Follow the Money For Supply Chain Control:Taking Advantage of Accounts Payable

Follow the money and you will illuminate the heart of supply chain strengths — as well as weaknesses for your company. However, as is so often true, saying it is much easier than actually doing it. Many global companies face the same primary challenge — the ability to comprehensively follow the money across the entire organization is inconsistent at best.

Consider a company with hundreds of product lines that has experienced substantial growth through mergers and acquisitions, has operation centers in countries across three continents, and has a supplier base that includes global companies as well as local, specialized niche suppliers. From an information management perspective, the challenges are daunting.

The company’s success through growth is now precisely the reason that accurately tracking full supply costs becomes difficult. Important supply chain performance and cost information exists in different pockets of the company, all disconnected from each other. Procurement does not talk to treasury. Treasury does not talk to A/P. And nobody’s talking to logistics or transportation groups.

The inability to accurately track costs can have profound impacts on corporate profitability. Typically companies have the ability to track individual costs for raw materials, manufacturing, shipping and other supply chain costs. However, bringing all of those costs together and associating them with individual products adds a layer of complexity and challenge. To further complicate the financial impacts, the relationship between those costs adds yet another level of complexity. For example, how does a manufacturing decision affect shipping requirements or cash management requirements?

Supply chain actions and events affect disparate groups such as procurement, transportation and logistics, accounts payable, and ultimately, treasury. Each business group works independently to keep its costs low and to resolve its portion of any problems that might arise in the supply chain. Sometimes, those efforts inadvertently create even larger problems for the company as a whole.

Here’s an example:

The treasury group, in an effort to manage cash flow, decrees that effective immediately, all invoices will be paid on day 60 — no exceptions. As you might imagine, the effects on the procurement group are substantial. The procurement group is now howling with outrage, because its contracts are negotiated with 30-day payment terms. Suppliers are not happy, and key suppliers are threatening to raise prices or stop future deliveries. In the middle sits the accounts payable group — doing what it has been told to do and taking protest calls from suppliers as well as internal customers. Everyone wastes time, everyone wastes money, and far worse, the company’s supply chain could be in serious trouble.

Here’s another example:

A large U.S. importer has separate groups responsible for the movement of a product to its end customers. There’s the product development group which commissions the research and development to continuously lead the market with new and innovative products; there’s the sales and marketing group which determines pricing and packaging that will prove to be competitive in the marketplace; there’s the manufacturing group which is responsible for sourcing and manufacturing the final product; there’s the global logistics group which is responsible for ensuring the smooth delivery of raw materials for the manufacturing process as well as finished product to the domestic supply chain; and finally, the domestic transportation group is responsible for distribution centers and transportation within the U.S., and ultimately, final distribution to the end customers.

Each group plays a key role in the supply chain — and consequently, the health of the company. Any failure automatically affects profitability. But even without catastrophic failure, the potential for one group to adversely impact another’s responsibilities is enormous. Minor events can easily change a normal 1-month order-to-manufacture-to-import time and stretch it out to 2 months. The delay has an immediate impact on how those goods are then moved to distribution centers and finally to customers. Typical handling in the ports must be expedited at large expense, shipments to distribution centers need to be arranged, and with short capacity in rail and truckload equipment, the costs to procure equipment and expedite the shipment could be substantial. In time, small adjustments in the supply chain become everyday practices —with higher than necessary costs.

Small changes in the supply chain or seemingly insignificant decisions by individual groups can have a substantial effect on the total cost of goods. Inability to tracking those costs and viewing them historically can have an exceptional impact on future profitability.

Without centralized cost reporting, or accurate G/L application throughout every step of the supply chain, there might be no way for a company to actually know what it costs to bring its product to the end consumer. The example might seem extreme, but it happens every day in some of today’s leading companies.

Following the Money Through Payments

When striving for supply chain excellence, a perfect place to start is to ensure that you can actually follow the money. That demands a high degree of collaboration, which can best be facilitated through the accounts payable process. Collaboration throughout the payment process starts first within the walls of your own company, and simultaneously includes data sharing with your suppliers as well.

Access to data is at the heart of collaboration and begins by linking essential data elements from throughout the supply chain — data from procurement, logistics, transportation, and suppliers. The data can be used to provide a clear window into both processes as well as costs. And the data leads to some extraordinary results beginning with financial controls, progressing to more valuable cost containment, and culminating with usable business intelligence.

