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Optimizing the Vendor Master File

Published
  • March 01 2005, 1:00am EST

George Marinos wishes to thank Michael Kody for his contributions to this month's column. Kody is a director in PricewaterhouseCoopers' Technology and Data Services Practice, focusing primarily on developing data optimization solutions for private and public sector clients.

The vendor master file? Without question, it is an integral part of the procurement and accounts payable control environments. A well maintained vendor master file helps prevent failure of system controls, process inefficiencies and inaccurate management reporting. Failure of system controls can result in duplicate and erroneous payments, missed earned discounts, uncashed checks, unapplied credits, tax reporting errors and fraud.

How do you avoid these consequences? Here are eleven critical practices you can't afford to overlook.

  1. Define Ownership: Make sure the data owner for the vendor master file is clearly identified. This should be someone with the procurement and payables business process knowledge necessary to assume responsibility for a) determining vendor master data requirements and standards; b) coordinating data quality activities for those that use, enter, update or maintain the file; and c) implementing and monitoring vendor master file optimization procedures.
  2. Engage Access Controls: Engage access controls, such as user IDs and passwords, to ensure that only authorized individuals have the ability to make changes, deletions or additions to the vendor master file. Multiple failures to log on should invalidate the user ID and be logged on an exception report. Management should investigate all unauthorized attempts to access the vendor master file.
  3. Establish Clear Vendor Setup Procedures: These should include formal procedures for prequalifying vendors (i.e., documenting and retaining research in accordance with corporate policies); for the requestor's completion of a standard Vendor Master Record Change Request Form; for operational management's approval of all change requests; and for standard procedures ensuring that vendor master file changes comply with data quality standards and naming conventions.
  4. Enforce New Vendor Approval Practices: Policies should be established to review quality control procedures, delivery history, distribution requirements, terms of trade, conflict of interest, discounts, promotional support, transactional accuracy, use of technology, and production scheduling flexibility prior to approving new vendors. Additionally, finance should make a determination (i.e., using Z-Scores) on whether the vendor's financial strength warrants a relationship.
  5. Determine When Multiple Vendor Records Will Be Allowed: Ideally, each vendor would appear in the vendor master file only once. However, in practice, multiple records for the same vendor may be required. Separate records for the same vendor should be used when there are differences in remit-to addresses, discount terms or transactional tax treatments. When negotiating vendor agreements, purchasing should take into consideration the impact on accounts payable processing and request consistent terms and remit-to addresses.
  6. Manage One-Time Vendor Accounts Separately: Policies should be established to ensure that vendor master records are not created for limited-use vendors. Establish minimum transaction counts (i.e., five annual transactions) and spend thresholds (i.e., $5,000 annually). Vendors not meeting these thresholds should be processed as one-time vendors. Consider maintaining a miscellaneous vendor activity file to facilitate 1099 reporting. Look to strategic sourcing and the use of p-cards to reduce the need for one-time vendors. To lower the risk of duplicate payments, consider not allowing manual or electronic data interchange transactions with vendors on p-card programs.
  7. Apply Consistent Naming Conventions: The basics? Start by excluding abbreviations or punctuation, eliminating honorifics (i.e., "Mr", Mrs", "Dr", etc.), storing information in all upper case and using ISO standards for country codes. For more ideas, see the sidebar.
  8. Enforce Data Validation: Vendor records should not be created without complete population of critical data elements, such as Federal Identification Numbers. Consider 1) sending Vendor Master Record Request Forms to the vendor for confirmation prior to establishing new records, or 2) obtaining confirmation of vendor data via a telephone request. Reconfirm this data on a periodic basis. One more thing: be sure to record the vendor's fax number used to return confirmation documents.
  9. Maintain Your Systems and Policies on a Regular Basis: Due to changes resulting from mergers, acquisitions, name changes, etc., vendor master records should be evaluated regularly. On an annual basis, review for inactive accounts, duplicate and incomplete records, file format errors and accuracy issues. Accuracy can be confirmed via a vendor confirmation process and is best conducted with the support of procurement. Information from D&B or marketing data service providers can be used to validate vendor name and address data. Postal code information can be used to ensure consistency with city/state and ZIP codes. Additionally, comparing vendor master data to employee files may help you detect fraudulent activity.
  10. Remove Old/Unused Vendors from the System: You may have to work harder at this than you think. Why? Many systems only allow users to "end-date" master data to disable a particular record - even though this process does not delete the record itself. And the purge feature? Most of the time, it targets only transactional data - not master data. So maybe you're thinking, "Fine, we'll remove vendors through table-level maintenance...", right? Good idea. But read the next paragraph first.
  11. Make Sure You're Retaining the Right Records: There's a good chance that your business and industry is subject to legal, tax or regulatory requirements that may require you to retain transactional records for seven years or longer. Still interested in doing table-level maintenance on the vendor master to remove old/unused vendors? Consider archiving transactional history.

Remember: your vendor master file isn't just a key source of corporate information. It's also a core business asset that directly impacts the effectiveness of your transactional controls. At the very least, make sure you're engaging the eleven practices outlined here.


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