A Supplier’s View of the P2P Process at a Large Chemical Company

A large chemical company was seeking to build and extend relational capital with suppliers, by building trust and becoming the “Customer of Choice.” The capital gained through this approach can result in preferred supplier delivery priorities, information sharing, participation on supplier councils, and other important rewards. Some important elements in becoming a “Customer of Choice” are to enable rapid payment, provide equitable and ethical treatment of suppliers, and focus on improving the procure to pay (P2P) process.

To address some of the major problems identified by suppliers, the company interviewed suppliers to identify their experiences with the current procure to pay process with some of their major customers. The most common symptoms experienced by suppliers involve high manual workarounds required to address problems, long cycle times for payment, no central point of contact, and a problem with matching the purchase order (PO) and invoice.

Suppliers interviewed also noted a number of root causes associated with the P2P problems. The most common root causes were associated with the lack of a formally designed P2P process, the lack of a central relationship management, and problems associated with supplier interfaces with their enterprise resource planning (ERP) system. Other reasons included the increased complexity associated with ERP catalog and line items, and the lack of a forecasting process.

Suppliers believed that the fundamental root causes are the lack of a process with designated roles and specific processes; an associated problem is that different internal and external functions are not defined. Maintenance people, buyers, planners, schedulers, accounts payable, project planners, and others are not in synch. Further, the system is not designed to be able to withstand the various approaches by which people enter data and request information. When too many people are not using the system in a unified manner, it is no wonder that the system rejects the input and causes problems. This points to a choice: either the tolerances of such systems must be changed, or the manner in which the system is used must be changed.

RECOMMENDED SOLUTIONS

Suppliers recommended that their customers explore the following solutions: redesigning the P2P process, developing a dedicated relationship manager to work with suppliers on key areas of interface, exploring the use of a vendor portal using the CATS interface in SAP, and reducing catalog items through a spend analysis to reduce the inherent complexity of entering information into the SAP system.

These responses by and large provide significant insights into the problems and complexities associated with improving the P2P cycle from a supplier’s perspective. Unfortunately, these issues also translate into significant problems for the purchasing company, and this is often lost in translation when the need for P2P improvement is communicated to a senior management team.

Late payment and excessive workaround to obtain payment in a timely manner will definitely in- crease the cost to serve for companies with a broken P2P process. Some of the typical problems that can occur when a malfunctioning P2P process is not fixed include the following events (adapted from Handfield 2006):

 Deteriorating response time from suppliers, which have no motivation to improve

 performance and respond quickly to a customer that fails to pay them for 90 days or more

 Lower service levels from suppliers, which may choose to service their more prof- itable customers first in their Cost to Serve Model

 Deterioration as the “Customer of Choice” in the minds of suppliers’ senior man- agement, which further breaks down trust and strategic alignment

 Delivery delays

 Higher pricing due to the cost of money that is attributed to late payment and excessive personnel allocated to the account

 Increased personnel on non-value-added activities (e.g., chasing payments) to the detriment of other value-added activities that can improve customer service

 Loss of the supplier as a critical link in the supply chain

 Higher costs internally for the purchasing company, which must also dedicate AP people and buyers to non-value-added activities

Many people new to procurement often have the wrong impression about how complex this function really is. A typical response is “Why can’t you just go out and buy it! I do all of my shopping online at Amazon—why can’t I do that at work?” In fact, the purchasing process is a good deal more complicated than doing your Christmas shopping online at Amazon or Best Buy or Target. The process is always changing, and supply managers are continuously working to improve its efficiency and effectiveness.

In this chapter, we cover the major types of activities and responsibilities that supply managers follow in conducting their duties. As shown in Exhibit 2.1, The purchasing process is used to identify user requirements, evaluate the user needs effectively and efficiently, identify suppliers who can meet that need, develop agreements with those suppliers, develop the ordering mechanism, ensure payment occurs promptly, ascertain that the need was effectively met, and drive continuous improvement. In every step of this process, managers are challenged to ensure that internal users are satisfied with both the process and the outcome. This chapter introduces the following topics and ideas associated with purchasing in multiple industries:

• Purchasing objectives

• Purchasing responsibilities

• E-procurement and the procure to pay process

• Types of purchases

• Purchasing process improvements

• Good practice example at Federal Express