Financial Control

In today’s corporate environment financial control is paramount, and recent scandals only serve to highlight the need for enforced corporate and regulatory policies.

In the supply chain, corporate policy enforcement starts with the use of approved suppliers and continues right through to how the invoice is audited, approved, paid and finally entered into the general ledger. Enforcement can be seen as a way to ensure that answers to simple questions are all in place. For example:

• Is this invoice actually for my company? From an approved, best-value supplier?
• Were the items listed on the invoice actually ordered and received?
• Does the price match the contracted price?
• Are all available pricing discounts properly noted on the invoice?
• Does the individual approving the invoice actually have the authority to approve the payment?
• Are the proper separations of duty in place to guard against fraudulent payments?
• Is the expense being recorded accurately and in the proper accounting cycle?
• Are the proper taxes being recorded, paid and reported?
• Is the supplier on a government watch list prohibiting payment?

Simple questions, but all necessary to ensure that the highest levels of fiscal control. With shared data from suppliers (invoices, ship notices, pricing, customs documents), combined with procurement and transportation data (orders, bills of lading, contracts, pricing, and receipts), financial controls become much easier to implement and maintain throughout the payment process. Each of the supply chain events has a financial component, and each of the controls exists to ensure that accurate payments are made and received.

Following the money has a profound impact on the types of controls necessary and enforced.

Cost Containment

Cost containment begins with the logistics of tracking and using all the information necessary to put financial controls in place. Traditionally, the controls are enforced by a combination of paper documentation and human resources to receive, analyze, verify and file the documentation.

In an electronic payment environment, a primary cost cutting strategy is to automate the handling of all the documentation required to enforce policies. Invoices can be sent and received electronically, customs documentation can be attached electronically, contract information, receipt information — all can be transmitted electronically and the data from each document can be used to automate the audit and approval process.

Automating the audit and approval process poses wonderful opportunities for cost containment — especially when one considers that between 80% to 90% of all invoices are correct. By using on-demand payment technology, payment decisions can be automated economically right along with the consistent application of general ledger information — eliminating 80% to 90% of the labor and processing costs to pay a supply chain invoice.

In addition, when invoices are processed electronically and payment is sent electronically, check writing and mailing costs are also eliminated. On the supplier side, electronic remittance information can be used to settle accounts without paying additional banking fees.

On-demand technology also carries another cost containment benefit: information technology resource needs are kept to a minimum. IT resources are scarce in most companies, and they are expensive. On-demand technology essentially outsources the technology aspect without sacrificing control.

Supply Chain Intelligence and Analysis

The greatest value for most corporations, however, is realized by using the data from an integrated supply chain and payment process to actually change and tweak business practices. Think back to the examples cited at the beginning of this article: in both cases, the situations and organizational practices inhibited efficient operations and automatically reduced profitability. Profitability suffered because decisions were made by independent groups with little or no regard for impact on other areas of the organization. In the treasury example, procurement, accounts payable, and suppliers all suffered because of the decision to adopt a new payment policy. The result led to a breakdown in supply chain activities and most certainly led to higher costs from the supplier.

The second example is typical of many companies that automatically adjust to individual situations. Over time simple, real-time adjustments often become policy and part of the normal process for doing business, resulting in permanent cost increases across the supply chain.

In both cases, following the money could prevent additional costs.

Why Accounts Payable?

Every payment goes through the accounts payable process, making it the perfect place to follow the money. Following the money ultimately points out the opportunities for collaboration and better decision making. Whether the decisions are as simple as choosing the best-value supplier or analyzing transportation costs to determine the best location for a distribution center, decisions are more informed. Armed with historical payment analytics, companies can more easily make the right decisions that address overall cost containment — not just costs at any single point in the supply chain.

Companies that adopt integrated payment processes realize immediate benefits in financial control and reductions in processing costs. Over time, the benefits continue and grow through the analysis of all costs occurring throughout the financial supply chain.

Old adages often ring true. Follow the money and you will find the root of the problem. Companies today have exceptional opportunities to follow the money throughout the supply chain by paying attention to their accounts payable process. Global payment systems like PowerTrack (powertrack.com) let you follow the money, gain better supply chain control, and more importantly, gain better profitability.