I have been hearing (and having) more and more conversations about supplier data lately, specifically in how that data is used to reduce risks and cut costs. It’s a critical issue for companies to get their heads around if they want to move beyond simply tackling the proverbial low-hanging fruit and drive real, strategic savings through procurement. The old garbage in, garbage out axiom applies as a company with incomplete, disparate data tries to identify strategic savings opportunities or identify potential risks in the supply chain.

This spring, I author a white paper titled Next-Generation Spend Analysis: Beyond Commodity Classifications, which looked at best practices and actionable advice for companies looking to manage more of their spend strategically. A critical piece of the process is supplier data enrichment, which if done properly can provide improved insight into the organization’s supply base.

There are six important supplier enrichment components that should be considered for inclusion in spend analysis for optimal strategic decision making as well as to support programs such as diversity and go-green initiatives.

1. Supplier Parent-Child Relationships - Accurate supplier parentage information is critical in optimizing supplier leverage in negotiations and should always be a part of a spend analysis enrichment program. A real-world example of a quick-hit opportunity that resulted from accurate parent-child relationships came from a regional retail organization that was able to renegotiate usage rates with their energy provider when realizing that several of their utility providers actually rolled up to the same corporate entity putting them in a higher usage bracket.
2. Industry Codes - Many third party sources exist that will provide supplier-level industry code information usually in either the NAICS or SIC taxonomy structure. This information is helpful in expanding existing relationships with preferred suppliers, but has another use. When embedded in the commodity classification process, industry code information provides an excellent source of information when limited quality supporting data exists. While the granularity of the classifications may not be as deep, these industry codes are often the only clue available and when coupled with the spend profile of the company in question, can often result in useful commodity classifications. When evaluating spend analysis providers, insist on understanding whether supplier industry details are truly a part of the classification process or simply a data element passed on from a third party. NAICS are also a required component for supplier diversity reporting.
3. Financial Information - A number of attributes including revenues, employee counts, bankruptcy indicators, liens counts, suits counts and credit scores are often useful in supplier assessment exercises. To the extent that this information is available in spend analysis, it can be a useful tool in assuring the viability of the supplier in the awarding of new business.
4. Risk Assessments - Taking the financial information elements to the next level, risk scores assess the financial viability of suppliers and their relative risk of failure. Financial information is backward looking whereas risk scores are predictive. This information can be invaluable to a sourcing and procurement organization since the failure of a single or small number of suppliers can often apply significant pressure on the ability of the supply chain to function or, in a worse case, come to a grinding halt. Critical information in any economy, but particularly in a recessionary economy, is critical for success. Any spend analysis program that does not take supplier risk assessment information into account is passing on a tremendous opportunity to mitigate supply chain risk.
5. Supplier Diversity - If your organization has a supplier diversity program in place, it is only logical that you would want to have this information available in a spend analysis program. To the extent that your spend analysis provider has the ability to extend your identification on which suppliers are certified as diverse, your diversity program can only benefit. And the program often has organizational revenue implications since more customers are requesting the percentage of your suppliers who are diverse.
6. Green Status - With environmental concerns clearly on the rise, if you have not already begun to track green suppliers, it is very likely that you will need to do so at some point in the not-so-distant future. There is even the chance that governmental regulations may at some point require the segmentation of green suppliers. While the identification and tracking of green suppliers is in its relative infancy, ask your spend analysis provider for their plans in this area so that you are assured that your future needs will be addressed.

Are there other focus areas or data types you’d add to the list?

Ken Miklos is a Senior Product Marketing Manager for Ariba’s Visibility and Contracts solutions.