Spend Management Vs. ERP Procurement

GEP and the North Carolina State University (NCSU) Supply Chain Resource Cooperative surveyed supply chain, procurement and IT professionals across a range of industries to gain insight into their priorities and strategies regarding supply chain resilience and optimization. The survey’s results suggest a series of misalignments where gaps in process, technology and information flow can be a drag on productivity and optimization. Of the professionals surveyed, 59% saw the gap between procurement/sourcing and supply chain to be a major disconnect, and the most pressing pain point.

But the vision of a truly integrated supply chain has proven difficult to realize. A multi-enterprise supply chain networks (MSCN) is a key technology for improved collaboration across an extended supply chain. A MSCN is a collaborative solution for supply chain processes built on a public cloud – many-to-many architecture – which supports a community of trading partners and third-party data feeds. MSCN solutions provide supply chain visibility, network-based applications, and network analytics across an extended supply chain.

Networks have distinctive advantages when it comes to supplier onboarding, communication, partner management, and being able to provide unique analytics. Oftentimes, the larger the number of industry participants on a network, the better the solution.

Spend Management Solutions Leverage a Network

The MSCN market is composed of different types of solutions. One type of solution is business spend management. Key spend management suppliers include GEP, Coupa, and Jaggaer.

By ARC’s definition, when a business spend management solution is used for direct procurement it is an MSCN. Indirect materials are not seen as being significant to supply chain management. In procurement, the problems associated with direct materials are more important, and more difficult, than the complications that surround indirect materials. A direct material is a raw material, component, or assembly used directly in the manufacturing process.

The procurement applications that reside in an ERP and business spend management solutions do very similar things. For example, one of the key decisions that a manufacturer needs to make is should they continue to buy goods from one of their suppliers. Both ERP based procurement and spend management solutions have supplier master data. This data would include things like the name of the company, the address of the headquarters, where the factories are located, whether the company is minority owned, whether the company is financially sound, and whether it is legal to trade with the company.

At the simplest level, a buyer might ask a supplier whether the information they have is still up to date. For example, are you still a minority owned company? If the information is not up to date, a buyer might decide not to do business with the supplier until the data is updated and verified.

Procurement solutions are often updated with purchased information. For example, Dun & Bradstreet (D&B) publishes reports on the creditworthiness of companies. Similarly, Descartes provides a solution called Denied Party Screening. Denied party screening provides a list of companies it is illegal to do business with.

Both procurement solutions from ERP companies like OracleORCL
or Infor – or business spend management solutions – can help companies enforce these sourcing supplier decisions. These solutions allow companies to import real-time third-party information feeds from organizations that monitor things like whether a supplier is minority owned, is employing children, or has unsafe working conditions in their factories. Some information – for example, weather a company minority owned – is updated once a year. But a lot of information on suppliers needs to be updated many times a year.

What if a company should not be doing business with problematic suppliers? That supplier can be put on “hold.” There are several hold types, but in Oracle the setting ‘Hold all new purchasing documents’ stops the ability to release any new purchase orders to a specific supplier site. Similarly, for spend management solutions the purchase order can be stopped if information is not up to date. Oracle, Coupa, and others, offer tailored questionnaires that allow due diligence information to be collected via a supplier survey. That information can then flow automatically into the supplier master.

Thus, in terms of keeping supplier data up to date and then enforcing the decision not to work with a supplier, the functionality is similar. What is the big deal about the network?

The PO is the Fulcrum for Spend Management Solutions

With spend management solutions, the purchase order drives payment to the spend management vendor. While the PO is initiated in the ERP system, those POs get routed through the spend management platform. When the spend management sends the PO on to the supplier, that initiates a small payment transaction for the spend management software provider. If the spend management vendor wants to get paid, the invoice better have accurate supplier data. Spend management vendors are thus incentivized to help keep their customers’ critical supplier data accurate.

Alex Zhong, the director of product marketing at GEP, argues that a purchase order (PO) function should not be done outside of a unified platform: “A buyer may send a PO to a supplier, but without being able to share visibility of updated order status, change order activities and logistics and payment information in a managed, guided process between multi-enterprise parties, neither will have a window into what’s happening on the ground. This will almost surely lead to high cycle times in fulfilling orders, the inability for both to production plan, inventory shortages or delivery disruptions caused by delays, and/or high inventory safety stocks and costs due to poor supply order management. In a disruptive environment, these issues are further amplified, affecting resiliency.”

Supplier Due Diligence

When buyers work with direct material suppliers, they seek to do due diligence. They create a request for proposal (RFP) and ask for all kinds of information: is your company minority owned? What is the carbon footprint associated with the products you supply? Are you financially solvent? And many, many other questions are asked as well. Each buyer will be asking for different pieces of information, but much that buyers seek to learn is the same. One of the banes of business is the time and effort that goes into filling out RFPs.

But with a network-based solution, if the potential buyer is on the network, that potential customer has access to many things that they want to know. The effort the supplier needs to expend in creating RFPs is greatly eased. The bigger the network, the more likely a potential buyer will be on the network with a supplier.

