Item numbers can be so powerful. An item number for a part provides a common spec/description, a way of tracking a part across time and different suppliers, and increases the efficiency of a supply chain. Item numbers, also known as part numbers, material numbers, SKUs, catalog numbers, and inventory IDs (among other names) are a big part of Supply Chain 101. So why do most companies only use them for materials and not services? Today’s article is about using item numbers for services as well as materials, why and how to apply item numbers to services, and challenges to doing so.

Why Item Numbers for Services?

Before you have item numbers for services, make sure you have a robust process for item numbers in general. Know how you will generate new item numbers, who governs them, and have processes established around item numbers. Now, why would you extend item numbers to include services? Because item numbers come with clear definitions and incredible access to data. 

Item numbers force clear standard descriptions of the purchase because they must be repeatable. When an internal customer uses that item number, they should get the same thing every time. For example with design engineer work, this may require a standard description of the qualifications of an “Engineer I.”. This has huge power because it puts all suppliers on a level playing field. Without standard definitions, one supplier’s “Engineer I” is another supplier’s “Design Engineer” or even “Drafter.” The first benefit to assigning item numbers to services is creating common definitions for what those item numbers mean.

After you assign item numbers to services, you suddenly gain a huge amount of access to data. How has this labor rate changed over time and between suppliers? What are we expecting our HVAC costs to be this year based on last years’ trends? Precisely how much of this service did we end up awarding to the secondary supplier? Item numbers open up a great deal of information that helps with planning at all levels of the business. Suddenly you can have the right answers quickly for whoever needs them. No AI or fancy software required. 

How to Apply Item Numbers for Services

Once you’ve decided to apply item numbers to services, define what will be a service item. Some examples include:

Hourly rates – design engineer time or plant maintenance services

Unit rates – quarterly maintenance for an HVAC system or the cost to calibrate a voltmeter

Repeated service (weekly/monthly/quarterly/annually) – janitorial services or an ISO audit

Start with the most frequently purchased or highest spend services, or those that the leadership team is constantly asking for in data pulls. Assign units to the services the same way they are billed, so do not make the units on an hourly rate “each”. A monthly retainer might have a unit of “month” and hourly rates would have a unit of “hours.” 

Follow the same rules for creating material item numbers: if an item differs in form, fit or function, give it a different item number. That means if item number A can substitute for item number B and vice versa, they can have the same item number. If they cannot, they need separate item numbers. Do not fall into the trap of having item number A for supplier A and item number B for supplier B simply because they are separate suppliers. Work toward standard definitions and ask if there is truly something different between supplier A and supplier B’s offerings. This will help you spot trends between suppliers and make a direct comparison over time.

Consider differentiating a service item number using a prefix or suffix. For example, if your standard item number format is nine numerical digits (#########), consider making your service item numbers an “S” followed by eight numerical digits (S########). That way everyone can tell at a glance that they are looking at a service item number. 

Challenges to Service Item Numbers

Many Enterprise Resource Planning (ERP) systems are not built for services to have item numbers. Because of this, there are a few hurdles to overcome. 

In most systems, materials require a three-way match while services require a two-way match. This means materials require three documents to pay a supplier invoice: The purchase order (PO), a delivery document/system receipt, and the supplier invoice. A two-way match only requires the purchase order and supplier invoice, it doesn’t need to be “received” in the system. This is because often the details of a service aren’t well known before the supplier invoice arrives. With item numbers, service POs become more accurate and changes to the PO are focused on changing quantities instead of changing the entire PO. To get around this, it is possible that the business unit using the service may have to “receive” the PO in the system once the service is complete. Receiving the PO has the advantageous side effect of the business unit verifying the work was completed satisfactorily before paying the invoice. 

Some systems also classify purchases as either a “service” or “material” at the PO creation point, where each option creates a different PO with different requirements. SAP is like this. If this is the case for your system, you may simply have to call a PO with item number services a “material” PO to enable the item number. This is why having a distinctive item number for services can be helpful. 

The last barrier to service item numbers is when the procurement/supply chain team doesn’t have jurisdiction over services. This might mean the business units do not pay for these items with POs, do all of their own supplier selection, suppliers write the scope of work, etc. If this is your business, then the first step is to decide where the procurement team should have jurisdiction. Perhaps you can start small or with a “borderline” service like plant maintenance that already lives with the operations team (especially if the supply chain team reports to the COO). Focus on which services benefit the most from data tracking, harmonizing item descriptions, and keeping clear comparisons between suppliers. These first steps should get you started on applying item numbers to services, which can really help the supply chain team support operations, sales, and planning with excellent data for budgets and trends. Remember the supply chain team is there to build relationships, which is where you truly build value instead of simply being “the team that processes POs.” If you would like to talk about your item number strategy, let’s chat.