212MTAMount Durham University Bachelor's Diploma in Technology
Practix032006
1. Best Practices in the
Procure-to-Pay Cycle:
Perspectives from Suppliers
and Industry Experts
— Rob Handfield, Bank of America University Distinguished Professor,
North Carolina State University
Executive Summary In addition, a suggested approach for
A benchmarking study of the procure-to- improvement of the P2P was developed
VOLUME pay (P2P) process was carried out with a that involved securing top management
9
number of suppliers and subject matter support, mapping processes,
experts. The research identified six key understanding needs of user groups,
findings that can lead to improvement in running team redesign workshops,
the P2P cycle: exploring technology solutions, defining
• Robust processes and training the new process, training users, and
MARCH • Onsite relationship managers to updating the system over time.
2006
allow field maintenance to focus
PRACTIX is available ONLY (and at no charge) via
on doing its job As technology and business requirements
www.capsresearch.org • Robust technology using single evolve, the P2P cycle will probably need
To receive automatic notification of issue availability, point of contact, i.e., supplier portal to be revisited from time to time to
send an e-mail to Debbie Maciejewski,
dmaciejewski@capsresearch.org along • Improved forecasting for ensure it is meeting the needs of internal
with your name and e-mail address. maintenance and planning for customers and that suppliers are
emergencies that can “flex” with satisfied with the system.
different situations that arise
• Reduced complexity in catalogs
and buying channels to
streamline procurement
• Top management support
PRACTIX | Best Practices in the Procure-to-Pay Cycle | CAPS | March 2006
2. Procure-to-Pay Cycle
Introduction planned process for managing the procure-to-
As companies are seeking to move beyond pay cycle, the organization may be bearing
procurement into fully deployed supply chain significant costs due to non-compliance to
systems, a key challenge for many of them is system or process requirements.
in the area of improving efficiency in their
procure-to-pay cycles for many of their This benchmarking study sought to define and
contracted services, especially in the area of understand the best practices currently being
facilities maintenance and onsite contract employed by companies in the procure-to-pay
management. There exist multiple challenges cycle for services. Specifically, the research
in environments where field associates are team focused on learning and sharing best
working from manual or electronic systems, practices in the following areas, shown in
requisitioning onsite services for maintenance or Figure 1:
other activities, and ensuring that this • Forecasting and Planning of Requirements
information is captured effectively. In addition, • Need Clarification/Specification
there exist significant challenges to ensure that • Sourcing Decisions in Emergency/
the proper service level agreement is fulfilled, Non-Emergency Situations
the correct price is charged, the purchase order is • Contract PO Generation for Structured
transmitted correctly, the invoice matches, and or Unstructured Requirements
finally, that the supplier is paid the correct • Receiving of Services, Materials,
amount for the actual services delivered. and Documents
While many enterprise systems claim that • Settlement and Payment in
these elements are simply defined within Accounts Payable
their structural logic, the truth is that there are
many opportunities for error, and that without a
Figure 1:
Procure-to-Pay PROCURE-TO-PAY
Generic Generic “High-Level” Process Map
“High-Level”
Process Map
PROJECTS MAINTENANCE OPERATIONS
START END
Forecast Need Contract/ Receive
Plan & Clarification/ Sourcing PO Material & Settle &
Coordinate Specification Decision Generation Documents Pay
Supplier
Need
Enablers: Finance, Legal, HR, IT Fulfillment
2 PRACTIX | Best Practices in the Procure-to-Pay Cycle | CAPS | March 2006
3. Procure-to-Pay Cycle
Symptoms and Root Causes: A Root Causes
Supplier’s View of the P2P Process Suppliers interviewed also noted a number of
Researchers first began by identifying the true root causes associated with the P2P problems.
customer of the P2P process: the supplier who As shown in Figure 3, the most common root
wishes its invoice to be paid quickly. Many causes were associated with the lack of a
organizations are seeking to build and extend formally designed P2P process, the lack of a
relational capital with suppliers by building trust central relationship management, or problems
and becoming the “customer of choice.” The associated with supplier interfaces with SAP.
