And Recover more than $100,000 (or more) in Wasted Spend

Is there anything more frustrating than trying to increase working capital with a team that fails to use contracted pricing and terms?

One of the primary functions for a Supply Chain organization is to negotiate the most favorable pricing and terms possible for any and all materials procured by the organization.

Big or small, these contracts represent the potential for savings and increased working capital, encapsulating a lot of the value driven by the department.

It is therefore no surprise that leakage, or the purchase of materials/services outside of contracted pricing and terms, is near the top of the list of pet peeves for any supply chain group.

Causes of Leakage

1. Breakdown in communication channels
2. Organizational Silos
3. Lack of willingness to participate
4. Lack of visibility/accountability

Effects of Leakage

1. Increased cost for raw materials, spare parts
2. Decreased working capital
3. Decreased leverage with contracted suppliers
4. Lost productivity

If left unchecked, leakage can eat into any organization’s bottom line to devastating effect. But, in today’s fast and complex business environment, how is it possible to convey and monitor the adherence to negotiated pricing and terms?

Fortunately, SAP allows commodity managers to easily record and ‘communicate’ the pricing, terms and preferred sources of supply for any material. Once in place, any organization can leverage that data and compare it to PO history to quickly and effectively highlight even nominal cases of leakage.

MASTER DATA – The 30,000 Foot View

For commodity managers in a supply chain group, negotiating pricing, lead times and payment terms for materials/services is the initial step, but equally important (and oft overlooked) is the process of developing and maintaining channels for conveying the results of these negotiations to the numerous buyers across an entire organization.

Communicating preferred procurement channels for each and every material/service purchased by every buyer across a corporation seems like a daunting task until we recognize how easily SAP allows us to do so through the use of master data.

Key SAP Transactions for Communicating Material Pricing/Preferred Sources of Supply:

1. Source List (ME01) – Link materials to preferred sources of supply
2. Purchase Information Record (ME11) – Maintain contracted pricing, terms and vendor specific MRP data

Placing an emphasis on maintaining master data is the most important step in a company’s fight against leakage. For every material there should be a preferred source of supply maintained in SAP’s ‘Source List’ (transaction ME01) which is used to link a material with a vendor.

Additionally, for every Vendor-Material-Plant combination there should be a Purchasing Information Record (transaction ME11) which is used to communicate the pricing and terms for a material sourced from that vendor.

Benefits of Accurate Master Data

With all of this data properly maintained, MRP will choose the correct vendor when generating purchase requisitions and the purchase order will automatically adopt the correct price at the time of PO creation.
Proper master data means that materials will be purchased from the correct vendor at the correct price even if a buyer is completely unaware of an existing contract with a supplier!

Expose Potential Problems

While this is certainly powerful functionality, it is still possible for leakage to occur which is why every organization should have the ability to quickly identify potential problems. How can a commodity manager quickly and easily identify savings slipping through the cracks?

COMPLIANCE REPORTING

Contracts with vendors have been signed, the details of which have been properly broadcasted to our buyers, but how can we be certain that all buyers are working with our preferred sources of supply? As previously discussed, accurate master data is extremely helpful in communicating contracted sources of supply and can additionally be used to pinpoint where leakage is occurring.

By comparing negotiated terms and pricing with actual purchasing information, we can determine if a material has been purchased in accordance with negotiated channels.

Options for Source Compliance Reporting

1. SAP Query in ECC
2. Custom Program in ECC
3. Business Intelligence Report

While manually performing these checks is nearly impossible, we are able to create reports in SAP to do the heavy lifting for us, bringing to the fore only those examples where a material was purchased outside of contracted terms.

These reports can be created in ECC or within a variety of external tools. In either case, we can use the report to filter through the noise and focus in on areas of greatest opportunity.

SUMMARY

When considering the value and stability that a supply chain department delivers through contracts structured with preferred suppliers, it seems tremendously wasteful to allow even a small percentage of potential savings to slip away as a result of leakage.

Fortunately, through the proper maintenance of master data and with the development of a few key reports, we have an automated option for highlighting and minimizing the greatest areas of risk.

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Guest Author

Mark Stacy is a SAP Supply Chain Expert who help companies increase their profits by eliminating wasteful spending and establishing optimal processes.