Getting to grips with supplier relationship management can help you streamline your company's purchasing processes and at the end of the day lead to bottom line benefits
While much of the recent debate involving purchasing departments has centred on e-procurement and electronic marketplaces, one basic area that has been overlooked is the use of codes to identify purchased goods and services.
This has all led to another acronym - not customer relationship management (CRM), but supplier relationship management (SRM). Essentially this is the deployment of systems to make the most of supply and purchase data.
Enhanced knowledge of what you have bought as a company leads to purchasing efficiencies and bottom line benefits. I know this is stating the obvious, but many companies just don't know what they have bought.
In one classic example, one oil company, whose critical purchases you might expect to have something to do with oil, found that the biggest expense was for beer and chocolate delivered for workers on rigs. It only found that out by checking the codes of goods it had bought.
Most companies have little knowledge of their volumes of supplies and non-production goods. It is only by having a reliable system for the identification of purchased goods and services and adopting product classification standards that those strategic suppliers can be identified and selected.
One of the most advanced codes is the United Nations Standard Product and Service Code (UN/SPSC), developed jointly by the UN and business information group Dun & Bradstreet (D&B). It has assigned a code to nearly 9,000 products, and has five increasingly detailed levels, namely: "segment", "family", "class", "commodity" and "business function".
For example, pen refills would come under segment 44, office equipment, accessories and supplies; family 12, office supplies; class 19, ink and lead refills; commodity 03, pen refills. Thus, the product's code would be 44-12-19-03.
Using this coding system provides a standardised purchasing framework - a response to the problem identified by Professor Andrew Cox of Birmingham University of "information noise", namely, failing to turn data into information.
According to Cox, there are a number of reasons why it occurs:
Lack of a systematic information process to capture all data on similar areas of spend within an organisation
Inconsistent classification of similar areas of spend across divisions and business units
Insufficient depth of information about suppliers' financial structures and the range of products and services they provide to the organisation
Where existing coding has not been conceived with analysis, summation and negotiating potential discounts in mind, but only for logistics and identification
So what's this all got to do with IT and e-commerce departments?
Well, if a new coding system is to be implemented, it will probably be the IT department that has to do it. And if you're thinking of entering an electronic marketplace, you might want to ask yourself whether your coding is up to date. If you take part in such a marketplace, is your coding system compatible with your partner companies?
Most company coding systems have so far been very expensive to develop, and take around a year to create, and for each new item code it takes on average 90 minutes to assign a code. That sort of timescale might prove incompatible with the oft-quoted promise "our e-marketplace will be up and running in three months".
UN/SPSC has been adopted by key purchasing-related organisations such as Visa and MasterCard, with Visa likely to announce a link-up with D&B soon, to take advantage of its work with the UN, and its business identifier "duns number".
So, if you are like one financial services company which recently admitted that the relationship between the business and its purchasing department was "testy", and that "hit and miss" buying was costing the company a fortune, maybe you should start examining your codes. Or ask yourself, "How much are we spending on which products and with whom?"