Compliance Matters: Analyzing the Future of Procure-to-Pay (Part 3)

In the first two posts in this series (Part 1 and Part 2), I shared and commented on a few of Andrew Bartolini's recent suggestions for improving future compliance in the P2P area. In this final post in this mini-series on P2P compliance, I'll take one of Andrew's final thoughts and extend it a bit, getting to what I think is the heart of the problem today when it comes to buying compliance across the spend that matters most for companies and organizations in non-services industries. To begin this thought, Andrew writes that tomorrow's eProcurement solutions will be able to do things such as "aggregating" order volume in real-time to drive volume discounts as well as tying contract pricing to underlying baselines and indices.

Frequent Spend Matters and MetalMiner readers will know these are topics we've tackled for years from a process perspective (as a start, you might want to check out these papers: Using Sourcing Intelligence to Combat Commodity Volatility – The Price Index Advantage, and Material Demand Aggregation Report. But the problem with what Andrew suggests -- even though his thought is a good one -- is that indirect purchasing systems aren't where this capability needs to be.

For this reason, while we might get to a nirvana where "ultimately, non-price compliant POs will be never be generated by [an] eProcurement system in the future" for catalog items, the 80/20 role in non-services industries suggest we should ignore eProcurement entirely in this area. Stay with me for a minute here. Since the bulk of a company's spend within such industries as automotive, A&D, oil and gas, CPG, retail, pharmaceutical is currently not touching -- and will never touch eProcurement systems -- because it falls in the direct spend area, we should be focusing our compliance efforts in these areas outside of the Ariba, SAP SRM and Oracle iProcurement areas. Instead, we should focus on driving compliance into the core purchasing, order release and related modules within ERP itself.

For example, if the price of copper rises and my organization is buying wire harnesses with a copper component from India or China where my supplier has agreed to an escalation/de-escalation clause tied to the MetalMiner IndX with local metals prices, I'm going to need to focus in truing up the broken-out invoice value with a total cost model that adjusts for the local price of copper in the regional supply market. Or, better yet, the buying organization will be the one with the power to determine how much to pay the supplier, who will send an invoice minus material costs. But all of this will need to occur not within indirect eProcurement tools, but rather within the direct requisitioning environment of ERP (tied in, of course, with underlying third-party market indices, contract management systems, etc.).

While I think Andrew does a great service by calling attention to the need for better compliance in P2P, I would encourage all Spend Matters readers to look at the bigger transactional purchasing picture for a moment. And don't just think about eProcurement when it comes to improving future buying compliance. Do the 80/20 rule to see where you have the most to gain. I suspect for many companies, the answer will focus on driving better sourcing, supplier management and related compliance programs in the direct spend area. Perhaps this is the best argument for considering outsourcing your indirect purchasing environment to someone who can drive compliance outside of where it really counts the most -- in the direct arena.

Jason Busch

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