Monthly Archives: August 2010

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

Mostly Harmless, Part XIII

Previous Post

In the last post, reconciliation was defined as the process of comparing and matching figures from the accounting records of one system with the accounting records of another system. This meant that records in the system not only needed to match up, but match any associated records in the inventory system, the human resources system (if temp labor was procured), and the records in the supplier systems. This often requires a number of challenges to be overcome. This post will address some of the challenges of reconciliation, some associated best practices, and a few of the benefits that could be expected from an appropriate e-Procurement solution.

Common Challenges

  • Manual SKU Assignment

    If a line item can not be automatically matched with a purchase order line item and a corresponding price, then it can be difficult to match an item with the proper item in the buyer’s system.

  • Overpayment Identification

    As explained in the previous post, sometimes overpayments will slip through the most controlled system, especially if it’s difficult to match a conditional discount against a line item or if a contract is late being entered into the system.

  • Tax Verification

    Is the tax rate correct? Are the items being taxed subject to taxation? Is the organization exempt? Is the organization eligible to recover (part of the) tax payment? These can all be difficult questions to answer.

Best Practices

  • Flagging of Manual Assignments

    The system should automatically flag any manual assignment, and queue any manual assignments above a certain value for supervisory review.

  • Automatic Identification of Potential Overpayments

    The system should automatically identify any off-contract payments for goods and services that relate to existing contracts with suppliers in case the goods or services were covered by general discount clauses or in case the opportunity arises to negotiate them into a (future) contract revision.

  • Automatic Tax Rate Verification

    The system should automatically verify that the tax rates used are correct, that each tax the organization knows it has to pay is included, and that any taxes it gets to reclaim are appropriately flagged.

Potential Benefits

  • Overpayment Detection and Recovery

    Good reconciliation support will increases the number of overpayments that are detected and increase the chance of full and timely recovery.

  • Tax Recovery

    Good reconciliation support will increase the chances that recoverable tax payments are identified.

Once the reconciliation phase is complete, it is time to reclaim any tax payments to which the organization is due, which is the subject of a future post.

Next Post: Payments

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Six Drivers of a Successful Supply Chain Strategy

In addition to offering insights into planning horizons and supply chain strategy drivers, the recent report on “Supply Chain Strategy in the Board Room” by the Cranfield School of Management and Solving Efeso also summarized six drivers of a successful supply chain strategy. While there were no surprises, the points do deserve reiterating.

  • A balanced input of vision. A strategy developed without the blinders on generally works better than one developed with the blinders on.
  • Frequent review. When there’s a regular review to insure the strategy is being followed and implemented properly, the strategy will tend to be more successful.
  • Balanced input of quantitative modelling. Decisions based on a consideration of facts tend to be better than decisions made solely by gut instinct.
  • Adaption.What gets adapted gets implemented.
  • Integrated risk management. A supply chain that is less prone to collapse tends to function better than one that is more prone to collapse.
  • Benefit tracking. What gets measured gets managed is a timeless truth.

It would have been nice to see more insightful drivers considered, but c’est la vie. The reality is that if every company made these six drivers part of their supply chain strategy checklist, the average supply chain would function much better than it does today.

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A Couple of Surprises in the Supply Chain Strategy Survey

A cooperation between the Cranfield University School of Management and Solving Efeso that resulted in the publication of Supply Chain Strategy in the Board Room (based on a survey of 181 senior logistics and supply chain executives) between July 2009 and January 2010) had a couple of surprises in the top ten findings, at least to me.

While the following findings made sense:

  • The most important supply chain performance drivers are cost focus, customer lead-time and customer quality but these vary by sectorUnfortunately, supply chain initiatives are still primarily focussed on cost and not the overall value supply chain can deliver in terms of risk mitigation, service level improvements, and innovation.
  • Customer service issues and cost issues are the main triggers for strategy reviewReviews are usually reactive and not proactive.
  • Supply chain strategy implementations are not straightforwardThe supply chain affects all areas of the business and multiple systems in sourcing, procurement, logistics, warehouse, and trade management are needed to address the supply chain end-to-end.
  • Successful supply chain strategy implementations have top level supportGreat results typically require significant changes to systems and processes, which just don’t happen without support and leadership from the top.
  • Cross-functional accountability and a balanced combination of several key approaches and techniques also improve the likelihood of successAll of the affected parties need to collaborate. This will generally only truly happen if they are all held responsible for the success or failure of the initiative.
  • Development of the supply chain strategy is largely internalisedEven though most corporations don’t truly understand how to revolutionize the supply chain, those that embark upon defining a supply chain strategy generally try to do it themselves without the help of an expert guide from outside the organization (even though Consultants are Cheap).
  • Of the many barriers to success, the major ones are company culture, lack of leadership and poor supply chain visibility. Barriers are predominantly people-related, rather than technical.Implementations may be difficult, but with the right guidance, support, and elbow grease, they can be done relatively quickly and efficiently and, depending on the system or process in question, sometimes be completed in a few weeks. Most of the solutions are fairly matures these days. As a result, any hiccups are generally caused by humans and not hardware.

