The Importance of Orders in Automating the Purchase-to-Pay Process
The Purchase-to-Pay (P2P) process consists of several major sub-processes; these are, sourcing, requisitioning and purchase order (PO) production, PO delivery, receipting, and matching and paying invoices. The potential benefit that could be derived from increasing levels of automation depends on how much of the manual component of each sub-process can be removed or de-skilled. A key ingredient to the successful adoption of any automation technology in the P2P process is the accuracy and timeliness of the PO details and availability of this information throughout the supply-chain. As the PO is the authoritative baseline from which all subsequent deliveries and charges are measured, the quality and availability of the PO information is crucial in achieving high-levels of process automation. If the process begins with inaccurate or ambiguous information, the performance of downstream activities will suffer.
In all but the smallest of businesses it is normally mandatory that a PO is raised for direct or production-related purchases, irrespective of value, and also for higher-value Indirect or non-production-related purchases. Lower-value purchases or occasional purchases from infrequently used suppliers is where businesses become a little more relaxed about the necessity to produce a PO, usually citing that the cost of the process is greater than the cost of the product being purchased. This can be true where there is a convoluted manual procurement process, but is not necessarily true in a highly-automated environment.
To achieve lower process costs, businesses have preferred to use a lower-cost procurement channel such as purchasing cards (P-cards). Whilst P-cards remove the necessity to produce a PO and to manage and settle infrequently used accounts, elements of the administration cost (monthly purchase reconciliation by each requestor for example) can be a hidden cost when calculating actual process costs and average transaction processing costs.
Also, given that the PO acts as the baseline from which the correctness of subsequent deliveries and charges are measured, removing the PO from the equation raises the question about the legitimacy of the purchase. The assertion is that low-value purchases carry a lower risk of abuse and that the reduction in process cost more than compensates for any abuse that may occur, and therefore it is justified to remove the normal checks and balances to deliver these process cost savings. Is this loss of control acceptable? Also, without a formal receipting process for P-card purchases how are deliveries traced, corporate ownership maintained and waste minimised?
It could be argued that the discipline, checks and balances associated with raising a PO is necessary in all cases to ensure that the procurement of each and every product or service is justified, and that there is an appropriate separation of duties between the requestor, who has the need, the buyer who sources the product and the AP staff who process and pay the bills.
Whilst the adoption of P-cards has driven out the need for the buying organisation to produce an order, the need for an official order by the supplier/vendor has been missed. Without a formal PO, the Selling organisation is more exposed than it would be if it had a PO. The selling organisation can also be less well-informed about the product or service that is to be supplied. The cost of correcting supply misunderstandings with P-card purchases is almost always borne by the supplier/vendor. The supplier pays for any additional transport, postage/packing costs as well as the cost of producing the credit note.
Could it be that P-cards have grown in popularity because of an inability to provide an efficient low cost requisition-to-order and settlement process? Is there a missed opportunity for a business to claw back some, if not all, of the 1.5% to 2.0% transaction charges applied to every P-card purchase?
The PO has two primary functions. Firstly, it provides the buying organisation with the detail and financial commitment of an authorised purchase in a standardised form; irrespective of what is being purchased, and secondly, it provides the supplier/vendor with an official buyers instruction to supply a product or service.
The buying organisation uses the PO as the authoritative baseline for delivery and invoice checking. The PO is therefore the primary controlling factor in an efficient P2P process flow and subsequent supplier/vendor payment. The buying organisation uses the total value of all outstanding PO’s to indicate the level of supplier/vendor purchase commitments. Where purchases are not covered by a PO, a business suffers from both higher processing costs, due to additional verification activities, as well as leaving the business understating its outstanding purchase commitments.
Given this primary role of the PO in controlling payment, its clarity, accuracy and timeliness are therefore key determinants in improving the efficiency of all activities in the Purchase-to-Pay process, and in lowering the processing costs of all subsequent transactions. These include order acknowledgements, advanced shipping notices (ASN) delivery notes, goods received notes (GRN)/goods inwards notes (GIN) and supplier/vendor invoices, payments and remittance advices.
Almost all subsequent receipting and payment activities in one way or another touch base with the PO; was this product ordered; did we order that quantity; is the price correct? Any missing or inaccurate piece of information on the PO that prevents that question being answered first time means additional intervention, additional handling of the transaction and additional delays, all leading to a less-than-optimal process and a higher transaction handling cost.
