In Part 2 of this P2P series, we discussed how direct materials Procure-to-Pay (P2P) processes vary tremendously for each industry and each company’s way of doing business. We specifically looked at the differences in relationship-intensity vs. automation-intensity in the Demand-to-Confirm and Build-Change-Deliver stages of procurement.
In this article, we continue by looking at relationship- and automation-intensity in the last two stages of the P2P lifecycle: Receive-Inspect-Accept and Invoice-Reconcile-Pay. (For a description of the four stages of P2P, see Part 1 of this series “Spotlight on Direct Materials Procure-to-Pay.”)
It is increasingly common, especially in strategic supplier relationships, for suppliers to do testing and inspection and incoming goods to be automatically accepted without inspection by the buyer. In these cases, if an issue arises, the buyer may start doing inspections again until confidence is regained. To the extent that a trusted relationship is built up with a set of strategic suppliers, and they prove they can deliver very consistent quality, it can enable automated receive-to-stock and invoiceless payment (evaluated receipts). Thus, the receiving process can be highly automated in these relationships.
However, when quality issues are discovered after an item has been received, accepted, and possibly even paid for, it can create a lot of headaches to undo all those transactions and figure out what exactly is owed by whom. One example is when a packaging company accepts large rolls of special printed paper. The roll may look fine on the outside, but there may be a printing error part way through the roll which is not discovered until the actual production of packaging using that roll.
Integrating Quality with P2P
Resolving supplier quality issues is by nature very relationship intensive, not something that can be highly automated. Performing the root cause analysis and corrective action is mostly considered to be the responsibility of engineering, quality, and manufacturing; outside of the P2P realm. However, those activities need to be well integrated into the P2P processes for a number of reasons. First it is critical that the disposition of all items is accurately understood. For example, a batch of items may have failed a test, but, ultimately, it is determined and agreed by the buyer’s engineers and quality/manufacturing team that those items can still be used — perhaps even at a negotiated discounted price. All of that information needs to be accurately updated in the P2P systems and processes, so that everything aligns when it comes time to pay the invoice. Furthermore, there may be updates to specs that need to be reflected in future orders.
The one stage in which dialog and negotiations add virtually no value, regardless of the industry, is invoice reconciliation and payment. Here the goal should be to get as close as you can to 100% straight-through processing. This requires detection and prevention of errors at every step of the way, starting with the creation of the PO, to the fulfillment of the order, to receiving. Through the use of barcode scanning and other techniques (such as scales to make sure the right items are being packed into a box), workers can be alerted the moment they are about to make an error and ‘forced’ to correct it before continuing. By doing this at every point of action throughout the end-to-end process, a company can move much closer to 100% error-free, automatic reconciliation and payment. Achieving maximum straight-through processing requires a significant investment in getting suppliers automated with error-detection and prevention automation. It is not enough for the buyer alone to automate.
It also helps a lot when supplier and buyer have systems in place that align on a ‘Single-Version-of-the-Truth.’ Technologies such as electronic proof-of-delivery and, especially, networked platforms — where buyer and supplier are literally using the same system for POs, ASNs, receipt, invoicing, and payment — can help reduce the number of disagreements and back-and-forth negotiations that result when each side has different record-keeping systems.
Lack of Automation
In spite of the availability of technology, there is a considerable lack of automation throughout the P2P process. We see multi-billion dollar companies that take the output of an MRP system, type it into a procurement system, and then send the PO via email or even fax. Similarly, manual data entry and paper-based systems are common throughout the P2P cycle in companies of all sizes. Often, the existing system is deemed ‘good enough.’ However, many companies are missing out on valuable improvement opportunities by not automating these processes whenever it makes sense.
In Part 4 of this P2P series we will look at some of the systems available for direct materials P2P. Unlike indirect materials P2P solutions, where there is some degree of similarity between solutions, in direct materials P2P solutions we see tremendous differences in heritage, functionality, and goals of the various solutions.
To view other articles from this issue of the brief, click here.