Category Archives: Procurement Innovation

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

Mostly Harmless, Part IX

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In the last post, the goods receipt was defined and some of the complexity around the requirements thereof were discussed. This post will address some of the challenges associated with the goods receipt, some of the associated best practices, and some of the benefits that could be expected from an appropriate e-Procurement solution that effectively handled goods receipts.

Common Challenges

  • m-Way Matching

    The goods receipt needs to be matched back to the appropriate purchase orders and/or contracts and forward to the appropriate invoices. This can be very difficult without a good system.

  • Issue Tracking & Dispute Initiation

    As soon as a potential problem is detected, it has to be documented and reported as a supplier’s liability is often greatly minimized, if not released entirely, if an issue is not reported in a timely fashion.

  • Inventory Management

    If the goods are not appropriately logged and tracked, they could be lost in the system. Or, even worse, the inventory management system might think there is not enough stock when there is too much and automatically reorder more, causing inventory management nightmares (as well as huge write-offs down the line).

Best Practices

  • Line-Item Matching

    Since a single shipment can relate to multiple purchase orders, contracts, and / or invoices, matching should be done at the line-item level of the goods receipt.

  • Dispute Management Integration

    The goods receipt should be automatically sent to the dispute management system if any issues are noted and the e-Procurement system should be capable of importing any modifications output by the dispute management system, as a result of an agreement.

  • Inventory Management Integration

    The goods receipt should be automatically sent to the inventory management system, and the inventory management system should send back an error message if any of the SKUs are unrecognized (which would be captured by the e-Procurement system).

Potential Benefits

  • Faster Dispute Resolution

    If issues are immediately tracked and reported from the time the goods are received and the goods receipt issued, a formal dispute can be initiated faster — and solved faster since accurate information will be immediately available.

  • Faster Payment

    The issuance of a goods receipt that is free of disputes can trigger payment approval for an invoice (that is issue free), which is then more likely to be paid on time, or early if a(n attractive) discount is offered.

  • Significant Savings

    First of all, because no issue goes untracked, losses from damaged or spoiled merchandise are considerably reduced. Secondly, because shipments are automatically tracked and reconciled and because disputes are resolved faster, the buyer is more likely to be able to take advantage of any early payment discounts that may be offered to save even more.

Once the goods receipt is issued, an invoice can be expected in short order (if it is not issued upon shipment). This is the subject of the next post.

Next Post: Invoices, Part I

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

Mostly Harmless, Part VIII

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A goods receipt is a written (or electronic) acknowledgement by a buyer that a specified set of products or services was received by the buyer in acceptable conditions. It’s primarily used for the receipt of goods by a buyer’s warehouse or distribution network. A goods receipt tells the supplier that the buyer has accepted the goods and that the supplier can expect to be paid subject to the terms of the associated purchase order(s) or contract(s).

A goods receipt is so simple in principle that one might believe that it hardly warrants its own post. However, a goods receipt is not so cut-and-dry in practice. There are many reasons for this, including:

  • The goods receipt has to be meaningful to the supplier.

    This means that it has to contain the product codes, or SKUs, used by the supplier, indicate the quantities, and reference the purchase order(s) given to the supplier.

  • The goods receipt has to be meaningful to the buyer.

    This means that it has to contain the product codes, or SKUs, used by the buyer for purchasing. It needs to reference the appropriate purchase order(s) and/or contract(s) and it needs to provide an ability to reference a forthcoming invoice.

  • The goods receipt has to be meaningful to inventory management.

    The goods receipt also has to contain the product codes, or SKUs, used in inventory and warehouse management, if they differ from the purchasing codes, and any auxiliary information required by inventory management and warehousing for storage and distribution.

  • The goods receipt has to account for irregularities that could form the basis of disputes.

    The supplier might require a receipt as soon as goods are delivered, but before they can be adequately inspected. Upon an initial inspection of a damaged box, it may or may not be possible to determine whether or not any, some, or all of the contained products are damaged. How can this information be captured so that there is a foundation for a dispute if damage is found upon future inspection?

  • The goods receipt has to be acceptable to multiple systems.

    Chances are the supplier uses one system for receiving goods receipts while Purchasing uses another for cutting purchase orders while inventory management uses yet another for managing inventory.

As a result, the goods receipt must be expressible in at least one universal format that is capable of supporting multiple product codes or SKUs, multiple references to related buyer and supplier documents, and multiple instances of such documents, as a supplier could ship goods relating to multiple purchase orders in a single shipment. (Also, a single purchase order could be related to many goods receipts if different goods on a large BOM are shipped in different shipments.) As a result, the requirements for the goods receipt cannot be overlooked in the selection of an e-Procurement system.

