August 19, 2020

How bad supplier data undermines your decision-making

What is bad supplier data costing you?

We know that bad data causes inefficiencies and creates vast sums of extra cost. It can also lead to inconsistent or bad decision-making. This is arguably the one of the most dangerous consequences, as it can result in some of the costliest mistakes that remain hidden – or potentially unaddressed – until it is too late.

Omera Khan, professor of supply chain management at Royal Holloway, University of London, explains, “too few organizations appreciate the costs of incomplete, out of date, or low-quality supplier data. If they realized their vulnerabilities in fraud, compliance, supply chain risk and purchasing performance, more would invest in better supplier data management,” she believes.

The situation can have real world consequences. As Giles Breault, Principal and Founder of The Beyond Group, describes, poor supplier data often provides a false sense of security, as he recounts, “We signed an agreement with a supplier located here in Europe who we thought was operating safely and in accordance with our Corporate Citizenship and Sustainability goals. We had done limited supplier research but, from what we had seen, were convinced of their bonefides. Later we found that this supplier was simply a front for a foreign organization that was operating using child labor and violating their own local laws. While we caught this in time, the lack of visibility into the supplier could have had a serious effect on our reputation and directly reflected on our poor oversight of the supply chain.”

In another example, operational and finance teams may be unaware of the checks and balances built into a contract, so fail to use them to address issues with suppliers, says Daniel Milnes, partner specializing in governance, procurement and information at Forbes Solicitors. “In a bad case, the buyer might have a valid contractual basis for withholding payment or obtaining recourse based on facts known to the operational function, which is not recognized, resulting in payments being processed by the finance function as a matter of routine.”

Incorrect or corrupt data could even halt a production plant or prevent the delivery of certain supplies, as Nic Walden, a senior advisor in The Hackett Group’s procurement advisory program describes. “This does happen and obviously it’s really urgently addressed,” says Mr Walden. “But it creates a cost.” He also points to a potential failure to complete customer orders thanks to corrupt data in the system.

Recent research by HICX offers further insights into why this problem exists. It showed that 80% of procurement and IT leaders plan to use systems that are unfit for managing supplier data. Of those, 59% plan to use Enterprise Resource Planning (ERP) systems, while 21% are opting for purchase to pay (P2P) and source to settle (S2S) solutions. ERPs are primarily designed to manage transactions like invoice payments and financial records. They are not well-equipped to be the master system of record for supplier data, not least because they only hold a subset of data related to each supplier.

Giles Breault comments, “Most organizations only realize when it is too late that poor data, specifically poor supplier data, is causing them to make inferior and ill-informed decisions. Realizing this after-the-fact has broad downstream implications that can run from lost value all the way to impacting the company’s reputation. The problem is, that this is a vicious cycle; poor data drives bad decision-making and that drives a heightened lack of trust in overall data integrity leading to lower levels of trust in subsequent decisions.”

On the other hand, as Costas Xyloyiannis, CEO of HICX, explains, “Decision making is enabled when you can easily record interactions and aggregate them for single suppliers. There is a rich stream of activity, such as interactions and transactions associated with suppliers, which, if it could be analyzed in a simple way, would yield a lot of insights. The insight comes from being able to understand the activities. But you have to be able to associate those activities easily with the same entity (or supplier) – and this is why it all needs to come together.”

In this regard, Supplier Information Management (SIM) becomes especially valuable. Merely being able to connect these points of information creates consistency and transparency so that informed decisions can be taken. Without it, decisions taken can lead to:

• Inefficient processes
• Missed cost reduction opportunities
• Damaged supplier relationships

Giles Breault concludes: “Most organizations realize that they have some level of data confusion when they look into their supply chains. While this awareness is useful and may be the impetus to overhaul the entire supplier data base, distrusting the data drives decisions that seek to cover or nullify the lack of knowledge. These decisions are made on the back of personal or tribal knowledge and often lead to poor and unexpected outcomes. Yes, lack of awareness about poor supplier data is bad, but sometimes even having a little awareness of the data problem can be equally bad.”

He adds: “In my experience, often suppliers understand the buying company’s purchasing behavior better that the purchasing company. Lost value opportunities abound in global supply chains.”

If you found this blog useful, then you may want to check out our other detailed resources as well, covering different aspects of master data managementdata cleansingdata governance and more.

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