ERP systems have been historically good at processing and recording transactions, but mining data for spend visibility was not one of them. Spend Analysis started in the early 1990′s at progressive companies like GE and at consulting firms like McKinsey. The idea was to mine existing spend data to identify areas where sourcing effort would be most profitable.

The idea in theory in the early days was cutting edge; however the methods to mine the data in an ERP system came with numerous problems including:

•    ERP data is usually incomplete
•    Contained duplicate vendors
•    Poor commodity information
•    Data is unchanging

Let’s dig deeper into these problems to better understand them.

ERP Data is Generally Incomplete: ERP systems record transactions which they are designed to do. However, they only record transactions that are made in that system and do not account for other systems that process transactions including P-cards. ERP’s also do not contain important SA information about supplier diversity, risk and scorecard metrics.

ERP Systems Contain Duplicate Vendors: An ERP system records the data that is entered in the transaction. It doesn’t consolidate their transactions into one supplier entity. For example, you could have 16 different transactions, with 16 different versions of Federal Express. Your transactions are just with FedEx, but it looks like you have 16 different suppliers. So you really have no idea how much you are spending with FedEx as a whole unless the transactions are entered identically by different people.

ERP Systems Don’t Contain Good Commodity Information: A good ERP system provides the ability to assign category codes to transactions, but the practitioner who is entering in the transactions usually is not well versed in the coding structure. In many, cases people don’t take the time to find the correct code, because they don’t understand the importance of it.

ERP Data is Unchanging: ERP systems are financial accounting systems by nature and because of that are designed to be rigid and make changing information about vendors or category codes very difficult. It can take weeks or months to modify the information.

All of these issues cause a very cloudy view of Spend Analysis. The problem multiplies itself with large global corporations, or with mergers and acquisitions, where you have numerous disparate ERP systems that don’t talk to each other. With incomplete, bad data, enormous savings opportunities are missed. This is where the data ends and the role of spend analysis begins. Stay tuned for Part 2: What is the value of Spend Analysis?

For more information about this topic and Spend Analysis click here for our White Paper.