Next Post: Goods Receipts, Part II

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

Mostly Harmless, Part VII

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In the last post, the purchase order was defined as well as some of the requirements for its generation. This post will address the challenges associated with purchase order generation, some associated best practices, and the benefits that could be expected from an appropriate e-Procurement solution.

Common Challenges

  • Requisition Partitioning

    A requisition contains requests for multiple goods or services, which are covered by multiple contracts at multiple rates depending on SKU, volume, or other terms. Which contract? Which rate? Which terms?

  • Forward Matching

    How will the purchase order be matched to incoming goods receipts and invoices?

  • Duplicate Detection

    How does one detect if multiple purchase orders contain a requisition for the same good or service? How does one detect if duplicate purchase orders were accidentally cut?

Best Practices

  • Automatic Generation

    The system should automatically generate the necessary purchase orders from approved requisitions.

  • Automatic Price Confirmation

    The system should automatically verify that contract or catalog prices are being adhered to.

  • Automatic Distribution

    An approved purchase order that sits on someone’s desk waiting to be sent can hold up the business or a production line if the parts or services are not delivered on time because the supplier(s) did not get the purchase order on time. Once a requisition is approved, the purchase order should be sent automatically

Potential Benefits

  • Reduced Lag Time

    An e-Procurement system can automatically create and distribute purchase orders as soon as the requisitions are approved.

  • Reduced Overspending

    The system can automatically grab and populate the purchase orders with contract pricing. Some categories, like office supplies or electronics, see a lot of overspending because buyers requisition at catalog, but not contracted, rates or don’t buy in the appropriate quantities (which can be flagged and corrected during the approval process).

  • Reduced Errors

    The system can automatically pull up the right codes, the right templates, and the right prices so that the supplier isn’t sending it back with a request for further explanation, which would only delay the process further.

Once the purchase orders are distributed, the next step is to wait for delivery and issue the goods receipt, which is the subject of the next post.

Next Post: Goods Receipts, Part I

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

Mostly Harmless, Part VI

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Formally, a purchase order is a commercial document issued by a buyer to a seller that indicates the type, quantity, and agreed upon prices for one or more products or services that the buyer is offering to buy from the seller. Once the seller accepts the purchase order, it forms a (one-off) contract between the buyer and seller, who will deliver goods and services at the agreed upon prices, in the agreed upon timeframes, to the buyer who must then, upon receipt of the agreed upon goods, in the agreed upon condition, make payment to the seller for the agreed upon amount.

A purchase order is the result of an approved requisition, but the relationship is not necessarily one to one. One requisition can generate multiple purchase orders, and this will commonly happen when a purchase order contains requisitions for goods and services from multiple suppliers. And while normally there will be one purchase order per supplier, if the goods and/or services are coming from multiple locations, there might be multiple purchase orders per supplier. In addition, a purchase order might be associated with more than one requisition, as requisitions from multiple buyers for similar goods to a similar location may be bundled into a single Purchase Order to save delivery and processing costs. As a result, the e-Procurement system must be capable of handling the many-to-many relationship between requisitions and purchase orders (and suppliers).

In addition to all of the information tracked on the requisition, the purchase order must also track approval information, delivery information, payment terms, and any other specific information required by the supplier. It must support attachments and include any attachments, schedules, or statements of work that are specified as necessary in any contracts that are in effect.

Furthermore, since the delivery of goods and services will generally result in the production of goods receipts and invoices, the e-Procurement system must support the association of purchase orders with the corresponding goods receipts and invoices, which, like the purchase order and requisition relationship, can be many to many. If the order is large, or if some items are not immediately available, a supplier may ship the order in multiple shipments, which would result in multiple goods receipts and which may be accompanied by multiple invoices.

In addition to tracking all of the relevant information, the system must be capable of translating the purchase orders in the standard EDI and XML formats that are used by the primary suppliers and electronically delivering them to those suppliers who have networks, marketplaces, or another on-line presence capable of automatically receiving an electronic purchase order.

When evaluating the purchase order capability of an e-Procurement system, which should support tight integration with the invoicing module, one should keep in mind the associated challenges of purchase order management, keep an eye out for best practice support, and insure that the solution will deliver the intended benefits. These topics will be addressed in the next post.

Next Post: Purchase Orders, Part I

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