capital gained through this approach can result Other reasons included the increased complexity
in preferred supplier delivery priorities, associated with SAP catalog and line items, and
information sharing, participation on supplier the lack of a forecasting process.
councils, and other important rewards. An
important element in becoming a customer of
choice is to enable rapid payment and equitable ROOT CAUSE
and ethical treatment of suppliers. FREQUENCY OF RESPONSES
Issue TOTAL
To address some of the major problems
Poorly designed process 8
identified by suppliers, researchers scheduled
a series of interviews with a group of suppliers, No relationship manager/point of contact 6
to identify their experiences with the current Lack of system/portal interface 5
procure-to-pay process with some of their Too much complexity in SAP catalog/line items 5
major customers. No forecast or plan in place 4
Too many suppliers drive complexity 1
SYMPTOMS Figure 3:
FREQUENCY OF RESPONSES Root Causes Identified by Suppliers
Issue/Opportuntiy TOTAL
As can be seen from these examples — the
Manual workarounds and high manpower 7
fundamental root causes are 1) a lack of
Long cycle time/Late payments/Aged invoices 6 a process with designated roles and 2) specific
No central point of contact 5 processes associated with different internal and
PO/Invoice match problem 5 external functions are not defined. Maintenance
Not enough funds on PO 4
people, buyers, planners, schedulers, accounts
payable, project planners, and others are not
Emergency work never properly recorded 3
“in sync.” Further, the system is not designed to
Figure 2: be able to withstand the various approaches
Symptoms Identified by Suppliers in which people are entering data and requesting
information. When too many people are not
As shown in Figure 2, the most common using the system in a unified manner, it is no
symptoms experienced by suppliers involve wonder that the system rejects the input and
high manual workarounds required to address causes problems. This indicates that either the
problems, long cycle times for payment, no tolerances of such systems must be changed,
central point of contact, and a problem with or that the manner in which the system is used
matching the PO and invoice. Some of the must be changed.
typical responses from suppliers in these
categories involved having to contact accounts
payable multiple times, having to re-submit
invoices, and waiting 90 or more days in some
cases for payments.
3 PRACTIX | Best Practices in the Procure-to-Pay Cycle | CAPS | March 2006
4. Procure-to-Pay Cycle
Recommended Solutions fixed include one or more of the following events:
These same set of issues were identified in • Deteriorating response time from suppliers
recommended solutions suggested by suppliers. who have no motivation to improve
The suppliers recommended that their customers performance or respond quickly to customers
explore the solutions shown in Figure 4. who fail to pay them for 90 days or more.
• Lower service levels from suppliers who
may choose to service their more profitable
RECOMMENDED ACTIONS customers first in their cost-to-serve model.
FREQUENCY OF RESPONSES • Deterioration as the customer of choice in
the mind of supplier’s senior management,
Recommended Action TOTAL
which further breaks down trust and
Redesigned P2P process deployed 7
strategic alignment.
Dedicated relationship management position 7 • Delivery delays.
Develop supplier portal using SAP Interface 7 • Higher pricing due to the costs attributed
Spend analysis and catalog item reduction initiative 7 to late payment and excessive manpower
Senior executive workshop to describe requirements 4
allocated to the account.
• Increased manpower on non-value-added
Develop standard forecasting process 4
activities (e.g., chasing payments) to the
Develop supply base reduction initiative 1
detriment of other value-added activities
Figure 4:
that can improve customer service.
Recommended Actions Suggested by Suppliers • Loss of the supplier as a critical link
in the supply chain.