Therefore, as we strive to deliver ever greater efficiencies from the P2P process, improving the quality of the PO and its individual line-item details is the first major issue that has to be addressed. As the opportunity to increase process efficiency is almost entirely governed by the level of automation that can be achieved, the more accurate and timely the information is, the more automated a process can be. Automating labour-intensive activities, is the key to reducing both transaction handling costs and process cycle times. For example: the automated receipting of product deliveries using advanced shipment notices, the use of authenticated GRN’s to automate the input of supplier/vendor proof-of-deliveries, the use of evaluated receipts (ERS) to automate the account billing and settlement process (self-billing), the automated matching of invoices against the PO, and the automated payments based on agreed contractual terms.
The production of a PO can be the culmination of a complex, time consuming and expensive sourcing process, or the result of a fairly simple exercise, producing a repeat or call-off against a previous order. In either case the PO, articulates and conveys to all involved, the details of what the buyer requires the supplier/vendor to supply; the details of the product or service, when, where and how to make the deliveries, the quantities required, the agreed price, and the terms and conditions covering both the sale and subsequent payment.
To drive downstream process automation, the PO production process has to provide clear and precise information about the purchases required and to deliver this information electronically throughout the supply-chain. Avoiding re-keying of any information is one of the first principles of an efficient and cost-effective automated process. The imperative is to create a value-adding information chain, whereby at each stage of the process, information is added to improve the clarity, quality and certainty of the outcome, rather than duplicate what has been created or entered elsewhere. This principle of sharing information to avoid re-keying applies as much within a company as it does between trading organisations.
The buying organisation uses the production of the PO as a formal end to the sourcing process and the beginning of the receipting and invoice matching and payment processes. These processes totally rely on the detail of the PO. The less specific the PO details are, the greater the risk that someone in the physical supply-chain will misunderstand what is required, or that someone in the financial Supply chain will produce incorrect delivery or billing information. In both cases, inaccuracies will result in frustration, costly delays and increased work for all concerned.
It seems unthinkable that, considering the effort that the buying organisation put into researching the products and producing the PO, and the likely impact on the business if the products are not delivered when needed, that a business considers the manual postal delivery service to be the most effective way of ensuring that the PO is delivered to the supplier/vendor.
Delivering the PO electronically is one of the easiest and most cost-effective steps to take along the road to automation. Is it not far more efficient, and certainly far more effective, to remove all the manual handling activities and to automate the PO delivery process? With electronic delivery, the entire PO document, together with full line-item details, would be available to be input directly into the supplier/vendor’s ERP application. This provides the supplier/vendor with the opportunity to build on the information created by the buying organisation and avoids the risk of misquoting or misunderstanding what is required. There is an added benefit that the supplier/vendor saves part of the cost of the order-entry activity.
Having automated the PO delivery process, it is a simple step to extend the process to include the supplier/vendor and the electronic delivery of order acknowledgements and order responses. Not only does this improve the visibility that the buying organisation has of the fulfilment process, it also improves the predictability of the outcome. The order acknowledgement and order response, confirm that the supplier/vendor has received the PO and can meet its delivery requirements.
Managing and scheduling large numbers of daily deliveries ordered through many PO’s, can be a time-consuming exercise without the automatic delivery of the advance shipment notice (ASN). The ASN contains the details of an impending delivery; usually within 24 hours of the receipt of the ASN, and fully explains the transport method, packaging, the products and quantities together with reference to the original buyers PO. The PO plays a vital role in validating the ASN long before the delivery is due to take place. Automating the ASN delivery and matching against the PO not only primes the receipting process, it also alerts the supplier/vendor to potential delivery errors, such as product over-delivery, and provides sufficient time to take corrective action.
In a highly-automated order-to-fulfilment process, the PO triggers an electronic chain-reaction whereby the buyer and seller continually exchange product requirements and product delivery information. This ensures that, as events develop, each has access to the most relevant and up-to-date information available, in the most efficient, timely and cost-effective way possible.
During the receipting process, the PO is the first point of reference in establishing the validity of the delivery. Material differences have to be resolved by the buying organisation, and in the absence of a clear and definitive PO, or where there is no PO at all, the buying organisation suffers additional process costs and time delays in verifying the accuracy of the delivery. Therefore, a PO must exist to ensure the most efficient receipting process.
