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Streamlining Purchase-to-Pay to Eliminate Work in Accounts Payable

In Purchase-to-Pay, it is the exceptions to the process that requires most of the effort by the Accounts Payable team, often with a ripple effect across the entire end-to-end process.  Even companies who have successfully automated most of their direct material transactions with high rates of electronic payments continue to struggle with the biggest frustration for any organization – handling exceptions to the process.

During a recent Peercast, we explored the approaches taken by our feature, a $15B global manufacturing company.  Not surprisingly, the majority of transactions are for direct material, where the process is highly automated and efficient.  Purchasing sends the order via EDI to the supplier (EDI 850 and 866 transactions), and the suppliers send Advance Ship Notifications (EDI 856 ASNs).  The Receiving process is also efficient with bar code labels on all shipments.  There are no invoices – they use Evaluated Receipts Settlement with a penetration rate of 95% for all production material.

Indirect spending has been more challenging, with more than 60% of the transactions using paper invoices.  For these transactions, the manual verification of paper invoices to ensure proper account coding and signatures is a big effort, and there is also a significant effort to manage the exceptions for indirect spending that have an associated purchase order. During the Peercast, our feature discussed five initiatives that were successful in reducing indirect spend exceptions.  Here is a summary of two of them:

  • One of the quick successes was to analyze price match differences to determine the optimal cost-benefit.  With the number of discrepancies decreasing dramatically as the threshold is increased, a decision was made to change the tolerance from $15 to $500 per invoice, which eliminated about 60% of the exceptions and dramatically reduced costs in Accounts payable and Purchasing.
  •  The current process required issuing purchase orders and processing paper invoices for purchases that were for a fixed monthly amount.  The fix was to implement a recurring voucher process where a payment schedule is created based upon the approved contract with the supplier, eliminating the need to receive monthly invoices.  Once the contract terms are entered, payment is automatic.

Results from an iPoll on the topic indicate that errors in the Receiving Department are the leading cause for exceptions in the Accounts Payable process for many companies, with 26% of poll respondents voting this reason as their top issue.  Discrepancies in price are also significant contributors, with 21% indicating this is the most significant issue, with issues related to “check request” or “disbursement voucher” purchases for items that are not on a purchase order also the top issue for 21% of poll respondents.

Here are the details:

which issue causes the most exceptions in accounts payable Streamlining Purchase-to-Pay ipolling results

While the iPoll asked about the “top cause”, it is clear that for many companies each of the response choices has been a problem to one degree or another.   To supplement their answers, many iPoll responses included additional comments.  Here are a few:

  • Most of our issues now are Receiving (mostly related to indirect material). Pricing was used to top the list until we tracked and identified a systemic fix.
  • We measure all invoices that require manual Intervention. The top 3 reasons are price-related, quantity/receiving related, and return to vendor (e.g., invoice quality, duplicate, or wrong tax).
  • Outside of pricing, the quantity would be next on our list of exceptions.
  • Most of our issues come from either Receiving or incorrect information on the PO — late updates, etc.
  • The information we gather indicates that many of our documents are unable to post because the related goods receipt has not yet occurred. Although not truly an error, this requires multiple touch points as the processors must attempt posting for several days thereafter until the receipt of the goods is completed.
  • Our biggest issue relates to Receiving issues. Invoices come in prior to supply/services being received, which is compounded because of delays in the Receiving department to entering receipt information. We now have a process where invoices without receipts are held for 10 days. After 10 days, if receipts are not available they are assigned to Receiving for follow-up.  

Creating an efficient Purchase-to-Pay process requires coordination and accuracy within the internal departments of Purchasing, Receiving, and Accounts Payable, and also between Purchasing and the supplier.   A problem in one area is often the source of frustration and rework in another area.  Knowing what the most significant exceptions are is a first step towards understanding and then controlling the causes for the exceptions.

What is your company’s approach to monitoring and then eliminating exceptions in the Purchase-to-Pay process, and what role does your Shared Services organization play?

Who are your peers and how are you collaborating with them?

“PeercastsTM” are private, professionally facilitated webcasts that feature leading member company experiences on specific topics as a catalyst for broader discussion.  Access is available exclusively to Peeriosity member company employees, with consultants or vendors prohibited from attending or accessing discussion content.  Members can see who is registered to attend in advance, with discussion recordings, supporting polls, and presentation materials online and available whenever convenient for the member.  Using Peeriosity’s integrated email system, Peer MailTM, attendees can easily communicate at any time with other attending peers by selecting them from the list of registered attendees.

Peeriosity members are invited to login www.peeriosity.com/shared-services/to join the discussion and connect with Peers.   Membership is for practitioners only, with no consultants or vendors permitted.  To learn more about Peeriosity for Shared Services, Click here.

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