When streamlining your procure-to-pay (P2P) process, you need to pay close attention to three areas: procurement, accounts payable/vendor management, and a payments function. Here are some tips for navigating each of these areas:
Procurement: This covers your purchasing strategy and impacts the entire P2P process. Inefficiencies here will have ramifications throughout the process and prevent things from flowing smoothly. It is important to ensure that any solutions you consider will enable a streamlining or reduction in labor and processing costs, as well as the ability to track every purchase.
Key indicators to review for cost reductions include: total number of suppliers, number of vendors per category, return on indirect procurement investment and procurement costs as a percentage of total indirect spend. Poor performance can often be attributed to your indirect spend, an area that often falls outside of the standardized purchasing process. We sometimes refer to this area as “dark purchasing” because often no one knows exactly what’s going on with spending for non-core items.
Accounts payable/vendor management: This is the area where you can see the greatest savings and the biggest improvement in efficiency. The items you want to measure here include the total cost of processing an invoice, procurement cost as a percent of the total of indirect spend, and total contract renewal rates. When you consolidate vendors throughout the organization, you often receive better pricing as a result of increased sales volumes.
Payments: Efficiency is important here in order to maintain good relationships with suppliers and to ensure you take advantage of early payment discounts. Key numbers here are the number of invoices being processed electronically, median transaction costs for each type of payment, length of your days-outstanding cycle, and the ability to capture early-payment discounts where offered. Decision makers can examine days inventory outstanding (DIO), days sales outstanding (DSO), and days payable outstanding (DPO) for insight into where improvements can be made to bolster working capital.
Companies can monitor cash conversion cycles (CCC) metric (CCC = DIO + DSO – DPO) to calculate the length of time in days that it takes a company to convert resources into cash flow. With increased transparency into how cash flows through the payables cycle, executives are able to evaluate real-time balances to rectify working capital on a day-to-day basis.
Asking some key questions and monitoring key metrics at each stage of the procure-to-pay process will be critical to your business’s success.
I will look at each area of the process more in-depth in future IdeaXchange posts.