The receipting process is the most difficult to completely automate as in most cases someone has to establish that products or services were delivered, how many and were they fit-for-purpose. However, the receipting task can be made considerably easier where the supplier/vendor’s ASN’s have been delivered electronically and pre-matched against the PO. The ASN primes the receipting process with high-quality delivery information prior to the physical receipting taking place. Pre-matched ASN’s are particularly beneficial in a distribution environment where advance notification of a delivery enables the buyer to schedule the resources needed to handle the delivery, and enables the supplier/vendor to complete the delivery in the most efficient and cost effective manner possible.
Automation can radically change the supplier/vendors proof-of-delivery (POD) handling and AR invoice production process. By using the buying organisation’s receipting process to turnaround the electronic ASN to provide an automatic authenticated receipt, the supplier/vendor can significantly reduce the time and cost of processing POD’s as well as being able to generate the AR invoice quicker, to a higher quality, but more importantly, with a greater prospect of on-time payment.
The most efficient selling organisations will plan to produce their invoices immediately following the delivery to ensure the earliest possible payment date. Having put considerable time and energy into fulfilling the requirements of the PO, the majority of selling organisations still post their invoices to the buying organisations. Why is this? Given that AR invoices are the only vehicle to drive income, it is surprising that the postal system is still considered to be the most effective invoice delivery mechanism.
Where the invoice delivery process is automated, and the invoice being delivered electronically, the selling organisation delivers their invoices more accurately, with greater assurance and at a reduced process cost. The invoice delivery time has been reduced from days to minutes with delivery being guaranteed. By transmitting the invoices to the buyer electronically, and the buyer uploading them into their ERP application, the selling organisation has effectively taken responsibility for the quality of the invoice entries in the buyers AP ledger.
Those buying organisations that receive AP invoice electronically, automatically match against the PO at a line-level. Invoices without PO numbers or with material differences that would normally need manual intervention, are rejected back to the supplier/vendor immediately. Therefore, by filtering out obvious errors, the only invoices that are presented to the buying organisation are those that match the PO details exactly or have minor differences that need to be resolved. Maintaining metrics on the number of invoices with matching errors provides the focus to drive further improvements in invoice quality.
Having accurate PO details available electronically as the electronic invoice is processed, provides huge opportunities to remove effort, time, risk and cost from the invoice handling process by automating both the Invoice matching process and the registration of valid invoices within the AP ledger. The performance of the matching process is entirely driven by the quality of the PO and the AP Invoice. Continual focus on the quality and accuracy of the transactional information will deliver further process performance improvements as the match-first-time metrics improve.
Invoices that are not cleared first time against the PO, introduce further transaction handling costs to the buying organisation and introduce potentially far more costly time-delays in late clearance of the invoice for payment. This time delay increases the potential workload of the AP staff by introducing double-handling of delivery and invoice documents and also by increasing the number of supplier/vendor credit control telephone calls that have to be dealt with. Also, as this time delay increases, the opportunity to leverage prompt or early payment discounts diminish. The cost of this process inefficiency could be the missed opportunity to further reduce supplier/vendor costs by 1.5 per cent to 2.0 per cent by paying in 10-15 days rather than net 30 days. This equates to throwing away the opportunity to reduce the cost-base of the business by £1.5m to £2.0m per £100m of purchases.
Purchase orders have a substantial and controlling influence over the rate of process cost-reduction and performance improvement of the accounts payable function, and the efficiency of the entire purchase-to-pay process. The information contained within the purchase order is key to successful internal transaction-based collaboration between the buying organisations’ procurement and finance functions as well as the external collaboration with the suppliers/vendors sales and finance functions. Ensuring that the PO is accurate and timely is fundamental in driving out wasted effort, unnecessary cost and increasing back-office efficiency.
Delivering the purchase order electronically through the use of e-Commerce technologies provides the greatest opportunity to kick-start the automation of the P2P process to achieve considerably lower cost-per-transaction metrics and higher FTE productivity returns.
It is possible to reduce invoice transaction handling costs by more than 90 per cent and to achieve a 7 to 10-fold increase in FTE productivity, by using a combination of e-Technologies that together eliminate the labour components of the process and work towards a fully automated, lights-out, transaction processing environment.