This is part one of a two part series of our findings from research into Procure-to-Pay for direct materials. We surveyed and interviewed over 120 manufacturers for this research. Here in Part One, we look at the relationship-intensive and automation-intensive aspects of the processes throughout the four stages of direct materials P2P processes: 1) Demand-to-Confirm, 2) Build-Change-Deliver, 3) Receive-Inspect-Accept, and 4) Invoice-Reconcile-Pay.
This report covers the four stages of direct materials P2P processes, in particularly examining the relationship-intensive aspects (involving a lot of dialog/negotiation/collaboration between the buyer and supplier) and the automation-intensive aspects (processes that can be highly automated with very little human intervention). The four stages are:
- Demand-to-Confirm—Unlike indirect procurement, where demand usually originates with a requisition created by an employee, direct procurement demand typically is driven by some sort of planning engine; usually MRP for manufacturing companies, or project planning systems for construction and project-oriented industries. In some industries with long lead times or complex custom products, the process of the buyer and seller coming to an agreement on delivery dates and quantities can involve a lot of back and forth negotiation.
- Build-Change-Deliver—For simpler products with short lead times (often built-to-forecast and shipped from stock) this is usually a short and hopefully uneventful phase. However, for large complex products, such as a large, expensive, totally custom machine with a long lead time or for custom pumps and components going into an oil rig, this phase can last for a year or more and involve many back and forth tweaks to specs and sometimes re-negotiations of price and schedule.
- Receive-Inspect-Accept—In more strategic relationships, the trend is to push inspection responsibilities back to the supplier and receive directly into stock. In many cases though, inspection will still be done by the buyer, including checking for damage during transport, quantities and correct item shipped, correct paperwork, documentation, and certifications, and in some cases in-house testing for compliance and performance to spec. At this stage, there may be adjustments to the amount received, based on what is accepted or rejected. There may also be a series of quality-related actions, such as putting a component on hold, root-cause analysis and corrective action. The amount, type, and location of inspection varies tremendously by industry.
- Invoice-Reconcile-Pay—Finally, an invoice is issued and checked against what was ordered and received. Any discrepancies are reconciled and payments made. Here again, there is enormous variation. Some companies don’t even require an invoice to be sent, but rather schedule the payment (per terms) upon receipt of goods (i.e. evaluated receipts settlement). In some cases, the buyer or the seller may set up an early payment discount program. There are also third parties that may buy receivables or even take title to inventory sitting in a VMI hub or in transit, in exchange for a discounted payment.