The top four elements that were identified as • Higher costs internally for the purchasing
possible solutions included redesigning the P2P company, which must also dedicate AP
process, developing a dedicated relationship people and buyers to non-value-added
manager to work with suppliers on key areas activities.
of interface, exploring the use of a supplier
portal using the CATS interface in SAP, and Subject Matter Expert Insights
reducing catalog items through spend analysis, into the P2P Process
limiting the inherent complexity of entering A number of senior procurement executives
information into the SAP system. from a variety of different industries were also
interviewed to understand their responses to the
These responses by and large provide significant same problems associated with the P2P cycle.
insights into the problems and complexities Each of these individuals provided a different
associated with improving the P2P cycle from perspective on how to improve the P2P process,
a supplier’s perspective. Unfortunately, these but their combined thoughts resulted in some
issues also translate into significant problems common themes that validated many of the
for the purchasing organization, which is often suppliers’ suggested recommendations as well.
lost in translation when the need for P2P
improvement is communicated to a senior Robust Processes and Training
management team. A critical element identified by all of the
subject matter experts was the need to develop
Late payment and excessive workaround to standardized processes and training around the
obtain payment in a timely manner will definitely P2P process. Specifically, roles and duties of
increase the cost to serve for companies with a the different people involved in the process must
“broken” P2P process. Typical problems that can be clearly defined. In addition, training should
occur when a malfunctioning P2P process is not emphasize how invoices and requests should be
4 PRACTIX | Best Practices in the Procure-to-Pay Cycle | CAPS | March 2006
5. Procure-to-Pay Cycle
processed, the reasons why deviation from the needs are met. While maintenance is often
process is unacceptable, and the consequences an emergency, there are many scheduled
involved with deviating from the process. maintenance activities that can be planned
This ensures that everyone not only is compliant, and communicated to suppliers. Even in
but understands the need and rationale behind emergency situations, having a plan in place
the compliance. Part of the process redesign with a designated supplier can avoid many
effort should also focus on simplifying processes of the problems that occur downstream in the
to reduce complexity. If there is no need for a P2P cycle. Too often, data, invoices, service
specific channel for purchasing, then eliminate it. entries, and other key elements are entered
incorrectly due to a fundamental lack of
Onsite Relationship Managers planning and forecasting. These elements
An important point that many respondents noted need to be incorporated into the design of
was the need to establish dedicated roles around new P2P systems.
onsite relationship managers from procurement
who are available to manage invoices, service Reduced Complexity in Catalogs and Buying
entries, and the like. The simple fact is that Channels to Streamline Procurement
many maintenance and project managers do not Many of the experts also emphasized the need to
think in terms of procurement, but rather are reduce complexity, both in the interface systems
focused on people, equipment, and schedules; as well as in the predefined procurement buying
they do not have the time or patience required channels. There is no need for users to have
to ensure that the correct entries are put into a multiple channels for procurement. However,
P2P system. The relationship manager can also establishing the credibility for users to only be
act as the liaison between the supplier and the able to use these channels also requires
maintenance organization to ensure prompt significant management support.
payment, resolution of issues, and improvement
of processes. Rolling Out the Initiative
In re-engineering the procure-to-pay process,
Simplified Online Portals to suppliers and experts recommend that executives
Minimize Human Intervention apply the following approach:
A number of subject matter experts described 1. Secure top management support for the
the need to eliminate the manual intervention initiative and budgeting for the project.
of multiple untrained individuals entering Develop a list of key benefits and deliverables
information into systems such as SAP. Many that will occur as a result of the improvements.
ERP systems have modules for purchasing Document the cost of leaving the system
and plant maintenance, but they all require “broken” in its current state.
significant configuration. On the other hand, 2. Map existing processes and problems with the
a number of “bolt-on” packages are also P2P cycle. Identify where the breakdowns are
available, but the experts advise against these occurring and why they are occurring.
due to the high probability of interface issues 3. Understand the needs and requirements of the
associated with deployment. user groups. Many of the people involved —
maintenance, planning, project management,
Improved Forecasting for Maintenance suppliers, accounts payable, buyers, etc. —
and Planning for Emergencies that Can have specific issues that prevent them from
“Flex” with Different Situations that Arise using the existing system. Also, many of the
The need to improve forecasting processes is specific sites may have issues that need to be
a critical element in ensuring that maintenance considered in designing the new system.
5 PRACTIX | Best Practices in the Procure-to-Pay Cycle | CAPS | March 2006
