This week, we’re going to go over how actionable data can lead to better, more effective procurement strategies.
Why procurement strategies?
A procurement strategy determines how purchases are made, focusing on a long-term plan that involves relationships with suppliers to get the best deals on necessary inventory. In other words, we all want to spend less and get more and that requires planning and an understanding of what you have and what you need. Which all comes down to good, clean data.
For example, imagine you need to negotiate your purchase of bearings for the year. You decide to look at how many bearings you bought last year to get an estimate of how many to buy this year, but the data isn’t easy to gather. Based on what you find, you come up with a purchase of $500,000 for the year and get a small discount from the supplier based on projected purchases. A few months later, you realize that the amount was inaccurate and you’ll need twice as many bearings for the year. If you had calculated the need properly and negotiated the full amount at once, the discount from the supplier would have been greater and you ultimately would have saved more money.
Of course, your procurement can also go the other way with poor data–overbuying when you still have a lot in stock that you don’t have properly recorded. Either way, you’re losing money that could be allocated elsewhere.
How does good quality data help?
Last week, we discussed the major issues in procurement:
Inability to accurately define spend by category
Inaccurate spend analysis
Unnecessary spot buys, as poorly defined items can’t be found
Non-enforceable contract compliance
Difficulty negotiating with supply chain
Ineffective inventory management
Having quality data can help you avoid these pitfalls.
Quality data provides more accurate management reporting. Not only is your data better, giving you the accuracy to trust your reports, but it’s easier to gather all of the data when it’s not stored in disparate systems, cleaned to different standards.
Quality data also makes it easier to make informed decisions in real time. Being able to pull up the data and trust it means you can act fast, rather than having to wait to gather everything (which you may not even find) and comb through it.
The procurement transaction itself is more efficient with quality data, as is the preferred supplier selection process. Armed with the data you need, you can make smart decisions and create supplier relationships that save you money.
How do you have optimal data for procurement strategizing?
Good data for procurement involves having clear, searchable records of:
Purchases
Purchase prices
Inventory
Receipts
Issuance
To provide good data, you need a defined product classification system. That involves identifying and assigning a product classification code and description to each material record. Codes and descriptions have to be consistent, or you’re back to having complicated, unusable data.
IMA has developed a best practice internal MRO product group classification system based on a simple category/sub-category schema, which enables high level spend visibility. The IMA product classification use:
4-Digit Code Format
XX Category / XX Sub-Category Structure
8 Parent Categories
Over 80 Sub-Categories
Customization to suit business requirements
In total there are eight parent MRO product groups, further segmented into detailed sub-categories.
IMA classification examples:
MFG name | Part Number | IMA Product Group Code | Category | Sub-category |
Bussman | FRS-R-30 | 0203 | Electrical | Conduit fittings, connectors, boxes, wire devices |
Klein Tools | D507-6 | 0507 | Industrial supplies | Tools & accessories – hand, power, machine |
The United Nations Standard Products and Services Code (UNSPSC) provides an open, global multi-sector standard for efficient, accurate classification of products and services. UNSPSC levels include:
Level 1 – XX Segment
Level 2 – XX Family
Level 3 – XX Class
Level 4 – XX Commodity
UNSPSC classification examples:
MFG name | Part Number | UNSPSC Code | Category |
Century | GF2054 | 26101100 | Electric alternating current AC motors |
Mueller | A15726 | 40183109 | Tube adapter |
Many organizations also use custom classification systems to include country-specific tax coding, various industry-specific classification systems, and any custom code set that has been developed and utilized internally.
How do you get your data to be quality data?
The benefits are clear and we know what the data should look like, but how do we get there?
There are several steps to the process, which IMA has honed over the years. It starts with collecting your existing data–both physical and digital. Physical data capture can be completed by IMA on site, while digital data is extracted from your systems (CMMS, ERP, EAM, legacy symptoms, etc.).
Next, data is evaluated to determine the state of the data and the standards to which it will be cleaned. Then, we select the data requirements–such as the codification options discussed in the section above. With the planning done, IMA cleanses the data. The process involves verification and communication to ensure quality data. Once the data is cleaned, it can be uploaded to the ERP/CMMS and a governance solution can be implemented. It’s important to have an ongoing governance process to make sure your data continues to be cleansed to the highest standard.
In conclusion…
Overall, the benefits of quality data in procurement are substantial, leading to cost savings, improved efficiencies, risk reduction, and strategic advantages that contribute to the success and competitiveness of the organization. To learn how IMA can help your organization, send us an email at info@imaltd.com.