How Lean Management Can Improve Your Procure-To-Pay Process

KayRee Lee

“Lean management” is not a new concept; in fact, most corporate businesspeople know it and may have even participated in lean projects. In the last 15–20 years, leading organizations have deployed concepts from lean into their businesses successfully. According to an Aberdeen Lean Supply Chain benchmark report (2006), “Successful Lean implementations have met and exceeded the performance expectations of over 70% of Best-in-Class companies in areas such as customer service and supply chain flexibility.”

However, a quick Google search on “Lean Procure-to-Pay” yields more than 373,000 business results, with the first 2 pages dominated by articles related to P2P from consulting and outsourcing companies, with little practical guidance on the application of lean in P2P.

What is “lean”?

The core idea of lean management is to use specific tools and quality improvement methods to create value for internal or external customers with fewer resources (less time, less money, etc.). Lean concepts were first adopted by Toyota broadly in the Toyota Production System, illustrated below:

Source: http://planet-lean.com/starting-out-with-lean-thinking-refer-to-the-original-tps

While lean and Six Sigma have both been traditionally deployed in production and manufacturing environments, its concepts are very much applicable to the P2P process to minimize costs, reduce cycle time, conquer complexity, and eliminate errors.

How to apply lean principles in P2P

The heart of the lean concept involves the reduction of waste. Waste can be grouped into two categories: non-value-added activities, and necessary non-value-added activities. This article focuses on the wastes generated from non-value-added activities, although the necessary non-value-added activities should also be a focus for organizations for the longer-term.

There are eight types of wastes attributed to the non-value-added activities:

Type of waste Description Example of P2P waste
Overproduction Doing or manufacturing /creating more than is required
  • Generating reports that are not meaningful and not used
  • Shadow organizations or the duplication of work being done across the organization
  • Completing sourcing projects but not fully implementing across the organization
Waiting Waiting for an activity/document to be processed before it can move to the next step
  • Waiting for a purchase requisition to be approved for a low dollar amount
  • Waiting for an invoice exception to be approved for a low dollar exception
  • Waiting to locate a viable supplier or responses from supplier
Conveyance The action of moving or transporting items/documents from one place to another
  • Moving or printing documents for storage
  • Opening envelopes and moving paper invoices from mailroom to AP
Processing Unnecessary or extra process steps
  • Manual entry of invoices, manual workflow approvals for POs and invoices
  • Manual approval for contract review (even with the availability of contract management system)
Inventory Abundance of work-in-process that is incomplete
  • Requisitions waiting to be converted into POs (waiting for supplier information, etc.)
  • Time coordinating with suppliers (forecasts, supply availability, POs, ASNs, quality), latency in the extended supply chain
  • Invoices waiting to be approved
Motion Unnecessary physical people movement
  • Looking for matching documents in various places
  • Reviewing paper/book catalogs for items
  • Documents that need to be physically delivered for approval
Correction Errors that need to be corrected
  • Incorrect information on catalogs
  • Invoice thresholds that are too rigid
  • Requisition approvals that are too rigid
Intelligence Underutilized resources focused on administrative tasks
  • Sourcing/category managers focused on one-off pricing issues rather than strategic category/supplier management

 

 Available tools to deploy lean

There are various lean tools that can be applied to the P2P projects listed above. The basic ones include:

Tool/Technique Description
Value stream mapping To illustrate the flow of material and information
Cause and effect To create a fishbone diagram that helps visualize the potential root causes of a problem
Handoff mapping To create a diagram that helps illustrate the number and flow of handoffs across a process
Work standardization and simplification To help standardize and streamline work and policies

 

Common P2P projects that might benefit

The application of lean and its capacity to deliver value within P2P is significant. There are different types of P2P projects (and even beyond P2P) that will benefit from the application of lean and lean techniques to include:

Area of focus Common symptoms Description of P2P Projects
Requisition
  • Long requisition-to-PO cycle time
  • Internal customers who voice frustration about the cycle of the buying process
  • Multiple rework on requisitions
  • Large number of suppliers

 

  • Conduct value-stream mapping of requisition to PO process to determine the flow of requisition, number, sequence, and threshold of approvals
  • Understand customer pain points
  • Review opportunities to enable more contract or catalog-type requisitions that will enable pre-populated information
  • Simplify requisition process through introduction of guided buying experience
  • Conduct value-stream mapping of vendor master process to include supplier onboarding and due diligence
PO processing
  • Long PO cycle time
  • High proportion of non-catalog-type orders
  • Review root cause of long PO cycle time and high proportion of non-catalog orders, which may be a result of inadequate catalogs or insufficient training/awareness
  • Review number of PO changes
  • Review time spent coordinating with suppliers
Receipt processing
  • High count of receipt exceptions
  • Invoice mismatches from incomplete receipt processing
  • Lengthy receipt-process cycle time
  • Conduct root cause of receipt exceptions, which may be a result of receipts required for all purchases (including low dollar items)
  • Evaluate the time it takes to receive goods and services
Invoice receipt
  • Invoices entered much later than the invoice receive date and/or due date
  • Late payments to suppliers
  • Inability to capture discount terms
  • Conduct value stream mapping of invoice receipt to payment to identify handoffs that occur and root cause of errors
  • Eliminate paper invoices through the enablement of more suppliers via a supplier network
Invoice entry
  • Invoice exceptions from data-entry error
  • Duplicate payment from entering a duplicate invoice
  • Payments made with incorrect payment terms
  • Conduct supplier enablement training to ensure that supplier invoices are entered via a portal that features built-in data-validation rules
Invoice reconciliation
  • High proportion of invoice exceptions
  • Large number of disputes
  • Review cause and effect of invoice exceptions – types of invoice exceptions, threshold of invoice exception, and AP group that has permission to do what within the software solution
Payment
  • Late payment to suppliers
  • Early payment to suppliers
  • Inability to capture discount terms
  • High volume of calls from suppliers requesting payment advice
  • High number of manual paper payments
  • Review cause and effect of late and early payment – who needs to approve invoices, what is causing early/late payments, timing of when payments are usually late or early (end of month vs end of quarter)
  • Pay electronically

 

How do I start?

To enable long-term, sustainable lean results, dedication and long-term focus is necessary. However, for starters, the projects above can be completed by dedicated resources who have embodied the lean concept and thinking to immediately “lean out” your P2P process. An immediate way to start is by measuring your current process performance and benchmarking your performance against your peers. One such resource is the SAP Ariba Benchmark Program. The benchmark program is a free resource that will help kick-start your journey to operational excellence.

References:

Buxton, M. & Jutras, C. (2006). “The Lean Supply Chain Report.” Aberdeen

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About KayRee Lee

Kay Ree Lee is Director of Business Analytics and Insights at SAP Ariba. Kay Ree has specialized expertise in procurement, sourcing, vendor management and analytics. He is a results-oriented, hands-on leader with experience improving the performance of Fortune 500 and small to midsize companies. He is based in Atlanta, GA.