Category Archives: Cost Reduction

A Hitchhiker’s Guide to e-Procurement: Invoices, Part II

Mostly Harmless, Part XI

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In the last post, the invoice was defined as well as some of the associated data requirements. This post will address the associated challenges with invoice processing, some associated best practices, and the benefits that could be expected from an appropriate e-Procurement solution that was flexible and efficient in its processing of invoices.

Common Challenges

  • Purchase Order Partitioning

    The line items on the invoice can relate to one or more purchase orders … but which items go with which purchase orders? If an invoice is for a large shipment of hundreds of line items, this can be a challenge.

  • Billing Validation

    Were all of the items ordered? Were they received in acceptable condition? Are they at contracted or otherwise agreed to rates? Do any discounts apply? Are there early payment discounts to be taken advantage of?

  • Duplicate Detection

    Is this invoice unique? Is each line item a unique billing against received goods?

Best Practices

  • Automatic Acceptance / Import

    The system should be capable of automatically receiving invoices from suppliers and automatically accepting them (conditionally) if no reason for automatic rejection is found.

  • Automatic Uniqueness Validation

    The system should automatically match each line item of the invoice against the indicated and/or outstanding purchase orders and automatically reject the invoice if it, or any part of it, is determined to be a duplicate of an already submitted, and (conditionally) accepted, invoice. This notice should automatically be sent to the supplier, along with the reason for rejection.

  • Automatic m-Way Matching

    As soon as an invoice is received, it should be matched against any and all relevant goods receipts, purchase orders, and contracts to make sure that all goods were ordered, received, and billed at contracted rates. If unacceptable errors are found, the invoice should be automatically rejected. If only minor (billing) errors are found, the invoice should be accepted with modifications. If one or more items are under dispute, the invoice should be conditionally accepted and a note made that it can not be paid automatically until the dispute is resolved and that manual intervention will be required if this resolution does not occur before the due date. If one or more line items can’t be matched, the invoice needs to be flagged for manual review.

Potential Benefits

  • Reduced Overspending

    Automatic uniqueness validation insures that duplicate payments are not made, automatic m-way matching prevents overpayments, and automatic flagging of invoices under disputes prevents payments for unacceptable merchandise.

  • Faster Payments

    Invoices that are determined to be problem free can be queued for payments according to the payment terms. Automatic payments can prevent interest charges or reduced goodwill on the part of the supplier.

  • Greater Savings

    The prevention of duplicate payments, overpayments, and payments for goods not yet accepted, the ability to take advantage of early payment discounts, and increased supplier goodwill all contribute to greater savings.

Once the invoices are accepted, it is time for final reconciliation of (conditionally) accepted invoices and invoices that are marked for manual reconciliation (due to one or more problems that are not cause for automatic rejection), which is the subject of the next post.

Next Post: Reconciliation, Part I

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A Hitchhiker’s Guide to e-Procurement: Invoices, Part I

Mostly Harmless, Part X

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A (sales) invoice is a commercial document issued by a seller to a buyer that indicates the products, quantities, and prices for products and services the seller has provided to the buyer. An invoice indicates that the buyer must pay the seller according to payment terms. While the purchase order is the most important document to the buyer, as it outlines what the buyer is willing to buy (and at what price), an invoice is the most important document to the seller, as it represents money due to the supplier for goods and services rendered.

An invoice is generally the result of a purchase order, but the relationship is not necessarily one-to-one. A supplier might fulfill an order with multiple shipments (especially if some items are not immediately available) and invoice after each shipment, indicating that there can be many invoices corresponding to one purchase order. In addition, a supplier might fulfill multiple purchase orders at once, if the orders were small (and the supplier is responsible for all shipping charges over an agreed amount), indicating that there can be many purchase orders corresponding to one invoice.

Like a purchase order, an invoice must contain a significant amount of information, including items delivered, associated SKUs, billing rates, adjusted rates, reasons for adjustments, corresponding purchase order(s), corresponding goods receipt(s) (if available), invoice date, delivery dates, unique identifiers, taxes, tax codes (state vs. federal vs. VAT etc.), descriptions, billing address, payment address, contacts (for disputes), and payment terms.

In addition, it must contain any information required for m-way matching, to insure that only the items that were ordered and delivered are paid for, and only at contracted rates, and adjusted rate calculations if line-item or global discounts apply (because a volume threshold was reached, because the buyer opted to pay early to take advantage of an early payment discount, or because the supplier agreed to a discount to resolve a dispute).

Furthermore, just like the goods receipt must be representable in a universal (e.g. XML) format that can be accepted by all of the systems that require it, so must the invoice, as the buyer may need to return the invoice to the supplier after adjustments (subject to contract terms and/or agreements that resulted from a dispute resolution) are made.

