March 7, 2013

The Value of Supplier Information Management for Accounts Payable

Accounting

Last week we glanced over the one area that Accounts Payable (AP) would be responsible for, with regard to supplier management, tax credentialing – see The Value of Supplier Information Management: The Tax Credentialing Use Case. But, of course, this is just the tip of the iceberg,  where the value of supplier information management for accounts payable is much greater.

At the core of the AP function is what a company pays its suppliers for good and services rendered. By having company resources spend a great deal of time deciding whom to pay, how to pay, and when to pay, certain inefficiencies in completing a “procure-to-pay” cycle ensue. Some of the common questions AP personnel frequently deal with on a daily basis include:

  •  How does a supplier prefer to be paid (such as check, draft, and electronic funds transfer)?
  • Are the payment details accurate (e.g., amount due, banking information, etc.)?
  •  Which payment terms were negotiated with that supplier?
  •  Is the supplier sending an invoice in a foreign currency and is there a tax implication on that payment such as VAT?
  •  Do payments get sent directly to the supplier, to a parent organization, or to another address?
  • Who has access to change supplier related payment information in the event of a change?

The processing of this type of information traditionally has been handled by a heavily based paper approach combined with data from ERP systems. But even with adoption of e-Invoicing, a majority of invoices in the marketplace are still sent in paper format. In this regard, payment processing, as it relates to supplier relationships, is a complex process. Consider that extra time spent when AP needs to verify supplier information like banking information, contracts (POs, MSAs, SLAs) or rebates without a central repository of supplier information for supplier contacts or documents.

Also one must look at the controls in place for paying the supplier. This means addressing, not only who in the organization has access to these various systems, but how the supplier interacts with the buying organization and tracking activities related to information changes being made to the supplier profile for preventing payment fraud.

As a result, for most organizations, AP processing inefficiencies like those described translate into extra time and money spent in collecting and processing supplier data to get payments out to the suppliers. The results are hard dollar costs on the P&L such as –

  • Accounts Payable resources tasked with tactical, versus strategic, duties.
  • Loss of early settlement cash discounts from suppliers
  • Higher processing costs due to a wrong payment address/bank
  • Suppliers getting paid twice
  • Poor reporting for supplier spend
  • Loss of supplier volume rebates
  • Higher potential of fraudulent payments

So, again, the question I posed like last week’s post is: What is it costing your business to manage these AP processes, and what is the value of adopting a supplier information management to improve it?

XYZ Company

Painting a simple picture can always help establish the framework for how a supplier information management platform can reduce the costs related to payables, so consider the scenario of the XYZ Inc.

  • XYZ realizes that one of its major challenges has been in handling helpdesk . By regularly fielding calls from suppliers wondering what their payment status is, XYZ estimates that the same eight resources are spending, at a minimum, 10% of their time handling helpdesk issues. This activity is costing them $64,000 annually.
  • Moreover, XYZ has five separate ERP systems where supplier data resides. Two systems were a result of an acquisition of a company a few years ago, but due to IT budget constraints, the effort of completely integrating these systems into one common platform with the other ERP has been put on hold.  As a result, AP is often spending time re-entering or updating supplier data to collect all the necessary information on the supplier in order to facilitate payment.  XYZ estimates this is taking two junior AP resources 75% of their time to complete.  At an annual average salary of $45,0000 for these resources, this is costing XYZ $67,000 annually.
  • Further, AP desires to extend payment terms appropriately. As such, one resource is allocating at least 5% of his time in the attempt to set more favorable payment terms for large spend suppliers. In addition to the $4,000 in resource cost, XYZ realizes that cash reserves are strong and the Treasurer would prefer to offer early payment for those suppliers willing to offer an attractive discount. With an industry average of 2% on 50% of spend, without being able to negotiate early payment terms, XYZ assumes they have another $10,000,000 in opportunity costs.
  • Finally, as the controls to completely lock out employee-driven fraud (e.g., modifying bank account routing) and/or verify each invoice (e.g., unsolicited invoices), XYZ assumes the industry average in fraud leakage of 4+ per company is $175,000 per incident per year, with two years of fraud before the incident is caught.

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Supplier Information Management adding value

The value of supplier information management for accounts payable becomes evident when breaking down the numbers.  For instance, now imagine in using a supplier information management solution. XYZ’s suppliers now must submit their invoices online to a supplier portal for checking the status of their invoice. Assuming that 60% of AP’s time could be saved in help desk processes, this which would translate into $32,000 in savings annually.

Also imagine, that with a supplier information management system, time spent on data reentry was reduced, with the supplier information electronically capturing supplier data from the various ERP systems and where data is syndicated to all relevant ERP systems.  It is estimated that 85% of the junior resources’ time reentering data is reduced, translating into a savings of approximately $57,000.

With the supplier information management platform, XYZ also recognizes that they can save $1000 in the effort of trying to extend payment terms and capture approximately 90% of the savings (based on the average of discount of 2%).  This would translate to about $33,000 in savings from establishing early payment terms.

Finally in using the supplier portal, efforts were enhanced in mitigating fraudulent activity.  Suppliers would be required not only to load their invoices all into the supplier portal, but also match their invoice to business relationship within XYZ.  The supplier information management system would also establish internal controls, where no employee could modify a supplier banking account profile without proper authorization. Assuming that the new system reduced the cost incidents by 50%, this would cut the cost of the fraud in half or $350,000,

Combined with the savings from W8/W9, XYZ has already estimated a savings of over $550,000 by using a supplier information management system.

In continuing the value proposition, next week we look at Sourcing….

 

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by Grant Watling

Chief Customer Officer

Grant has 11 years management consulting experience specialising in supplier data and analytics advisory services. Grant holds a Master’s Degree (MSc) in International Business, is a Prince2 practitioner and holds certificates from the Institute of Financial Services and the Chartered Insurance Institute.
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