Supplier Statement Audit Can Provide Important Insights Before Your Next Sourcing Decision

With the increasing pressures on the profit margins, the efficiency of the procure-to-pay (P2P) processes has been under intense scrutiny within an enterprise. Typically, Procurement and Finance organizations manage various aspects of P2P processes. Thus, for a successful execution of the entire P2P process, each organization needs to understand the actions and motivations of the other. This P2P mindset threads procurement and payment activities into one continuous lifecycle.

With this in mind, it's worthwhile to consider the details of the entire cross-functional process. At the front end, one will encounter any number of sourcing and procurement activities where highly trained professionals are chartered to identify the best suppliers to buy the best products or services at the best cost of ownership. At the far end of the P2P lifecycle, one will encounter Accounts Payable (AP) department whose goal, as told to me by one industry expert, is very simple, "To pay the right entity, the right amount, at the right time." This is a simplification of course, but generally, all professionals in the space are pursuing some combination of these stated objectives.

Typically these departments are measured, evaluated and guided through an exhaustive suite of metrics. A number of sophisticated software applications and service providers stand ready to review, in fine detail, how efficiently resources are being spent across commodities, geographies, business units and supplier types.

Having been a practitioner in this space, I can tell you that even though the concept is simple, AP departments face a number of external factors that constantly challenge their ability to achieve transactional perfection. As a result, the last decade has seen the emergence of a supplier statement audit, which routinely reviews the transactional (read: payment) history of the enterprise (by way of collecting and reviewing the AR records of suppliers) to determine the efficiency of the payment processes. For too long, such supplier credit recovery has been confined to the AP suite as a tool for improving the efficiency of Accounts Payable. With increased focus on the broader P2P process, supplier credit recovery audit results should be more frequently evaluated by the procurement professionals in the context of the larger supplier management process.

There are many benefits to combining supplier statement audit results into the associated procurement metrics, such as supplier scorecards or spend analytics. Procurement departments have as much or more to gain by evaluating the results of the recovery effort as do AP departments. Here are just a few ways procurement can gain from incorporating a review of statement audit results:

  • Supplier AR can reveal profit leakage, which procurement needs to understand in order to assess larger budgeting or savings opportunities that may exist.
  • Analysis of recovery claims can reveal valuable insights that will better inform future procurement activities, such as overlooking the related nature of separate suppliers and missing out on pricing discounts.
  • Procurement can identify suppliers that routinely commit transactional errors and incorporate those suppliers' lack of accuracy in the supplier scorecard for a more holistic supplier evaluation.
  • The recoveries uncovered through this activity are almost always a manifestation of decayed supplier data in the ERP system. These discoveries can be addressed to improve communications and transactions with suppliers.

As a best practice, build in a process to review supplier statement audit results before your next supplier strategy review. It will provide important insights for managing suppliers.

To read more about this process, you download a recently published white paper here.

-- Aloke Bhandia, Sr. Director, Product Management, Lavante

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