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GE Global eXchange Services

For more than 20 years companies worked to eliminate paper from the cumbersome order-to-pay cycle. Electronic data interchange (EDI) was touted as the wonder application, though it failed to eliminate all paper from the process. Realistically, a cornucopia of solutions is needed to fully automate the cycle and deliver cost-saving benefits.

Historically, the area that resisted automation the most has been payment processing as suppliers were unable to receive payment details. According to the Federal Reserve, only 17 percent of all business-to-business (B2B) transactions are settled electronically, with the actual remittance data often supplied by mail or fax.

The new millennium began with the euphoria generated by the Internet. It promised that new technology would eliminate nearly all paper business transactions. New industry exchanges were announced almost daily and the press wrote obituaries for EDI and Value Added Networks (VANs). Yet, today little has changed. Why?

One key reason paper still exists is due to the hype on how firms sell and, to a lesser extent, buy. Little attention was paid to the internal processes in a business. Success was measured by the number of hits on a company’s Web site or by how much price deflation an auction could generate. In contrast, existing business functions, such as the accounts payable (AP) department, were overlooked in the excitement of the new technology. However, these business functions are ripe for change. Few improvements have been made over the years: clerks still match documents, answer the phone, and try to explain to suppliers that their payment is being processed in the system. For proof of this, one only needs to call an AP center where the first question asked is, “What is your invoice number?”

Current AP Operations

Even today, AP function in most businesses is a manual operation. Paper invoices are received through the mailroom and distributed to the buyer or requester for approval. Accounting information is then added and the document is signed and forwarded to the AP department for matching and payment. According to industry sources, this is an error prone process that averages 25 days, eliminating any chance of making a prompt payment and obtaining available trade discounts.

Attempts have been made to automate at least part of the process. Some companies continue to receive paper but will electronically scan the documents and then send the approver an email message requesting he review the document online. He approves it and adds the accounting information. Others receive the invoices and then manually input the details directly into an accounting system. Several companies combine both processes by sending the scanned images to a third party, often offshore, for data entry.

Once in the system, automated matching takes place. All items that fail are sent to a resolution cue for manual intervention.

Best Practices

Before beginning to improve the current processes, a company must first decide on its goals. Is the goal to obtain a trade discount, take cost out of the AP operation, or simply eliminate paper from the inbound invoicing process?

After deciding on the goal, the company must first review the current processes and measure the defects or points of failure. In GE’s case, the goals are to increase trade discounts and reduce AP costs. Studies indicated that GE was unable to obtain discounts on 77 percent of all invoices processed. An analysis of the AP data from GE showed that although paper made up 60 percent of all invoices processed, paper invoices represented 80 percent of all the defects.

Proposed Solution

There is no single solution that will eliminate paper completely from the invoice-to-payment cycle. But, there are four areas where digitization can vastly eliminate paper: P-Card, evaluated receipt settlement (ERS), Web invoicing, and EDI.

P-Card

An analysis of invoices processed through GE’s largest AP center showed that 82 percent of all invoices were for amounts below $2,500. These purchases are prime candidates for a P-Card.

The benefits of P-Card include the elimination of the invoice completely as the payment authorization is handled directly from the purchase order (PO). In addition, the P-Card provider can handle all accounting as the accounting information is derived from the card number and general ledger updates are provided directly by the credit card issuing banks’ reporting system. To a supplier, the key benefit is that settlement usually occurs within 48 hours.

The drawbacks to P-Card include potential loss of discount as the supplier is charged the interchange fee on the amount charged. The buyer also bears the risk that the ordered goods will not be shipped. In addition, users may misuse the card.

Evaluated Receipt Settlement

Evaluated receipt settlement (ERS) works on the principle that payment can be made directly from receiving. Once the goods are received, the details are compared to the purchase order, price is taken from the PO, and the payment amount is calculated. If necessary, tax can be calculated and paid directly to the tax authorities.

Benefits are similar to P-Card as the invoice can be eliminated completely. In this case, all accounting information and approvals are derived from the PO. Trade discounts are captured as payment is initiated immediately upon receipt.

ERS is well suited to direct material purchases, preferably ones where there is no tax calculation required. However, ERS is not easy to implement. Clean accurate receiving is required and the supplier has to be advised of exactly what is being paid. In addition, the buyer must correctly calculate tax, pay the tax to the supplier, or, if using a direct pay certificate, account for all tax paid. In effect, the buyer is creating the invoice on behalf of the supplier.

Web Invoicing

P-Card and ERS can eliminate the invoice in many circumstances. Many situations exist where the invoice will remain, mostly for services. The ability for the supplier to access the PO and turn it into an invoice online has benefits for both parties. For the buyer, matching errors are greatly reduced as PO details are carried forward onto the invoice. For the supplier, the error reduction, coupled with the electronic submission, means they are paid promptly.

Matching and approvals still need to take place with Web invoicing, but these processes are automated. PO and receiving data are stored in the system and an invoice is automatically compared with the data. If the invoice matches, accounting information is automatically added from the PO record and the document is sent onto AP for payment. If approvals are required, such as service invoices, the appropriate approver is then notified by email to review the invoice and approve.

EDI

EDI is still an extremely viable option for large volume, automated systems. Large numbers of documents can be processed effectively and inexpensively. Despite threats that EDI would become obsolete due to new Internet technologies, the more conventional wisdom of “if it ain’t broke, don’t fix it” has been the norm. The key is to combine EDI with the new Web-based systems that utilize XML or HTTP.

The final step in the AP process is payment. Payment by check is usually the most common means of payment in the United States. According to the National Automated Clearing House Association (NACHA), only 17 percent of B2B payments are made electronically. Why? One key reason is the delivery of the remittance detail. Electronically, the EDI 820 can be used, but very few companies handle this document and few banks handle the ACH equivalent the Certified Trade Exchange.

The solution is to utilize the same system that displays the PO for invoicing to display the remittance information for the supplier. A second benefit is that all four documents – PO, invoice, receiving, and remittance advice – are tied together electronically. In addition, the remittance details generated by ERS payments are posted, giving the supplier a complete view of all transactions.

Conclusion

To be successful in automating the complete order-to-pay cycle, a company must have a clear understanding of its goals, ensure that the purchasing department and the AP department work together, and recognize that more than one solution is most likely needed to solve the problem.

The key to success lies in the purchasing discipline within the organization. If the purchase request is approved at the time of the request, the correct accounting information is added to the record, POs are issued for all purchases, and, above all, buyers stay away from the phone and the fax machine when making PO updates and changes. Only then can the system can be successfully automated.