Spend Compliance via Supplier Compliance: 50 Shades of Pay (Part 18)

Supplier compliance

In the previous three installments of our miniseries on spend compliance, we introduced an overall framework for spend compliance analytics and then dove into contract compliance, payment compliance, budget compliance and process compliance. In this edition, we’re diving into supplier compliance and how to unlock some latent value there. We’ll assume you’ve already done some basic spend analysis to identify when you’re paying different prices from the same supplier for the same item, but obviously supplier compliance runs deeper. How? Read on.

Extending Spend Compliance Analysis into the Supplier Base

So far, we’ve really only discussed spend compliance and process compliance from an internal viewpoint, but suppliers are also part of the equation. When buyers use spend analytics to identify non-compliance, many root causes tie back to suppliers, such as:

  • incorrect catalog/PO pricing relative to contracts
  • incorrect invoice pricing not tying to catalog/PO pricing
  • duplicate invoices
  • incorrect freight, handling, tax, duties/tariffs
  • delay in submitting invoices that arrive too late to capture early payment discounts
  • incomplete implementation of accurate data into buyer systems

Suppliers must deliver not just goods and services but also information that is compliant with their contracts, codes of conduct, scorecards and other related data. In fact, invoice data accuracy, for example, is so important that it’s actually part of a composite performance metric called supplier perfect order, which factors invoice accuracy alongside order accuracy, completeness and quality. Quality is narrowly implemented here but can be more broadly defined, especially surrounding service level agreements (SLAs). These SLAs are increasingly prevalent and complex as services continue to increase, become more complex, become outsourced across tiers and become more performance-based on the upside and downside. Let’s take some examples:

  • Buyers need to be able to monitor rebates and volume discounts that are due to them, and the reconciliation process needs to be clearer across procurement, contract administrators and financial accounting.
  • Buyers also are increasingly using managed service providers (MSPs) for spending in contingent labor, process outsourcing, capital equipment, maintenance, repair and operations (MRO), logistics, and other areas where the MSP-incurred spending on your behalf should also be visible and compliant to you (and maybe even your customers). There may be category-specific systems and other specialized systems — contract management, warranty management, commodity management — to integrate too as well.
  • Group purchasing organizations (GPOs) are another valuable type of third party where you need transparency and spend/rebate monitoring. If you’re large enough, you may even be able to do your own aggregation of common materials that suppliers use and buy and resell them to those suppliers.

You get the idea — it’s complicated! And we’re not even diving into the area of total cost analytics that break down spend into low level activity drivers and cost elements that ultimately peg back to labor rates, currencies and commodity and energy prices. So, since there is no single technology application yet that can manage all these complex spend categories and requirements across the source-to-pay (S2P) spectrum, it’s important to make sure that you have a good management system with a capital “S,” in addition to a good analytics technology platform, which may also have multiple vendors underneath, with a lowercase “s.”

As your analytical capabilities increase, so will your opportunities. For example, as predictive analytics become more powerful, you’ll be able to improve the predictive value of supplier behavior and performance. Or, degradation of service levels combined with faster invoicing and a willingness to take payment discounts may signal supplier financial distress and warrant further investigation.

Obviously there’s only so much you can do with spend information on its own, but if you have spend analytics and you have some level of supplier performance monitoring, there is synergy in combining the two. And speaking of synergy, there is also no reason why you shouldn’t use spend analysis and related process analysis (i.e., the process of spending) to uncover potential regulatory compliance — and also to put a monetary figure on what that non-compliance might be costing you. We’ll tackle this in our next installment of this miniseries.

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