The GEP network has 5 million active suppliers and conducts over 10 million transactions, and $300 billion in spend, on an annual basis. GEP estimates that about 35 percent of the spend is direct.

Then there is Jaggaer. The Jaggaer network has 1800 buying customers served by 5 million suppliers. There is $550 billion in annual spend captured, approximately 30 percent of that being direct spend.

The Coupa network includes 8 million suppliers, over 2500 customers. This represents $3.6 trillion spend under management. The amount of that spend that is direct materials has not been made public.

The PO is a Key Fulcrum Point for Spend Management Solutions

With spend management solutions, the purchase order drives payment to the spend management vendor. While the PO is initiated in the ERP system, those POs get routed through the spend management platform. When the spend management sends the PO on to the supplier, that initiates a small payment transaction for the spend management software provider. If the spend management vendor wants to get paid, the invoice better have accurate supplier data. Spend management vendors are thus incentivized to help keep their customers’ critical supplier data accurate.

Alex Zhong, the director of product marketing at GEP, argues that a purchase order (PO) function should not be done outside of a unified platform: “A buyer may send a PO to a supplier, but without being able to share visibility of updated order status, change order activities and logistics and payment information in a managed, guided process between multi-enterprise parties, neither will have a window into what’s happening on the ground. This will almost surely lead to high cycle times in fulfilling orders, the inability for both to production plan, inventory shortages or delivery disruptions caused by delays, and/or high inventory safety stocks and costs due to poor supply order management. In a disruptive environment, these issues are further amplified, affecting resiliency.”

Networks and Sourcing

If companies want to work with new suppliers, network-based solutions can help identify possible sell side companies to work with. This ability to find potential new sourcing partners is something valued by both buy side and sell side participants on the network.

But finding indirect suppliers on a network is much easier than direct suppliers. Office cleaning services is a category, for example, with many participants. In contrast, a part used in the production process may be custom made for that manufacturer. Creating a sourcing peer group is not as simple as looking in a catalogue.

There also will often need to be logic that breaks down a bill of material and then captures technical specifications that can be used to search for suppliers in the network. Not all spend management solution providers have this functionality. But Jim Bureau, the CEO at Jaggaer, says that they do. Sourcing is even more complex in process industries where companies use recipes rather than bills of material. “We do work in the pharmaceutical and chemical industry, Mr. Bureau explained. “If you are making new products in these industries, you need to be able to search for material by their chemical compound structure. This allows chemists to say, at a molecular level, what they are trying to source.”

Networks and Benchmarking

Companies seek to benchmark their performance against peers. A business spend management network generates huge volumes of data. This data can be used to help procurement departments benchmark their performance. If a network is built with the proper permissions from their tenants to use their confidential data for specified purposes that do not impinge on proprietary data. At Coupa, procurement professionals have given Coupa permission to aggregate and anonymize their data for analytics. Coupa calls this community intelligence. Coupa customers can get benchmarking data, but they know the data related to what they purchased – including the price they paid and the suppliers they work with – will not be shared with others.

For example, Coupa has a metric called the “Risk Management Evaluation Completion Rate” that specifies the percentage of risk questionnaires filled out by a company’s suppliers. At top performing procurement organizations, 86.2% of suppliers fill out these questionnaires. For benchmarking metrics to be valid, they need to be based on a large sample. With 2500 buying organization on the network, these metrics are clearly statistically significant.

Coupa has a product called Risk Aware that uses community intelligence to help assess the risk associated with working with a customer. The solution is based on third party data on risk – credit scores, legal filings, government data, etc. But that data is married to community transaction data to generate a risk score.

Supply Chain Financing

A recession appears imminent. During a recession, companies try to protect their cash flow by paying their suppliers more slowly. This can be counterproductive. It can drive smaller supplier out of business. Business spend management vendors can leverage network data to help provide better financing options for suppliers.

If a supplier’s risk scores are increasing (which are determined partially with community intelligence), and they are an important supplier, a buyer can agree to pay the company immediately if they can have a discount. For small companies, cash flow is often more important than margin.

Supply chain finance programs have been offered historically by financial institutions, but often only to top-tier suppliers, not to the small and mid-sized businesses that need them the most. However, public cloud platforms have visibility to buying transactions between buyers and suppliers. The platform can be used to show a bank that a supplier has an invoice and thus will eventually be paid. The bank can then offer a factoring deal. In factoring, a business sells its accounts receivable (i.e., invoices) to a third party – often a bank – at a discount. The transaction data on the network can speed up these factor deals while providing increased assurance to banks, which can reduce the discount the supplier has to pay.

Final Thoughts

Ultimately, when companies decide between a traditional ERP procurement solution and a business spend management solution, the depth of functionality, the way the solution is integrated with the rest of their business applications, and the cost of the solution, are all key considerations. Nevertheless, networked solutions do have some distinctive advantages.