Payment Activity (Duplicate, Paid Wrong Vendor, Overpayment)
The invoice payment process is often misunderstood. Internal workloads, manual processes and approval processes all play their part. For customers, maintaining vendor master tables is the foundation of payment accuracy. Both the ordering and invoicing processes are contingent upon accurate data and clarity regarding what to pay.
Data entry processing errors are a significant contributor, along with communication issues between the various parties involved. Duplicate payments normally involve exceptions – pricing variances, miscellaneous charges or shortages – delayed for research or correspondence; thus, multiple copies. Delays and correspondence simply increase likelihood of errors.
Different payment methods (check, EFT and P-Card) or checks created from different systems also impact duplicates. Vendor masters containing multiple accounts for the same supplier increase risk and reduce the effectiveness of ERP duplicate controls.
Perhaps the most important aspect of containing overpayments is awareness of process weaknesses and training. Credit issued by suppliers for duplicates or overpayments is an opportunity to understand the root cause. If there are problem suppliers, proactively use that occurrence as an opportunity to address the issue. If a result of a system or process weakness – archive the examples and plan changes needed to reduce future occurrences.
Regardless of the “root cause” of payment errors, there is an expectation for both parties to seek a resolution; reducing go forward administrative costs. Most suppliers reconcile receipts thoroughly and return funds they’re not expecting. Others simply prioritize collections and opt to reconcile overpayments as time permits.
Insight – Payment Errors & Suppliers
Pricing (Price Changes)
Pricing is perhaps the most complex aspect of the P2P process and addressing the associated variances is expensive. The transition to EDI has provided efficiency – due to automation, improved systems and visibility; however, even best in class companies still face change. While tools position management to increase accuracy; the process is still driven by people.
Item master tables maintenance is involved due to the sheer number of items. Timeliness of price changes is contingent upon communication between the different parties (suppliers, GPO’s, distributors and customers) and changes being made accurately. If alignment is lacking, exceptions will result and resources required to resolve the variances increase.
Pricing (Contract Pricing, Off Contract, Tiered Pricing)
Establishing partnerships to consolidate purchasing is a current focus of cost reduction efforts. Lower costs are often structured as incentives requiring increased purchases over time. Having the ability to track purchases is dependent upon internal systems, quality data and resources.
Inevitably, not being in a position monitor purchase activity translates to relying upon suppliers to track on your behalf – which is not the best case scenario. Regardless of whether you are a buyer or seller, monitoring contract compliance is involved, time sensitive and requires internal resources. As a result, the intent of the negotiation is often compromised.
Cost exceptions occur when the “expected cost” negotiated does not meet the “actual cost” paid. The verification process – involving pricing, deductions or credits – is often cumbersome, but also integral to profitability. Understanding these discrepancies positions companies learn and improve.
Insight – Pricing Variances
Incentives (Allowances, Discounts, Rebates)
Incentives are used to build market share, loyalty or encourage timely payment of invoices. While discounts offered are somewhat consistent – allowances are not. In many cases they are temporary, only apply to specific items and may require certain conditions. Rebate payments are driven by a specific calculation and often unique to supplier. Tracking and verifying rebates requires quality data, along with a thorough understanding of timing constraints, qualifying items and contract specifics.
Suppliers possess internal resources, along with sophisticated systems that position them to track pricing, incentives and contracts efficiently and effectively. Most do partner with their customers to resolve open issues and encourage corrective action to resolve go forward occurrences. Unfortunately, others do not – and often at your expense. Having the awareness of who those suppliers are – along with an understanding of what you lack internally – positions you to increase go forward accuracy.
Insight – Suppliers
Process (Terms, Freight Charges, Returns Credit)
Supplier offer a standard set of terms that outline expectations and company policies. Buyers also create purchase order terms and conditions they expect suppliers to meet – which may change during program negotiations. All of these variables create an environment that is cumbersome and manual – increasing the likelihood for error.
Freight terms are typically negotiated and often contingent upon order size and delivery timing to meet the buyer’s needs. Since there are multiple parties involved (ordering, invoicing, receiving and payment), verification that terms were accurate and payment correct is not always feasible.
Returned product is another area that creates complexity. Supplier terms are contingent upon different variables (price, restocking fee’s, dates) that drive the credit memo amount. Since returns often involve different people in various locations, tracking specifics is often compromised.
Most companies do an outstanding job in the Procure-to-Pay area. Regardless, there is always an opportunity to get better. While the percentage of transactions processed correctly is typically very high – 99.9% plus, humans still drive the flow of information. Understanding why leakage occurs is beneficial. Findings identify problem suppliers and create a roadmap to create process improvements and strengthen internal controls – reducing future occurrences.
Insight – Leakage