Procure to Pay Process Challenges

and its Impact on Business

Gaurav ShuklaPartner Risk Advisory

gaurav.shukla@outcomes.com+91-9873007076www.outcomes.com

Purpose: This document defines the issues arising out of mis-managed purchase function in an organization and its real causes, which may impact the relation with vendor. The document further defines the internal issues of procurement process and how vendor gets impacted due to these internal issues.

Overview: A standard purchase function has many different sub functions and stakeholders, who needs to work seamlessly to ensure the optimum purchases are done at good price. For the sake of clarity in the document we shall be focusing on internal stakeholders as one party and vendor as second party. In a standard purchase cycle there are many internal steps like, material requirement

planning, identification of vendor, raising purchase order, receiving material, recording of financial invoice and making vendor payments.

From vendor side following key links are maintained between vendor & internal stakeholder: Registration of vendor Providing quotes with good business terms such as high quality material or service at

lower cost and at the time of need. Vendor invoicing, payments and debit notes Vendor reconciliation process

A standard procure to pay process looks will have following key steps:

Internal challenges of procurement processGenerally, procurement and payable department of a company are responsible for developing a strong partnership network on buy side of the business. In order to understand how partnership model is developed we shall first understand what not to do with vendor or we can say key internal challenge of not converting vendor into a partner:-

• Lack of Single Face: While developing any business relation, continuous communication is required, but biggest challenge in most Procurement teams is that there is no continuity of face for communication with vendor. Hence in case of issue/grievance a vendor needs to re-initiate discussion with new person every time. This delays the process of settlement and in turn the vendor starts to lose confidence in the company.

• On-going communication: In continuation to above point, another challenge is to follow a standard practice of not updating or informing vendor about status of transactions. In addition to this vendor also gets burdened with repeated requests from purchaser to provide the documents which were already provided by to them.

• Poor Record Keeping: The repeat documents mentioned in above point reflects the lack document management and record keeping practice in the company. Study shows a

process driven company can reduce the communication duplicity with vendor by 4 times

by controlling the repeat requests.

• Incorrect data punching: One of the major challenge in delay in settling or recording vendor transaction is data punching errors. Companies with no or minimum review mechanism have tendency to delay the transaction posting process and in turn increases mis-communication with vendor.

• Delay in Payment Processing: historic trends suggest that the key reason for delay in vendor payment is not shortage of funds rather it is due to delay in recording of liabilities and non-availability of vendor information on due date. The moment vendor payment is delayed the perception vendor creates is that the company does not have funds to discharge vendor liability, which demotivates him to become partner of company.

Impact of challenges on business

Pointers highlighted above though are internal challenges of any organization, but they directly impact a key stake

holders sitting outside. Also, most of the companies spend fortunes for employees (who is an internal vendor) but

the same company fails to be fair when it comes to vendors, due to this thought process gap and internal challenges

an vendor fails to become partner of the company.

Let us also analyse the impact of the above issues and see how it impacts vendor relationship and in turn what are

negative impacts of this on the company.

• Loss of Goodwill: The moment vendor payment is delayed or there are miscommunications from

the company’s side, the vendor starts to get nervous about the payment and in turn tries to

follow up with the company. In case of inappropriate response the first loss that the company

faces is loss of goodwill, which has its own consequences in medium to long run.

• Loss of negotiation power: Once a vendor is dissatisfied, the direct and immediate financial

impact comes in terms of lower discounts, rigid payment terms and low credit limits. The

statistics suggest that cost of procurement of a process driven company could be substantially

lower than mismanaged companies in the same industry and this amount could actually go up to

5% of total cost.

• Loss on long term prospects: While a mismanaged company may just be treated as a vendor and

be required to procure in advance in case of material in short supply. A Process driven company

having developed a partner out of a vendor, can optimize the inventory buy moving towards Just

in Time (JIT) delivery model and drastically reducing inventory carrying cost.

How to improve current business processesIn-spite of identifying challenges and its implications it is not simple task to convert into a process driven company. To become a process driven organization a series of sequential steps to taken over a period of time, some of the key steps may be:

• Current State Assessment: in-order to lay down the roadmap for optimization of business process, the first step could be to identify the current business challenges and their corresponding magnitude.

• Process design & documentation: once the depth of process is understood along with the challenges, the next steps is to design the business process and document the same. Key pointers to be kept in mind should be:

a) Process should be simple to followb) Clear input, processing and outputs to be definedc) Roles & responsibilities to be clearly identified d) Every process should be supported by appropriate reporting and exception tracking

• Process implementation: just designing or documenting proposed process may not achieve the desired results for the organizations. In order to ensure optimum utilization the process needs to be implemented appropriately. All the relevant stakeholders and users needs to understand the depth of process document created. End user to given appropriate training to perform daily tasks.

• Review of implementation status: in-order to ensure that process has been defined, documented and implemented as per the spirit of business, there is need of regular monitoring the process implementation. This step also gives management a confidence about improvement of business process.

• Automation: one of key transformational step is to automate the business process, but the precondition to automation is to have defined process in place. Hence the assumption of having automation at first is not correct, rather companies should focus on defining processes and then automating the same. Automation is generally done to remove the manual effort and to reduce the chances of manual data punching errors.