Framing the challenge of AP inefficiency and lost opportunity in terms of PPM and manufacturing defect rates is astute indeed (check out our initial coverage of the topic based on OB10’s recent eBook covering the subject matter— E-Invoicing and Supplier Networks: Reframing Success and Failure in Manufacturing Terms). Continuing on with this analysis (read Part 1 here), we come to the importance of conducting what Danny Thompson calls a “root cause analysis.”
For manufacturing types trained in Six Sigma and continuous improvement approaches, understanding the root cause of failures and sub-optimal performance is as ingrained as showing up for a production shift on time. Yet, such practice is surprisingly not widespread in AP and finance. Where should one begin? Thompson suggests that while “many companies report on blocked or failed invoices, together with the corresponding reason codes … they seldom examine their exceptions on a case-by-case basis to understand why they are occurring and how to eliminate them at source.”
Invoices can fail for a lot of reasons, and they don’t always fail for the same ones, though those flagged for exceptions often cluster into a handful of areas. For example, as Thompson notes, invoices may fail due to price discrepancy. But why? Thompson suggests that “by looking at specific examples, you are more likely to get to the bottom of the problem: was the item ordered off a catalog? Was the pricing updated correctly? Was the supplier or procurement at fault?” Moreover, “if Procurement instructs AP to reject invoices, it is usually a supplier-related issue however, if Procurement adjusts the PO to match the invoice, then it is probably a Procurement issue that can be addressed through training or a change to the standard procedures.”
The power of root cause analysis lies in that it can help organizations to understand the “magnitude of exception issues” and to “prioritize efforts.” This is true on the shop floor, in on-boarding new suppliers and, of course, in the backwater of AP, an area of the business that is just waiting to be measured and for root cause elements to come to the surface.