iSixSigma

Accounts Payable Practices

Six Sigma – iSixSigma Forums Old Forums General Accounts Payable Practices

Viewing 13 posts - 1 through 13 (of 13 total)
  • Author
    Posts
  • #33551

    BB to be
    Participant

    I am currently working on my BB certification project, involving improving the accounts payable process at my company.  Our purchase order process feeds into a shared services organization, who receives the invoices from the suppliers and, if everything goes right (which seemingly it rarely does) pays the suppliers after the appropriate time period set out on the purchase order (usually net 30 or net 45), measured from the date on the invoice (not the date it comes into the shared services org).
    The current practice is to pay freight companies, such as FedEx, UPS and other similar companies with net 7 day terms.  When I asked shared services, they said that 7 day terms are the “industry norm”.  The problem we run into here is that invoices take on average 7-10 days to be keyed into the shared services system; this includes mail time, waiting and scanning, which means virtually all freight payments are late.  The end result is that our on-time payment metric is skewed by these payments.
    I have a couple of questions regarding these:

    Does anyone know if the norm is to measure on-time payments from the date on the invoice?  It’s hard to control the mails and the shared service workload.
    Is it truly industry practice to expect freight payments to large companies in 7 days from when the invoice is printed?  I could believe this if invoices were transmitted electronically, but they’re not!
    Thanks!
     

    0
    #91971

    Andy Noble
    Participant

    It is the norm for transport invoices to be on 7 day payment terms.
    If you use another date rather than the invoice date (i.e. invoice reciept at Shared Sertvice Centre) you will lose valuable data for identifying defects within the invoice transmission process. 
    These defects will give you leverage with customers and suppliers for improvements such as evaluated reciepts or electronic invoice transmission (if your defects point in this direction)
    Any process improvement that does not address the invoice delivery time will reduce your ability to take early and on time payment discounts.
     

    0
    #91973

    Srinivas R
    Member

    If you are a big customer, it is possible to negotiate terms as 7 days from the date the invoices are posted in your books. It is important to track the time you take to post the invoices, and improve on it to ensure vendor satisfaction, but you can avoid losing discounts at the same time by moving to 7 days from posting date scenario. 

    0
    #91975

    Marz
    Participant

    Given that AP is a discrete event process instead of a continuous flow process, I would look to gather as many dates as possible in order to analyze invoice processing.  For instance, the following dates may help shed some light on cycle and activity times:
    1) Postal Date (date stamped on envelope)
    2) Invoice Entry Date
    3) Invoice Date (date on invoice)
    4) Invoice Approval Date
    5) Invoice Hold Date (if necessary).
    The above dates should be readily available except postal date. However, it can be captured if necessary either through requiring problematic vendors to use the USPS confirmation tickets during your study.  Otherwise, it would be almost impossible to get postal date in a large organization since it would take additional time to modify a system to capture this information and invoice processors would resist the additional work.
    Bottom Line: capture as many dates as you can in order to highlight where things are slowing down within the process. 

    0
    #91999

    Camilleri
    Participant

    The AP group at my business instituted a “green dot” system in order to indicate priority payments on invoices.  When the mail person opens the invoice, they check the date due and terms.  Any urgent items are then labeled with a large green sticker for priority processing and the invoice entry personnel were instructed to process those invoices first.  This mitigated the queue delay for invoice entry of the quick turnaround items.Be sure that processing delay is truly your root cause before implementing a solution, since priority queueing can cause delays for the lower priority items.

    0
    #92002

    Swami
    Member

    “On-time payment” metric is always seen from the vendor perspective so you would need to track it from the date of the invoice. The vendor would expect payments from the date of the invoice (which usually corresponds to date of shipment too). If the date of the shipment is substantially later than the invoice date, there would be a case for tracking “On-time payment” from the date of the shipment vs date of the invoice.

    0
    #92023

    Ravi Srinivas M
    Participant

    Probably this might of use. We are working on reducing the payment time for materials part of the business, not the services part. For this we take the due date based on the goods receipt date and the credit period.
    As such this will not bother the vendor as he is interested in payment based on invoice date. But what we found is, many a times, the invoice is sent late and the material is delivered with delivery receipt. The same is intimated to the vendors and they are brought in agreement with this.
    Probably, in your case, if there is  no delay in receiving the invoices, you can take the invoice date itself as base for due date. i mean invoice date + credit period. (7days) or you can try with date of entry into the shared services as the base line for your payment.
    all the best …
    Any information on the on the following is appreciated
    payment procedures for various payment types such as emergency payment, cash on delivery, advances, payments with higher credit periods, and payments with credit periods less than 7-10 days.
    thanking all in advance.

