September 08, 2014 by Donna Fritz
In the previous articles of this series, we talked about the four stages of the P2P process: 1. Demand-to-Confirm, 2. Build-Change-Deliver, 3. Receive-Inspect-Accept, and 4. Invoice-Reconcile-Pay. We explored how the automation-intensity and relationship-intensity of each stage varies from one industry or company to the next. None of this implies that relationship-intensive processes cannot leverage technology. Conversely, just because there is potential for automation-intensity does not mean it is realized. Many companies still have manual processes, even where the potential for automation is high.
These are our research survey findings from interviews with over 120 manufacturers about their level of direct materials P2P automation, why they automate, the KPIs they use to measure success for their direct P2P, and more.
The level of automation was one of the questions we asked in our survey and interviews with over 120 manufacturers1 about their direct materials P2P processes and practices. There are automation opportunities at each stage of the P2P lifecycle. And while it is not uncommon for companies to automate one or two of the processes, most have not automated all of them. Of the companies we surveyed, the average (mean) had 31% of their direct materials procurement spend automated. Automation levels were higher among larger (over $1B) companies—the median being 45% of direct spend automated—and lower for smaller (under $1B) firms, where the median was 25% automated.2
We know there are significant benefits to automating direct materials procurement processes, such as creating a faster, more precise, more cost-effective business, with a dramatic reduction in errors. So why do so many companies, including major corporations, still have so many manual processes for direct materials procurement? During our interviews, we heard some of the reasons. For many, it was a matter of competing priorities for finite capital and management attention. Perhaps most commonly, it was organizational inertia—“we’ve always done it this way.” Without a passionate champion for the cause who has the political skills and influence to bring about change, it is less likely that a company will invest in and adopt P2P automation.
In a separate question we asked about the percent of invoicing and payment for direct materials spend that was automated. The numbers were even lower than for overall procurement automation, with companies on average automating only 28% of their invoice processing. Again larger companies on average processed more (38%) vs. smaller firms (25%).
Failing to automate invoicing and procurement also incurs non-value-add labor costs and introduces errors. In addition, it makes it harder to methodically take advantage of early discount opportunities offered by the supplier and much more difficult for the buyer’s company to set up their own early discount program for suppliers. Without automation, it is nearly impossible to set up dynamic or sliding-scale discount programs. Early discount programs are lucrative from a corporate treasury perspective, as the discount rates offered and accepted by most suppliers are much higher than the returns available for overnight and short-term investments.
We asked as an open-ended question (rather than multiple choice) about why companies automate. We categorized the answers into different reasons to automate, as shown in Figure 3 below. Some people gave multiple reasons for automating.
The top four reasons for automating direct P2P were all interrelated: 1) cost reduction, 2) efficiency, productivity, speed, 3) spend reduction, and 4) labor savings. Obviously, eliminating manual processes saves the cost of the labor involved. But perhaps more importantly, it reduces costly errors. For example, when incorrect items or quantities are shipped, it takes substantial time and effort to fix the mistake (identifying and understanding the problem, communicating and coming to agreement on resolution with the supplier, creating and executing return shipments, etc.). Mistakes like that frequently add additional shipping costs; both for shipping the incorrect items back and shipping the correct ones to the buyer’s plant, often with expedited shipping charges to get the right parts to the factory on time. And they can wreak havoc with production scheduling if other production has to be shifted around due to the shortage of that specific part. In the worst case, the lack of a part shuts down production entirely until it arrives, though manufacturers usually go to extraordinary lengths to avoid that.
It is also expensive when mistakes are discovered in the 3-way match process after receiving an invoice. Both sides spend time hunting for and sorting through the data about what actually happened and then sending back and forth emails and making phone calls trying to resolve the disputes because of errors that could have been avoided in the first place if automation was in place. All of these additional costs are completely non-value-add.
