How B2B Integration Automates the Procure-to-Pay Cycle for Manufacturing Companies

Large companies in the aerospace, automotive, high tech and industrial manufacturing sector purchase trillions of dollars of goods every year.  Most of the purchases consist…

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August 10, 20124 minute read

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Large companies in the aerospace, automotive, high tech and industrial manufacturing sector purchase trillions of dollars of goods every year.  Most of the purchases consist of raw materials, component parts or finished goods which they take into their manufacturing plants to create products.  It would not be uncommon for a $5 billion manufacturing company to issue several hundred thousand purchase orders during a single calendar year.  There is a tremendous amount of overhead associated with managing each of these orders throughout its lifecycle as they are acknowledged, changed, acknowledged again, received, invoiced and paid.  Integration technology eliminates many of the manually intensive processes associated with purchase order lifecycles.

Traditionally purchase orders were created in an ERP system then printed, faxed, e-mail or phoned to suppliers.  The supplier would rekey the data into their order management system.  The sales team at the supplier often took liberties with interpreting illegible data, filling in missing fields or substituting line items that were out of stock.  These “value added” activities during the order entry process contributed to lower fulfillment quality.  Furthermore, buyers often lacked visibility into whether an order had been acknowledged by the supplier indicating that they could, in fact, ship the quantity of goods requested to the specified location on the desired date.  As a result, buyers had to phone the suppliers on a regular basis to assess the status of orders. 

With B2B integration technologies such as EDI, many of these administrative challenges went away.  The purchase order was sent electronically into the supplier’s fulfillment applications for immediate processing.  An electronic acknowledgement could be returned to the buyer indicating the supplier’s ability to fulfill the order in part or in whole according to the specified terms.

The receiving process at a manufacturing plant or warehouse location also traditionally created challenges for buying organizations.  Receiving personnel at these locations lacked visibility into what shipments were going to arrive and when.  Several inefficiencies are created by a lack of awareness of inbound shipments.  First, the warehouse personnel could not plan their work schedules.  It is impossible to determine how many people would be required and what times to support unloading of shipments from the trucks.  Second, the warehouse personnel could not arrange for outgoing transportation of goods not needed in inventory.  Ideally, the inbound shipments would be unloaded from a truck then immediately cross-docked to another outgoing truck taking the products to their final destination – a customer’s location; the company’s own manufacturing plant; or another warehouse.  Third, since the supply chain organization did not have visibility into the locations of inbound shipments it did not have a good sense of how much inventory was in-transit.  To reduce the risk of out-of-stocks many companies would store buffer inventories in their supply chains (and their balance sheets). 

With B2B integration technologies such as EDI, many of these visibility challenges could be eliminated.  Suppliers could send advanced shipment notices from their warehouse systems directly into their customer’s warehouse applications.  As a result the customer would have visibility to which shipments were arriving on what dates, via which carriers, containing which contents. This would enable the receiving team to better plan its labor schedule, arrange outbound transportation and lower buffer inventories.

The accounts payable processes, which represent the tail end of the order lifecycle, have also suffered from high levels of inefficiency.  Invoices were received via postal mail or e-mail.  The invoice needed to be printed off and then rekeyed into an accounting system.  If certain critical fields such as the “remit to address” or the “general ledger code” for the purchase were omitted then the accounting clerk would need to phone the supplier to obtain the requisite information.  The invoice then needed to be matched against the original purchase order and the warehouse receiving records to confirm that what was invoiced is actually what was ordered and received.  Discrepancies resulted in a deduction taken against the order. Once the invoice was approved a payment instruction would be created then routed to the bank.

With B2B integration technologies such as e-invoicing, many of the administrative costs associated with invoice processing were reduced considerably.  Invoices arrived electronically into the buyer’s accounts payable system.  The invoices are automatically validated and matched against the corresponding receiving records and purchase order to identify discrepancies.  The invoice then flows through an approval process before being released for payment.  Because the process happens so quickly there is an opportunity to pay the invoice faster.  Usually a buyer will demand a discount against the invoice in exchange for an earlier payment to reflect their working capital costs.

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OpenText, The Information Company, enables organizations to gain insight through market-leading information management solutions, powered by OpenText Cloud Editions.

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