World Class Operational Procurement: Oh yes, paying the supplier…

Part 9 of a ten-part series that examines key operational aspects of the so-called “Purchase to Pay” value chain
by Independent Contributor, Peter Alkema – Head: Purchase to Pay at Absa

“Money makes the world go round and this is even more so in the world of ‘Purchase to Pay’ (PTP) where the last step is often the one that receives the most attention, simply because the up-front steps and general governance has not been in place”, Peter Alkema, Head: Purchase to Pay, Absa, told SmartProcurement.

“Generally speaking, once an invoice is received you are liable to that supplier as the goods or services have been delivered in good faith, whether or not there was a purchase order (PO) in place”.

In cases where the PTP process has been followed and all source documentation and approvals are in place, the payment step is just a formality. This step can largely be automated using intelligent invoice scanning with exception processing as required. It is, however, worth noting a few aspects of this critical step in the purchasing process, to ensure that there is the right focus on the right activities and the right principles.

Bulk invoicing can be automated by a process called Electronic Invoicing. Electronic invoicing is where a flat file of data (for multiple invoices) can be uploaded into an organisation’s payments system. Various checks will be performed on the data; and instead of a team of payment clerks stamping invoices the system does all the work – it collates the payments into one bulk amount, that goes to the supplier on completion of the automated process. This process works especially well for high-volume, low-value payments, where some degree of error can be accommodated since it would cost more to process the invoices individually. Sample audits can be performed on the data to flag any anomalies, and re-process or fix the system configuration if needed. An example of a commodity for which this can be used is temporary personnel agencies. Invoices are generated separately per temporary worker, but can be combined with electronic invoicing.

Payment terms are mentioned above, but is worthy of separate consideration: “The most common payment terms are 30 days, however, 7, 60, 90 or even 120 days are also used. Importantly there must be reference to the original contract when payment terms are loaded onto the payments system, as the system will automatically release the payment to the supplier on the date when it becomes valid. Just as important are changes to payment terms that need to be governed properly, because often the payment department does not check original contracts and thus change control must have sourcing involvement. While invoices may be processed and approved for payment on a certain date, they will be placed in a queue that is released based on a calculation of current date, due date and payment terms. Payments exceeding due date may incur penalties which are not loaded onto the payments system, therefore requiring a further invoice from the supplier”, Alkema continued.

It is important for any large organisation to act in good faith with its suppliers, particularly with regards to paying invoices on time and accurately. In most cases, late and inaccurate payments are due to broken processes within the organisation – invoices get mislaid and paid late or even not at all. Usually there will be a central payments department were invoices should be sent to, but ensuring this behaviour in decentralised business units and with suppliers is not always straightforward. This is for two reasons:

  1. Often business units feel they own the relationship with the supplier, and they should therefore receive the invoice directly from the supplier which they will then forward for payments. In some cases, the business unit may even have its own payments platform to process the invoice.
  2. Non PTP compliant purchasing typically requires the business unit to sign-off the invoice, provide a cost centre and other details before forwarding to the payments department. As indicated above, if the organisation is already liable for the invoice then this step is completely meaningless and is an extra, un-needed step. When a PO is quoted on the invoice, and the goods receipt has been done by the business unit, this will ensure that the payments department has reference to both the original approved request, as well as the approved receipt showing a full chain of compliance, against which an invoice can routinely be paid.

It is often seen as poor service delivery on the part of the payments department if invoices are not paid on time to suppliers, however, it is actually poor compliance by the business unit that causes this delay. The actual processing of an invoice to go into the payments queue, for payment terms, to expire and be paid is not the difficult part of the process, it is ensuring the PO and goods receipt are in place which is crucial.

The discussion thus far has focused on the primary channel, being the PO process. There are instances where this is not applicable, and suppliers still need to be paid. Travel is a good example where in-house travel offices will link their booking systems and approval processes to the workflow of reservations and approvals. Corporate cards for policy approved purchases is another payment mechanism and works as an upfront payment for services rendered or goods delivered, where a PO is not feasible. Internally, the cost centre presenting the corporate card will be billed by the corporate card provider on an aggregated basis, and depending on this process, very often there will be significantly less meaningful Management Information (MI) than in the case of a PO. To address this problem, but retain the flexibility of using a credit card type channel, some organisations make extensive use of a purchasing card, which requires set up on the vendor’s point of sale systems. This system captures the transaction at the point of sale and ensures all the necessary MI (such as commodity) is available in subsequent reporting.

“In advanced cases, typically for high-value engagements, payment schemes may be in place; and for foreign exchange payments certain hedging arrangements may also need to be acquired. These require special processes, but generally can still run through the normal payments mechanism and control. The bank account details, for any particular supplier, on any stated invoice must be verified through the pre-loading of those details in the vendor master. Quoting these on the invoice is then unnecessary for established vendors, and reduces the risk of fraud if not loaded at point of invoice processing. Checks and balances in the payments department will go a long way to reducing these risks. The most robust process of supplier payments are that which occurs at the end of a fully fledged PTP process with all the necessary elements in place, as per previous articles on this topic”, Alkema concluded.

In the final article of this ten-part series we will examine the topic of MI, which in many cases can be referred to as ‘management dis-information’; whereby there is continual frustration at the poor data quality in the system from which reports can be drawn and decisions made. However, it is possible to ensure meaningful MI is in place and available, but as always this depends on the organisational will-power to embed world class operational procurement processes.

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