    0
    #92033

    howe
    Participant

    I agree with Andy.
    “If you use another date rather than the invoice date (i.e. invoice reciept at Shared Sertvice Centre) you will lose valuable data for identifying defects within the invoice transmission process.”

    0
    #92055

    Dwayne Gantz
    Participant

    Great discussion. The metrics around Account Payable information has always been a grey area, especially when relating internal processing to an external expectation. How I have managed this is to determine those items that are really in the control of the area or department, and eliminate those items which can not be improved no matter how well the process in AP processing is improved. Be sure that the measures are repeatable, reliable, and are useful in providing actionable information.
    The fundamental question is, “who determined the seven day turnaround time?” that seems to be cornerstone… and how does this fit into the current AP environment. I would not want to be bleeding edge in the processing of invoices, but have a metric that can be managed and improved. Appear to be too many other “uncontrollable” factors in the invoice date that may not be consistent from invoice to invoice.
    Hope this helps and please let me know what direction you end up going with.
     
    Dwayne 
     
     

    0
    #92074

    BB to be
    Participant

    Thanks all for your suggestions.  The unfortunate cold, hard reality is that the shared service organization doesn’t see that they have a problem, and that the problem is entirely with their customers (e.g. my company).  So, getting them to track the data, let alone make changes, isn’t going to happen in my lifetime (unless all of their customers band together, which we’re working on!)  An example of how un-customer focused they are:  if the shared services group makes a key-in error on one of your supplier’s invoices, they charge YOU an error fee, and you have to research the problem to figure out what happened!
    To influence the invoice receipt time, we decided in our improvement phase to move toward web invoicing, which reduces the time for invoice arrival to zero, since it gets dumped directly into the database.  This should help with the invoices that have shorter payment terms, as well as reduce invoice errors.

    0
    #92101

    Dwayne Gantz
    Participant

    Very interesting. I have also encountered similar problems when dealing with a shared services environment, and while at times have felt helpless to do anything about the situation, there are many avenues/opportunities to improve the situation…
    there are two main approaches, first, I communicated my dissatisfaction with the SS organization, and then demanded and implemented Service Level Agreements(SLA) from that organizaton. I made this happen by documenting the additional cost (opportunity cost) to the organizaiton by the errors of one department negatively impact my department. It did not happen over night but I remained consistent with my story, and before long had the ear of those key decision makers.
    My advice is be diligent, tell a consistent story, and document the effects this type of defect has on the entire organization. Not easy but a process that will eventually bare fruit. Good luck.
    Dwayne
     
     

    0
    #92104

    BB to be
    Participant

    Thanks for the words of encouragement, Dwayne.  It’s good to see we’re not alone.
    When the process operators (in this case, the Purchasing group who have to research the problems) start complaining about the shared service group and saying “it’s all their fault”, I turn it into something positive by reminding them that we can’t change them until we get our own house in order.  Once we demonstrate committment to improvement (through a BB project) and sustain that improvement, then we have ammunition to bring to senior management to show that we’ve gone as far as we can go without shared services buying in.  Part of my job as the BB is to preach some patience to let the improvements flow, while at the same time preach some impatience and a questioning attitude with the status quo if it’s not functioning up to snuff..

    0
    #92207

    Dwayne Gantz
    Participant

    My pleasure. I could not agree more with the approach that you have selected to address the issues. Though I do find it hard to take that step back and to ensure the the sequence of addressing the particular problem are prioritized and logical.
    Human nature has this need or drive just to dive in and start to “make things happen, or improve things” which what not well designed or developed can create more problems than the initial problem. Getting your own house in order, or at least making visible/quantifiable improvements provides may provide upper management with the confidence to look at other areas such as shared services.
    Demonstrating results and improvements (aka bottomline savings) will provide the flexibility to expand the use of six sigma methodology into other areas. Upper management will sponsor and support activities that provide value, but in most cases must be convinced by repeated success, especially with new methodology like SS.
    Keep going as you appear on the right track… and remember Rome was not built in one day… but with each step forward you are moving in the right direction.
    Dwayne
     
     
     

    0
Viewing 13 posts - 1 through 13 (of 13 total)

The forum ‘General’ is closed to new topics and replies.