Visit the websites of any of the major e-commerce or supply chain management system vendors, and there will almost inevitably be a schematic of the ‘requisition to payment’ cycle, illustrating a process that begins with the recognition of a need, and ending when the supplier has been paid.
That is as it should be. The opera isn’t over until the fat lady sings, and a transaction isn’t complete until the cheque has cleared. But go further into the offerings of e-commerce vendors, or the internal systems of companies large and small, and in practice, it seems that the process stops at Receipt of Goods. Receiving, reconciling, approving and paying on invoices is in software terms,nothing to do with SCM – it is some little sub-routine in a Finance package.
In fairness, that only reflects common business practice. A typical business may have whole hierarchies of credit managers and debt-chasers; but in the self-same firm, the business of settling with suppliers may be a lowly and part-time responsibility.
Getting cash in is a number one priority for any business: paying money out is the last thing on anyone’s mind. It is easy to see why this situation arises, especially in countries, such as the UK, which have historically experienced high inflation and high interest rates. Keeping the cash in your own interest-bearing account, and eventually paying the supplier in devalued currency, must seem a no-brainer.
Unsurprisingly, international surveys show the UK having an appalling payment record – an average of 30 or 40 days late is typical (and one which applies to government departments as much as to private business). Figures in continental Europe tend to be a little better, but on the other hand it must be borne in mind that standard payment term in much of UK commerce is 30 days – contract terms of 60 or even 90 days are commonplace elsewhere.
The damage to relationships
The consequences, in supply chain terms, are wholly malign. Suppliers necessarily over-charge, on the reasonable assumption that they will have to cover the gap in their cash flow. Nit-picking arguments over invoice details erode supplier relationships. Because purchasing and procurement departments are typically out of the loop on payments, they are constantly wrong-footed by suppliers: you can bet your bottom euro that a supplier’s rep will come fully armed with details of every outstanding, late, or disputed invoice, most of which will be news to the buy-side negotiator.
So, whither ‘partnership’ or ‘supplier development’? And, despite the lowly and unconsidered position of Accounts Payable, there are real costs. A survey earlier this year of UK companies with turnovers in excess of Á150m, Tranmit, a specialist ‘purchase to pay’ solutions provider, showed the average Accounts Payable staffer processing 7-8,000 invoices a year (the top figure was a staggering 23,000 per person per annum). Over half the companies surveyed receive more than 90 per cent of their invoices in paper form (fax or post) and more than three-quarters receive 80 per cent of invoices this way.
The inevitable results – mountains of paper; filing, storage and retrieval issues; time-consuming and labour-intensive processes; even if the original document is correct there are always re-keying and data-inputting errors; complicated procedures and arcane hierarchies for approving apparently non-compliant invoices; all leading to increased cost, delayed payment, unhappy suppliers and in some cases legal action.
Meanwhile, essentially arbitrary payment makes management reporting and accounting pretty arbitrary too: patterns of cash outflow may bear little relationship to the periods in which supplies were actually purchased, and foreign currency exposure, may make reconciliation of booked and actual expenditure all but meaningless.
On the face of it, Accounts Payable is an obvious case for electronic automation – after all, the banks have been using electronic clearing for decades before the phrase ‘e-commerce’ was coined. But progress has been painfully slow. The survey already cited found just two companies receiving as much as 40 per cent of invoices electronically. Even supply chains that routinely use, for example, EDI, for procurement often fall back on paper and snail-mail for invoicing.
So far, e-solutions have tended to work round the problem, rather than tackle it directly. Purchasing cards have their uses, and can be valuable in reducing the number of very low value invoices – but even there, how many firms can receive and reconcile the billing from their card company electronically, and how many are wading manually through a monthly multi-page print-out?
Business processes based on XML are relatively new, but they should in theory make e-invoicing, reconciliation and payment easier and more attractive. Increasingly sophisticated Optical Character Recognition offers some hope of increasing the accuracy and efficiency with which paper invoices are dealt.
Firms that have successfully tackled the problem have seen Accounts Payable as, in essence, a logistical problem, and have addressed the systems and workflow issues at least as much as the mere technology. It is not obvious, though, that the Finance function in most organisation is likely to volunteer to improve the speed at which cash leaves the company. It is probably up to the Purchasing and Supply Chain functions to reclaim, at least in part, the missing link in the ‘requisition to payment’ cycle.
Briefing points
- Payment to contract terms is an integral part of the supply chain, but too often is entirely divorced from the rest of supply chain management.
- Although holding on to suppliers’ money has superficial attractions, the penalties of ineffective Accounts Payable performance are very real, both in terms of internal costs, and externally in the impact on supplier relationships.
- The solutions are only partly technological – they depend at least as much on rethinking and re-aligning the business process.
- Purchasing and Supply Chain are the ultimate ‘users’ of Accounts Payable, so they need to reclaim some element of control and direction.
