Supplier Master Data Management (SMDM) solution can help organizations generate a more intimate knowledge of their suppliers and buying behavior, while driving productivity with suppliers.  Why?

  • SMDM helps organizations stay on top of active vendors, which means accounts payable spends less time managing data and collecting information on suppliers that are no longer relevant.
  • SMDM increases overall productivity and usage of sourcing / procurement’s time to focus on more tasks related to supplier selection, category management, contract management and supplier performance management.
  • SMDM prevents poor data quality, and inconsistent data standards for vendors, across various systems; this means more time is spent (from both global and local suppliers) on obtaining, harmonizing, and enriching vendor data/information, rather than trying to identify the accuracy of supplier information.
  • SMDM assists in centralizing and standardizing vendor master data by making critical supplier management processes more efficient.  Benefits of this include:

–      Centralized processes for the collection of vendor master data and supplier documentation
–      Integrated processes for creating and setting up vendors into back-end systems like ERP
–      Improved data accuracy for monitoring compliance to supplier related controls
–      Audit recovery capabilities due to a more accurate vendor masters
–      Improved data accuracy for analyzing spend
–      Improved capabilities for reporting on supplier profiles such as parentage or geographies
–      Better means to identify duplicate suppliers in preventing erroneous payments

  • Finally SMDM provides efficiencies in supplier onboarding.   While most traditional vendor master systems are internally facing and provide functionality to manage a distinct set of data, the best systems also allow for processing data and syndicating of supplier information to a master set once a supplier is on-boarded.

Based on the benefits just described, it is clear that SMDM solution can be a key enabler for procurement transformation and ultimately a CPO’s best friend.  By improving data quality and increasing process efficiency in managing supplier data, answering the following questions with a high level of integrity is now possible like   –

  • How much do we actually spend with that supplier globally or at the subsidiary level?
  • How many transactions do we actually conduct with that supplier globally or at the subsidiary level?
  • Who else in the company is using the same supplier and to what degree?
  • How many contracts do we currently have with that supplier globally or at the subsidiary level?
  • Are terms and prices across contracts consistent across all these relationships?
  • How well is this supplier performing for our organization?
  • What risks are posed based on all the locations where that supplier and its affiliates are located?

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In our next blog on this this topic, we look at the dynamics of MDM a little deeper. For instance while MDM is data driven, it is not just an analytical process.  In fact there are two distinct types of MDM that includes analytical and operational, a topic we will discuss further in our next blog segment.

 

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by Grant Watling

Chief Customer Officer

Grant has 11 years management consulting experience specialising in supplier data and analytics advisory services. Grant holds a Master’s Degree (MSc) in International Business, is a Prince2 practitioner and holds certificates from the Institute of Financial Services and the Chartered Insurance Institute.
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