NSYNC, The Simpsons, chokers. Some things just seemed cool in the nineties. Now… not so much. And in terms of business management, we’ll add ERPs to that list.
Sure, the organisation you run or work for may have purchased an Electronic Resource Planning platform more recently – even this year – but little has changed since they were first implemented nearly three decades ago. Certainly not enough to make them a worthwhile aid in the decisions you make concerning every facet of your company, and often not enough to justify their cost.
When ERPs were first introduced, they were marketed as having the ability to handle procurement and sourcing, distribution and receiving, sales forecasting and integration into production planning. Businesses have evolved beyond what they were in the 90s, though, and outstripped the usefulness of an ERP.
Modern organisations spend vast sums of money engaging with thousands of suppliers and dealing with an extraordinary array of goods and services. ERPs simply cannot provide a meaningful understanding of a company’s spend profile.
If you want the sort of spend analysis that allows you to be proactive instead of reactive, you need to know what sub-categories and variants your organisation is buying, which departments are buying them, and the volumes purchased from the different suppliers. This sort of deep analysis is what Purchasing Index lives and breathes, and far outstrips archaic ERPs.
Still not sure? Well, let’s have a closer look at the weaknesses of ERPs.
An ERP is basically a centralised database of all information across all departments of a given business. This is handy – and the reason ERPs were dreamt up in the first place – because it means data collection is streamlined and anyone from accounting to procurement examines the same figures on recent purchases or customer information. It also means that there is a degree of automation when it comes to the process of reporting.
However, it’s not uncommon for a single business to use more than one ERP, or a similar operational system such as a Customer Relationship Manager (CRM). This is a problem, because ERPs do not talk to other platforms, so all data that is needed within an ERP to help you develop an effective spend analysis has to be manually inputted. This obviously takes time and undoubtedly involves human error.
As Les Wright points out in his analysis of why ERPs fall short, if data is not manually keyed, integrated or imported into an ERP system, your ERP does not know it exists.
Don’t forget – this also refers to transactions. Any payments made outside the system, such as credit card transactions or data from a merged entity, will not appear in the ERP system.
Any proper spend analysis needs detailed information about all transactions and it needs them tagged so they can be sorted, grouped and consolidated to achieve cost reduction. This provides a more detailed picture of corporate spend.
A single vendor can show up multiple times in an ERP system. This can happen for a variety of reasons. Oftentimes, it’s human error, such as spelling mistakes; some ERP systems have been known to have a single supplier represented fifty times, with each occurrence spelled or abbreviated differently. It can also occur due to different billing addresses or as a result of a merger.
This can be very detrimental to your organisation because you need to know how much business you’re doing with a supplier in order to negotiate better prices.
For instance, you may have data showing $350,000 of spend involving over 100 different suppliers when there are actually only three suppliers. You won’t be able to negotiate volume discounts with those suppliers because you don’t know the volume of business you’re doing with them.
Also, in order to conduct an effective spend analysis, you need to be able to associate vendors who represent separate legal entities and who are separately paid. This white paper uses the example of two hotels within the one chain, who may be separate for payment purposes, but should be analysed together to support negotiations.
The good thing about ERPs is that they allow detailed insights into each activity conducted by your business. But this is also a bad thing. When it comes to forecasting or analysing data to make the most prudent decisions regarding your performance management, summary data is far more useful. ERPs fail to provide this holistic view of your business.
When a payment is recorded in the ERP system, it contains the vendor name, the organisational unit responsible and the general ledger (GL) code against which the spending is booked. Unfortunately, the GL codes are designed to support the accounting function, not the procurement function, and these codes are heavily regulated by authorities.
For example, a company buys a printer from Canon, and the procurement group wants it linked with all the other printers bought by the business. However, the accounting for this printer will vary depending on how it is used and any other specific accounting rules that may apply. 200 printers bought at once could be considered capital goods, one printer bought as a single item may be expensed. The data for a single commodity is therefore scattered across the ERP.
A complete spend analysis simply is not possible without data standardisation and categorisation tools, which ERP’s either do not provide, or take too long and too much money to customise. Spend data is ever-changing; ERPs are static. It’s time to move on. Contact P-I now for a glimpse of the future.