In this 6-part series, guest blog writer Michael Lamoureux, a freelance procurement expert, explores and takes a deep dive into spend forecasting. With years of deep domain craft in sourcing and supply chain, he shares the secrets of what it takes to keep up in today's fast moving economy. Read Part 1, Part 2, Part 3, Part 4, Part 5.
Many spend "analysis" providers tell people one of the best places to start is invoice analysis with on-contract suppliers, as a thorough analysis m-way matched with contracts, POs (Purchase Orders), and / or goods receipts will often identify significant overpayments that can be captured as credits or refunds.
Why is this the case? Consider the following types of overpayment that are common in an average organization of considerable size:
Duplicate Invoice Payments
The most common type of overpayment that occurs when a supplier invoice is not paid on time for whatever reason and the supplier re-sends the invoice, which gets re-entered and queued for payment
Overpayments for Defective/Returned Goods
The warehouse rejects goods that are defective, or accepts goods from an end customer that broke-down under warranty, and returns them to the supplier that is supposed to credit the organization, but doesn't for whatever reason
Fraudulent Payments, Unintentional and Intentional
The organization gets a seemingly valid invoice from a seemingly known supplier which is fraudulent either because a valid supplier(unintentionally) re-sent an invoice with a different invoice number or a fraudulent party sent an invoice attempting to mimic a valid supplier (but with different payment instructions that go unnoticed by AP)
A spend analysis solution that can do an m-way match between invoices, purchase orders, goods receipts, and payments and find all the discrepancies can easily find the duplicate payments, overpayments, and even the (potentially) fraudulent payments which can be quickly confirmed by human eyes. Then all over-payments to suppliers under contract can be immediately put in front of those suppliers and be reclaimed as credit against future orders.
And that's good, but this is just a one-time savings opportunity. Once the reclaimable credits have been captured, what comes next?
Well, the smarter providers tell you to automate the process and repeat it monthly and not only detect these overpayments faster, but identify if unpaid invoices match invoices that have already been paid or goods already paid for and/or returned. This insures that less overpayments are made and those overpayments that are made are generally detected fast enough so they can be captured as credits before the supplier goes off contract.
And this is great because not only will the organization make less overpayments over time, but the suppliers will suddenly get much more accurate because they know even the smallest mistake will lead to an invoice rejection and/or a delayed payment. But then what?
What these providers don't tell you is that invoices are also great for spend forecasting. And, in particular, those invoices not tied to POs or those that have POs not tied to contracts. Why these invoices?
If the invoices are associated with POs, and, in particular, POs associated with a contract, then the POs are issued according to a schedule defined by the contract. In this case, they have no predictive capability beyond the contract as they were defined by such contract.
But in the other cases, they have great predictive capability. Consider the case of a sequence of POs without a contract, where users or buyers are making spot buys for the same product or service and the quantity is increasing month over month. Through the application of trend analysis and comparisons to similar categories, the organization can predict future volume, spend, and identify the best opportunities for cost savings and avoidance before spend in these products gets out of control.
And the invoices without a PO can be an even better indicator of emerging spend areas. If the organization keeps seeing spend across suppliers for a new type of service, it can be a leading indicate of a change coming down the pipe as the organization transitions to new product lines that need to be supported by new services. And if it sees new products, that could indicate changes in production line technology or back office equipment that will soon be standardized and allow Procurement to get involved early, even before the organizational departments realize that they need Procurement's support.
But beyond that, you can identify commonalities not just across products or services, but supplier selection (are certain individuals trying to phase suppliers in discretely), categories (which might just be emerging and not well defined), and even geography (especially once one or two time invoices are filtered out). The power of invoice analysis goes well beyond overpayment detection. At the end of the day, all business is about changes in the balance sheet, and invoices are the best, and most consistent, early indicators of that. So why not use them to your advantage?
About the Guest Writer
Michael Lamoureux, aka the doctor, is the Editor-in-Chief of Sourcing Innovation (.com), a resource for sourcing, procurement, and supply chain professionals who are interested in improving themselves and the overall performance of their organizations. A regular contributor to Spend Matters, he is a Computer Science PhD who has been heavily involved in the Sourcing and Supply Chain Space since 2000 and the e-Commerce space since 1997. As a freelance procurement consultant with extensive expertise in sourcing, procurement, and supply chain processes, he aims to continually push innovation in and beyond the supply chain space. With particular expertise in analytics, modeling, and optimization, he is able to dive much deeper into technology and core issues, striving to help businesses with their internal knowledge transfer, positioning, and planning problems.