Published: April 01, 2012
Many companies, including Bayer MaterialScience (BMS), have invested significant human and financial resources in optimising their cash management and banking activities so that payments are transacted securely, efficiently and cost-effectively. To achieve a truly efficient payment process, however, companies also need to focus on the activities that take place before the release of the payment file to the bank, and ensure that every step in a payment cycle is optimised. At BMS, the procurement department owns the entire purchase-to-pay (P2P) lifecycle, so we had the opportunity to identify where surplus costs or inefficiencies existed, with a view to streamlining and optimising the entire process.
In 2010, we undertook a review of the costs inherent in our P2P cycle. We had over 15,000 external vendors, with around 1,000 new vendors each year. These were distributed globally with different requirements in each country and varying degrees of risk associated with each supplier. Internally, we had several shared service centres (SSCs) in Spain, Germany, South America and Asia, with rising personnel costs. Although we maintained a single ERP (enterprise resource planning), we had three separate instances, resulting in different processes in each SSC, with a large number of manual tasks. These manual processes relied on a high level of resourcing and were prone to error, which in turn resulted in additional cost. With over 3,000 FTEs [full-time employees) approving invoices across the business, approval processes were also fragmented and diverse. Technology was also an issue, as we needed to ensure that this was maintained effectively with new innovations introduced as necessary to ensure that we were able to demonstrate best practices in security, efficiency and compliance.
As a result of this analysis, we found that our purchase-to-pay costs were increasing year on year due to the growth of our supplier base, rising resourcing costs, and a lack of capacity in our systems and processes to absorb higher volumes. In addition, we were not leveraging economies of scale or opportunities for innovation in our technology infrastructure.
We therefore made the decision that the less that individuals had to interact with payment-related information, and the more standardisation that we could achieve in both data and processes, the more efficient and cost-effective we could become. In particular, we identified that the original initiation of a payment, through raising a purchase order, needed to be more automated and standardised, which would then facilitate further automation further along the payment cycle, through invoicing, approval, payment and releasing the payment file.[[[PAGE]]]
To achieve this, we embarked on a project to explore and optimise the entire payment cycle from end to end. The first step in achieving this was to create a P2P process map to illustrate where resource requirements were the heaviest and therefore where we should direct our efforts. We resourced the project with members of the Bayer team, and appointed a project manager who worked full-time on the initiative for two years. We also drew on expertise from other departments, such as treasury and IT, whenever necessary. Overall, we calculated that the project cost was around $0.5m, which we would recoup within the first year (an objective we achieved), therefore providing a very strong business case for the project.
The success of our project was dependent on having a large proportion of purchase orders, which would enable us to automate the entire P2P process by maintaining referential continuity. In addition, we had a large proportion of electronic contracts, which also supported the inclusion of high quality information throughout the process. As a result, we were able to embark on a series of initiatives, including:
ERP standardisation – although SAP was already the backbone of our procurement department, we had three different set-ups in place. Therefore, we rationalised our infrastructure to achieve greater automation and reduce maintenance costs.
Online ordering – for regular day-to-day purchases, such as office supplies, we introduced an online portal (named ‘ProCURE’) which enables employees to browse suppliers’ electronic catalogues and order the items they require for direct delivery. This streamlines the purchase initiation process considerably, and allows us to capture the relevant data for approval and invoicing automatically.
PDF invoicing – we introduced greater automation into the purchase order issuance and invoicing processes. We automated the production and transmission of purchase orders as far as possible, and encouraged suppliers to send PDF files electronically in a standard format which we could then convert using OCR (optical character recognition) in order to process electronically.
eInvoicing – in addition, we introduced full integrated eInvoicing and standard formatting to enable direct integration with EDI and facilitate easier integration with banking systems.
Standardised approvals – we introduced standardised approval processes for both internal and external invoices to streamline and accelerate approvals.
Migration from cheques to ACH payments - we recognised that we could reduce printing, mailing and transaction costs by using electronic payment methods to pay suppliers whenever possible.
Through these initiatives, we have improved on our P2P metrics substantially. For example, we have increased the automation of our purchase order issuance by 28% and added 291,000 automated purchase order lines. Every region has experienced a significant improvement in process automation (figure 1) particularly Europe and Latin America. Asia remains the most difficult region due to the variety of different legislative requirements across countries. However, with the go-live of our single SAP instance at the beginning of 2012 we expect Asian automation metrics to be on a par with the rest of the world. We were also able to increase the proportion of invoices paid on time, with 90% of invoices in the US paid on time by end of 2011. Automated matching between purchase and orders improved dramatically, from less than 60% in 2010 to more than 90% by end 2011. While internal invoice handling took up to 25 days in 2010, this plummeted to less than five days on average by end of 2011, with 98% of invoices now received directly into SSCs.[[[PAGE]]]
The financial implications have also been considerable. We have reduced our invoice processing costs by 20% in two years, and we are in a position to increase capacity by 25% whilst keeping our costs stable. Our supply chain financing programme has already reached $600m, which represents around 10% of our total global purchasing volume and considerable working capital benefits. There are also qualitative benefits across our entire P2P optimisation project in terms of supplier and staff satisfaction.
There were some important factors that led to the success of this project. Firstly, a shared services model, with SSCs located in low-cost countries, is vital to reducing costs. Invoices can then be received centrally so they can be processed consistently and systematically, standardising invoice layout as far as possible to allow OCR.
While the purchasing and accounts payable functions are the primary departments involved in such a project, internal partners also have a very important role to play. For example, we engaged treasury and finance to enable a shift from manual payment types, such as cheques, to ACH payments. Legal helped to standardise contract terms, which in turn made it easier to standardise documentation and processes. Similarly, external partners were critical to success. For example, we needed to work with our banks to enhance both electronic payment and information processing. We also engaged with our suppliers to consult on purchase order and invoice processes, and alternative forms of payment.[[[PAGE]]]
Supplier engagement led to a range of benefits. Not only could we enhance our internal P2P processes, but we also used the opportunity to introduce a supply chain financing programme. This is valuable both in supporting our suppliers during a period of constrained market liquidity and in enhancing our own working capital position. We started with suppliers to our three largest entities in the United States, Germany and Belgium, and we are now rolling out the programme more widely. Our intention is to expand supply chain financing globally, but there are some countries such as China where there may be legal constraints.
There are inevitably some challenges with a project of this scale and complexity. Achieving standardisation globally is fraught with difficulties due to varying legal requirements in each country, requiring significant input from the legal team. It is also important to remember that a P2P project has a variety of stakeholders, both internally and externally, who all need to support the initiative. We found this easier than we had anticipated, as there was a compelling business case, a rapid payback, and advantages for all stakeholders. The most challenging element of this is working with suppliers, who potentially need to change their processes, for example to support eInvoicing, which brings cost and resource implications. We took time to develop a positive and compelling message, emphasising the benefits, such as timely payment, fewer disputes, and the opportunity to join our supply chain financing programme.
Looking ahead, we are focused on delivering further process enhancements, such as increasing the coverage of our online purchasing platform, ‘ProCURE’, which is a highly efficient procurement tool. We will also extend the reach of our supply chain financing programme to new regions and suppliers. Fundamentally, we recognise that success is based on collaboration and integration between business functions and both internal and external stakeholders. By bringing everyone together, with a common objective, there are substantial improvements that we can continue to achieve.
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