Recently I received an email from my employer discussing issues associated with the workflow of the Procure to Pay (P2P) process. I was impressed by the maturity of my employer as to how they handled this business process. It reminder me of some research Deliotte (1999) conducted in regards to obstacles/issues companies face in achieving the expected benefits from their ERP system. By creating this blog I hope to provide a good case study for the classroom and provide other companies with the motivation to evaluate their core business processes.
Many companies believe that the implementation of an ERP system will solve many of their business process issues and will provide an extensive range of benefits to the company. In a landmark study, ERP’s Second Wave by Deliotte in 1999, companies were surveyed about what were the major barriers to gaining the percieved benefits from their ERP system after go live. The major issues or obstacles were people related and included; change management, skills, resources and discipline.
The discipline obstacle, which is related to change management, refers to employees following business process rules and workflow. Some of these rules are enforced in the ERP system but others are about good work practices. The following is an example of what proper change management and discipline can achieve
As part of a cost savings initiative the university evaluated their Procure to Process. They monitored invoice and Purchase Order activity and discovered a large percentage of purchase orders were being raised after the supplier invoice was received. This caused delays in the automated processing of invoices because each unmatched invoice had to be work-flowed to the requestors to raise and complete a Purchase Order.
In 2011, tghe university received over 25,000 Invoices, and it cost the university $37.10 (or 20 days) to process each invoice.
Market data for
– Best practice is $3.09 per invoice (or 3.8 days);
– The industry average is $15.60 per invoice (or 9.7 days);
– Laggard (worst practice) is $38.80 per invoice (or 20.8 days).
In 2012, an analysis of the number of Purchase Orders that are raised after the supplier invoice has been received in shows that this trend was increasing:
- January 2012: 64 % (Total invoice spend $2,710,071)
- February 2012: 68 % (Total invoice spend $3,395,216)
- March 2012: 68 % (Total invoice spend $3,346,987)
- April 2012: 69 % (Total invoice spend $1,595,051)
- May 2012: 71 % (Total invoice spend $2,200,088)
It was calculated, based on the industry average, that by following the procedure of raising Purchase Orders prior to receiving a supplier invoice the University could save $21.50 on the cost of processing each invoice, which equals total savings of $537,000 a year.
The university had a policy in regards to the requirement of PO’s before any purchases but obviously adherence to this policy was poor.
Several benefits of raising Purchase Orders before delivery of goods or services were identified including:
– Adherence to University’s Terms and Conditions;
– Visibility of our commitments to spend therefore maintaining expenses within budget;
– Visibility of payment terms and University’s cash flow requirements;
– Improved supplier management, performance and compliance; and
– Maintaining the integrity of financial delegations.
A decision was made to send a communication to all suppliers on the importance of the receiving Purchase Orders prior to delivery of goods or services, and seeking co-operation in improving the University’s purchasing process. Also a‘No Purchase Order – No Pay’ process will be introduced and enforced.
This example reinforces a couple of important points. Firstly to improve you must understand what is happwenning in the business and secondly as Peter Druker said ïf you can’t measure it you can’t manage it.