In our survey, we dug down a little to find out what levels of automation and types of systems companies use for their direct materials purchasing. We asked people to “check all that apply.” In this case, the top selection was a virtual tie between “We are partially or largely manual” and “We use the purchasing tools built into our ERP system.” We found that smaller companies were nearly as likely as larger ones to use the purchasing tools in their ERP system, but much less likely to be using best-of-breed purchasing or e-invoicing tools, compared with larger firms. This may reflect larger companies’ bigger IT staffs and ability to support a broader portfolio of systems, whereas smaller firms are less able to support, and therefore less inclined to implement, multiple specialized systems. Our research found that smaller companies are actually more likely to use home grown systems than their larger brethren.
Also notice that quite a few companies (over 45%) are using imaging/scan/OCR or fax-to-EDI solutions. This shows that many companies are trying to bridge the gap between paper and automated worlds. Scanning invoices, especially when combined with OCR, can get companies much of the way towards automation, though it has its limitations and still requires some labor (whether internal or a third party service). 100% electronic invoices from suppliers are preferred, but in many cases that is not feasible, especially for smaller firms. Some companies put their efforts into getting as many suppliers as possible to submit invoices electronically, and then use a network or third party to handle the rest.
In addition to asking about the level of procurement automation, we looked at how companies define success and how they measure their progress and performance in direct materials P2P. In the survey we asked what KPIs they were using for direct materials P2P (see Figure 5). The two most popular KPIs were spend reduction and supplier performance (on-time delivery, quality, order accuracy, etc.). This is interesting, because spend reduction is typically much more heavily influenced by sourcing practices than by procure-to-pay processes, especially for direct materials.
Sourcing practices,3 like reverse auctions or strategic sourcing, are where we see the big year-over-year reductions in spend. Similarly, supplier performance is typically most influenced by supplier scorecarding, regular supplier reviews, and relationship management. In contrast to the survey responses, the interviewees we talked to emphasized more the importance of measuring procurement costs and invoice accuracy as their key metrics. Those two came in third and tied for fourth in the survey.4
Some of the more advanced organizations pay a lot of attention to First Pass Accuracy or Straight-Through Processing5 (STP) rates, measuring the percent of invoices that are processed the first time with no errors, untouched by humans. This is one of the better metrics for measuring the quality of the end-to-end process, encompassing both supplier and buyer processes. If errors are introduced anywhere in the chain, they will show up at the reconciliation phase and prevent straight-through processing. Therefore, in order to get above 90% to 95% STP rates, it requires automation and process improvements to reduce errors on both sides of the equation—supplier and buyer.
To err is human. Automation helps greatly to reduce those errors. For example, using barcode or RFID scanning of items while picking, packing and shipping to detect and alert the operator when the wrong item is being placed in the box, wrong box on the pallet, or wrong pallet in the truck … and preferably the system does not let them proceed to finish the order until the error is corrected.
There are a wide variety of systems out there that address different needs. These systems come from different heritages and address different issues. Some focus on automation, others on visibility of orders and goods flowing throughout the lifecycle of a PO. Some connect up a network of suppliers and buyers and provide collaborative functions between them. Others provide supply chain finance capabilities.
In the final article in this P2P series, we will take a look at examples of some of the direct material P2P solutions available in the market today.
( This article is excerpted from the report: “Spotlight on Direct Materials Procure-to-Pay.” )
1 The survey sample was about 80% manufacturers, but also included some wholesale distributors doing light manufacturing, construction and EPC (Engineering, Procurement, and Construction) companies that bought direct materials for large construction projects, and a small number (3%) of retailers who were managing private label procurement.
2 In our sample, about 25% of the firms were greater than $1B in revenue, 69% were less than $1B, and 6% declined to reveal their revenue. Hence the smaller firms had a disproportionately larger influence on the overall averages.
3 For indirect, P2P can help reduce maverick spending and increase on-contract spend, thereby reducing overall spend.
4 You will see P2P Cycle Times is the fourth most popular KPI in our results. However, if you we consider Invoice Automation Rates and First Past Accuracy to both be proxies for invoice accuracy, then invoice accuracy is in a virtual tie for fourth place with P2P Cycle Times.
5 Straight-Through Processing (STP) is a term borrowed from the financial trading world, where it refers to the ability to execute a trade entirely electronically and automatically.