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Why you are thinking about direct spend AP automation all wrong

In light of all the disruption over the last year, businesses must re-examine how they operate, and bottlenecks in back-office operations are ripe for digital transformation that can make companies more agile and resilient.

One of the key chokepoints where supply chain operations teams think about procurement technology the wrong way is believing that an indirect AP automation solution can solve direct invoicing as well.

The nature of what’s being bought in direct procurement is more detailed, so your solution needs to account for that. Indirect spend invoices need to be matched on the total amount due, but direct spend invoices require line-level matching of purchase order number, part number, quantity received, unit of measure and pricing. And since invoices can contain parts from multiple purchase orders, AP automation for direct spend requires much more sophistication.

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If your company uses an indirect AP automation solution, it will handle the purchasing of supplies and services, like cleaning crews or IT help, really well because the invoices are straightforward and can easily be checked by a computer once the stacks of paper invoices are digitized. Digitizing paper invoices is necessary to facilitate automation, but it’s just the first of many steps to process and pay a direct spend invoice.

When your company relies on procuring raw materials from hundreds of suppliers, the price, dates, and receipts often change after those materials are ordered. Dealing with those changes requires a more robust technology that can parse and match invoices with purchase orders and receipt data. After matching an invoice to the appropriate purchase order and receipt data, the solution then needs to reconcile the price, date and quantity for every line of the invoice.

In general, direct material purchases are more prone to change throughout the lifecycle of a PO, which is why you need line-level matching. Without granular line-level matching, up to 40% of direct spend invoices will fail to match automatically, take longer to process manually, and increase the chance of overpaying or underpaying suppliers.

Let’s take a closer look at the issues that are holding companies back and the ways in which digital transformation can help.

Why is line-level matching so difficult?

Several factors specific to direct manufacturing complicate the invoicing process.

After purchase orders are sent from the ERP, buyers and suppliers often need to change things like delivery date, quantity and price. But even if those variations fall within a set percentage of difference, there’s a good chance the final PO won’t match what the supplier sends on its invoice.

Indirect solutions match the totals seen on POs with what’s on the invoice. Since orders for indirect items rarely change, that approach works for indirect spend. But because direct spend invoices can contain lines from several POs and because suppliers ship materials at staggered intervals, the total costs on a direct invoice rarely line up well enough for a computer or manual process to make a basic match.

To further complicate matters, change orders from suppliers or buyers can make it more difficult to reconcile a direct invoice with the final, agreed-upon PO. Since 40% to 60% of purchase orders change after they’re issued and before the goods are received, there’s a good chance that an invoice won’t match the final, corresponding PO.

How is direct spend AP handled today?

AP professionals who process direct invoicing today know the attention to detail needed for line-level reconciliation. That’s what it takes to be accurate.

But getting there is difficult. Suppliers send invoices as PDFs, emails, Word docs, spreadsheets and some still use paper. That variety creates a lot of manual effort to process, and lots of opportunity for mistakes.

Many companies can’t justify the number of employees it takes to move paper around and manually reconcile invoices when those tasks can be automated. Automation also, frees people to do strategic tasks like collaborating with vendors, finding innovative suppliers or exploring new savings opportunities.

How can automation help?

The key hurdle for direct spend invoicing is the inability to move beyond the basics. All AP automation solutions can extract data from invoices, but not all solutions can parse them down to the line level to unpack the part numbers and look for mismatched prices, receipts and units of measure.

Systems that automate the AP process — and that can read and match to the line level — should be able to automatically approve 95% of direct spend invoices. That includes digitizing them with OCR (optical character recognition) and then assessing them against the POs and receipt of goods to find and reconcile all of the problems and variations that we mentioned above. AP staff can then focus on resolving the remaining 5% with exceptions.

Napoleon Products, a manufacturer of grills and fireplaces looking to improve its ERP, said AP automation helped streamline its operations.

“We had a 95% reduction in supplier invoice discrepancies — mostly around pricing. So, where the supplier would have come back and maybe given a different price or something that wasn’t caught in our manual process. So, we went from having 10 to 12 pricing discrepancies every day to having 1 or 2 per week. That’s a huge reduction,” said the company, which uses a SourceDay solution.

The right digital automation drives that kind of scalability. Because it helps companies add more business without also having to hire more people to read and reconcile more invoices. The solution can shoulder more work, and the process will get easier as companies standardize supplier invoices as digital documents that can be automatically processed.

This automation also gives finance teams clearer visibility to outstanding liabilities, making it easier to close the books each month. Everyone wins: Companies process invoices faster and more accurately, and suppliers get paid quicker.