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The Supply Chain Management Blog covers the latest in SCM strategy, technology, and innovation.

Controlling Costs with Smarter Procurement

Guest Author

Jim D’Addario, Director Product Marketing SCM, Cloud GTM SCM

From office supplies to raw materials to machinery parts, businesses are continually making purchases to ensure their employees have what they need to be productive and keep the manufacturing lines running. Procurement is a critical part of the business that ensures uninterrupted supply, consistent supplier performance, risk mitigation and keeps costs under control. On the latter, to control costs, buying activities must be managed because of the effect they have on profit margins and the company’s cashflow. Managing a company’s spend is a top priority, but many organizations today lack effective processes and controls over employee buying activity.

Procurement: Holding the Line on Expenses

Procurement is a complex discipline covering many activities.  For many companies though, getting basic purchasing activity under control can be a challenge. It’s a problem that can be blamed, in part, on the tools businesses are using to manage their procurement processes. Smarter spend management involves both incentives and deterrence. Many businesses struggle with getting spending under control because they lack the systems to support it. eProcurement systems emerged in the 1980’s as a component of larger on-premise ERP system deployments.  However, legacy eProcurement systems—those that manage the transactional purchasing by employees—were often difficult to use and expensive to deploy. Their intimidating user experiences were often a deterrent, enough for well-meaning employees who simply gave up in frustration and “went around” the process. Still other companies, including small and mid-size businesses, simply didn’t consider deploying eProcurement systems. Instead they focused on financial management systems in an effort to get their finances in order.

The Downstream Effect: How Unchecked Spending Impacts Productivity

One  company, a fast-growing provider of medical language interpretation services, followed that formula. However, several months after deployment, the company’s controller found her finance staff overwhelmed with invoices from vendors with no reference to a purchase order. Perhaps even worse, her finance staff had no way to identify the employee who made the purchase. As a former accountant for a regional developer and property management company, I can personally attest that processing “orphan invoices” was the least favorite part of my job. The hours I would spend attempting to find out “whodunnit” were almost as enjoyable as receiving phone calls from vendors attempting to collect on their overdue invoices. To add insult to frustration, most of our vendors were contractors or building supply companies, prone to using colorful language to emphasize their point. which gave me a new appreciation for parking enforcement officers! Going back to our language translation company. Their controller recognized she had several big problems, including:  

  • Out of control spending
  • The burden placed on her staff who received invoices from over 2,500 different vendors
  • Each of the vendors had to be manually entered into her ERP system
  • Every invoice lacking a purchase order had to be verified with the purchaser in order to approve it for payment.

Advantages of  Integrated eProcurement and Financial Systems

The company controller deployed Oracle Procurement Cloud along with her Oracle Financials Cloud providing a control mechanism, making it easy for employees to find the products and services, resembling an eCommerce website experience. With such an easy buying experience, employees could find everything they needed from approved suppliers and vendors. Also,  employee requisitions were automatically routed to an employee’s manager for approval through system approval workflow rules. Only then did the solution generate a purchase order to send to the vendor. With a firm “no PO, no pay” policy, the company’s vendors quickly got the message. Now her accounting staff receives invoices with PO references, and in most cases are processed automatically by matching the PO to the invoice and an “OK to pay” authorization. The result: a 12% reduction in expenditures and an impressive annual reduction in invoice processing times by over 2,000+ man hours.

Creating Strategic Value with a Better Procurement

Procurement organizations provide increasingly strategic value to their companies. However, for many companies, in order to shift the focus to more strategic activities it requires getting the company’s transactional procure-to-pay processes under control. Often, that requires a combination of eProcurement systems that make it easy for casual users to find what they need quickly along with compliance enforcement through approval rules and purchase order creation that ultimately makes Accounts Payable much easier—if not completely automated—and reduces the company’s expenses considerably. For more information on Oracle Procurement Cloud, please click here.

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