The following findings are a little shocking:

  • Supply chain is recognised as an important part of the businessWhile I hear a lot more talk these days about how important supply chain is to the business, I still don’t see a lot of action. It’s shocking how many mid-market companies still don’t have basic e-RFX/e-Auction platforms even though affordable solutions have been available for years! As far as I’m concerned, it’s Action, Not Words, and until I see more action, I won’t believe it.
  • Service and corporate strategy are key driversNo, cost is. While 10% of the true innovators might have moved onto service and strategy in an attempt to generate long term value, 90% of the time it’s cost, cost, cost. (If you get any other response is just lip-service.) While it should be value, it’s still cost.
  • Review of supply chain strategy is highly cross-functional and in many cases, a continuous process with regular monitoring and continuous adaptation according to circumstances. Well, at those few companies that actually have real supply chain strategies, review is likely to be cross-functional (as these are the few companies where the CSCO/CPO will actually have a seat at the table), but at the vast majority of companies monitoring is irregular, adoption is haphazard, and cross-functional participation is still a pipe-dream. Sorry, but this is either wishful thinking on the part of the survey respondents, or the survey sample was very skewed towards the 10% of true innovators. If review and monitoring was continuous, you wouldn’t have 40% to 60% of negotiated spend unrealized at the average company, because maverick spending would be caught and eliminated, overcharges would be caught and never paid, and off-contract shipping options avoided in all but true emergencies.

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Supplier Partnerships

Today’s post is from Robert A. Rudzki, President of Greybeard Advisors LLC, who has (co-) authored a number of acclaimed business books, including Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise, On-Demand Supply Management, and the supply management best seller Straight to the Bottom Line.

A supplier representative visits your offices and begins to talk about “the partnership” between your two firms. You hadn’t realized the relationship was that comprehensive, so you ask him to describe the exact nature of this partnership. Chances are that the answer you receive will be rather wordy and nonspecific, about what you would expect from a “glad-handing salesperson.”

“Partnership” is one of the most overused and misused terms in the world of business. When I was a CPO, we dealt with this phenomenon by taking two steps:

(1) our Procurement Council developed a written definition of what we meant by the term “supplier partnership”

(2) once we had that definition, we decided how to put it to good use to improve both our internal and our external processes

If you’ve never done the exercise of developing your own written definition of supplier partnerships, I would encourage you to do so. It has several benefits. It will help you organize your ideas about this important subject. Also, you can create a common understanding within your company regarding what the partnership term means and how it should fit into your overall supplier selection and management process. And finally, it can serve as an excellent point of discussion with your suppliers — especially those who say they want to become your partner.

We did this in my corporate career as a CPO, with real benefits. We went so far as to print our short definition of supplier partnerships on the back of our business cards. When meeting a supplier for the first time, we pointed out the definition on the back of the cards and used this as a launching point for a discussion that often proved to be very meaningful.

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Thanks, Bob!

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

Mostly Harmless, Part XII

Previous Post

Reconciliation is the process of comparing and matching figures from the accounting records of one system with the accounting records of another system. In e-Procurement, it generally refers to the reconciliation of the invoice and associated payments against goods receipts, purchase orders, contracts, and / or tax records.

While reconciliation should be done at each step of the process — as the purchase order should be matched against the approval and a contract, the goods receipt against the purchase order(s), and the invoice against the goods receipt(s) and the purchase order(s), there should be a separate, (semi-)manual reconciliation phase as not everything can be reconciled automatically and there will always be new situations and exceptions not accounted for in the automatic rules.

If there is an error in a SKU or other identifying attribute, it may not be possible to automatically match one or more invoice line items against the purchase order(s) they correspond to. In this situation, the e-Procurement system would flag the invoice for manual review, at which point the individual who (first) processed the invoice would do a manual match. If the amount is significant, this match should be rechecked at a later time, because if there were two similar items in the procurement system (catalogs) and the match was made to the wrong, off-contract item, the organization might end up paying a higher price.

A review should also be made of all purchases against a supplier’s account for which there are no contract prices if there are contracts in place with the supplier. For example, a contract with an electronics vendor might be such that the organization gets 10% off of list price for all items for which a contract price is not specified or that the organization gets 15% off of all purchases once it has purchased One Million Dollars worth of goods and services. These situations may not be caught by the system automatically as it might not be easy to encode which goods or services are covered, especially if items are being ordered / purchased not yet in the system.

In addition, a review should be made of all tax payments. Is the tax rate correct? Are the items being taxed subject to taxation? Is the organization exempt? Is the organization eligible to recover some of the payments (such as GST in Canada)? This is a difficult subject and a manual review will be required to ensure that the right taxes are being made at the right amount and that the organization is capturing the right information that will be required for tax reclamation, which is the subject of an upcoming post.

Next Post: Reconciliation, Part I

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