Thus, when a buyer is evaluating an e-Procurement system, extra attention must be paid to the invoicing capability as it not only has to support m-way matching (with contracts, purchase orders, and goods receipts), but support revisions and automated communications with the supplier. Some of these topics will be addressed in more detail in the next post.

Next Post: Invoices, Part I

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Saving on Systems Integration Costs

If you’ve ever bought an enterprise system, you know that the sticker price is usually only a small fraction of the total cost of ownership and that the implementation and integration costs can dwarf the sticker price by an order of magnitude. As a result, integration costs often present supply management with an opportunity to save six or seven figures. But how? Especially when 70% of enterprise projects fail to deliver on their initial promise?

In a word, planning. According to several experts in the field, the most common problems that arise when companies set out to integrate procurement, distribution, warehousing and communication systems come not in executing their plans, but rather in conceptualizing them. The reality is that if your plans are good enough, you can get a junior team fresh out of an India technical school to implement them successfully*. But if the plans aren’t good enough, you might as well take that money to Las Vegas, because those 10% odds of success are better than the odds of your project succeeding.

Not only do you need a shared view of success at the enterprise level, as discussed in this article on “drawing the lines on system integration”, but you need a detailed plan that describes what systems will be integrated, what modules will be linked, what data will be exchanged, what functionality will result from the integration, and what success cases look like. Coding is rarely the challenge. It’s usually knowing what to code.

* Unfortunately, the doctor has never seen plans this good. It is possible to create them, but it seems that companies never spend enough time in the planning stage anymore …

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Want Savings? Stop Ignoring Indirect Spend!

Procurement leaders recently summarized a new study by A.T. Kearny that found that “CPOs [are] slow to focus on indirect” categories such as IT, Marketing, Professional Services, Facilities Management, and MRO. This is worrying when you consider that not only do some of these categories represent an organization’s biggest savings opportunity, but that indirect spending accounts for up to 50% of spend in many manufacturing organizations, 60% of third-party spend in non-manufacturing companies, and 90% of spend (or more) in the financial services industry.

This is doubly worrying when you consider that:

  • IT savings can be double digits across multiple categories10% to 15% on PCs and Laptops is normal; and 20% to 40% on consulting and integration
  • Marketing savings can be 20% to 25%and even higher on print spend
  • Legal spend can also be cut by over 20%with appropriate AFAs and negotiation

There are ample savings opportunities where indirect spend is concerned, and they can all be uncovered with good visibility and analysis. To find out how, start with the recent Sourcing Innovation Illumination on Strategic Spend Visibility.

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When You’ve Got to Cut Costs

You can follow the advice in the HBR article that outlines some things you can do “when you’ve got to cut costs”, but only if you do it very carefully. In short, the practical guide to reducing overhead offers up six tips that will reduce your costs, but only if implemented properly as a couple of them will actually increase costs if implemented incorrectly. This post will discuss the six cost savings ideas offered up by the article and the right way to go about them.

  1. Consolidate IncidentalsBy the time cost-cutting becomes a must, the company has already done away with most discretionary spending and non-critical perks and activities and further cuts would be difficult, if not dangerous. (Such as slashing the training budget when you need highly capable staff.) In this situation, look for further savings through the consolidation of incidental spending. For example, hold training events and trade shows on the same day(s) and cross-schedule the use of outside resources across departments.
  2. Take Overdue Personnel ActionsRestructure the jobs of any individuals who are not fully engaged, confront under-performers, and eliminate the dead-weight or problem personnel. Be careful not to overburden already fully engaged resources, assign responsibilities that the resource isn’t trained for, or eliminate too many positions at once. Not only can each of these actions can cause resentment, but the latter can have those who remain fearing for their job security and looking elsewhere.
  3. Reduce Spending on Department ManagementMany administrative departments will use as much as 20% of their budgets on supervision and coordination. If staff are competent and capable, and if responsibilities haven’t changed much in a year, supervision and coordination is probably costing more than it’s saving. In this case, supervision can be reduced by at least 10%, if not more. Just be careful to appropriately re-assign duties or confusion will set in.
  4. Gain Control of “Miscellaneous” SpendingGiven that even the best organizations tend to max out at 75% to 80% of Spend Under Management, it’s almost always possible to find 15% to 20% of spending that hasn’t been managed closely which is ripe with savings opportunities. It could be supplies, telecom, or electronics devices.
  5. Hold Down Pay IncreasesSpecifically, limit pay increases to top performers and award additional compensation based on performance, giving the top performers the bigger cut. Cutting pay increases across the board or eliminating bonuses will alienate top performers, the 20% of staff who are responsible for 80% of the bottom line contribution.
  6. Repropose Rejected Cost-Savings IdeasChances are that a number of good cost savings ideas were rejected over the past few years because of constraints, other priorities, or required investment. Review them and select those with a short-term ROI.

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