Manufacturers can run more cost-effective businesses by automating direct materials procurement processes. However, most manufacturers across different industries have been slow to take advantage of the benefits of procure-to-pay (P2P) processes.
Supply chain management and advisory firm ChainLink Research recently released a study that provides a clear picture on the adoption of P2P processes in the manufacturing sector.
From the study, it’s clear that many firms, both large and small, know and appreciate the benefits of automating direct materials procurement processes. ChainLink Research’s analyst Bill McBeath provides more insight on the findings:
i) P2P Automation opportunities at different stages
Companies can automate different processes at each stage of the P2P lifecycle. In most cases, companies automate one or two processes in the lifecycle. ChainLink Research wanted to find out about the manufacturers’ direct materials P2P processes and practices.
From the survey, some manufacturers had not automated any of the P2P processes. Among the companies surveyed, only 31% had their direct materials spend automated.
ii) Invoice and payment automation
In another question, respondents were asked what percentage of invoicing and payment for direct materials spend was automated. From the responses, companies only automated 28% of their invoice processing on average.
Large companies (over $1B) processed 38% while smaller companies (under $1B) processed 25%.
iii) Reasons for automating direct materials P2P processes
In the survey, manufacturers were asked about their reasons for automation. 16% of the manufacturers cited cost reduction as the major reason for automation. 12% of the respondents cited efficiency, productivity and speed as the major reason.
Other reasons cited for automation include spend reduction/management, labor savings, reporting, supplier integration, time-to-market and competitiveness.
iv) Existing automation
In another question, ChainLink Research wanted to find out the levels of automation among companies and the types of systems used for direct materials purchasing. Respondents were given multiple choices and were asked to check all that apply.
From the results, majority of companies use the in-built purchasing tools available in their ERPs or don’t have any P2P automation.
Both large and small companies were likely to use in-built ERP purchasing tools. However, larger firms were more likely to use the best e-voicing and purchasing tools available than smaller firms.
v) P2P automation KPIs
Manufacturers use different KPIs to define success and measure their progress and performance in direct materials P2P automation. From the answers given, two popular KPIs were cited: spend reduction and supplier performance.
However, in interviews with different manufacturers, measuring invoice accuracy and procurement costs were identified as the key KPIs considered in P2P automation. These two were ranked third and fourth in the survey.
P2P Solution Capabilities
There are many systems that manufacturers can use to address the challenges they face when running their businesses. The systems focus on different issues including orders and goods flowing throughout the lifecycle of a PO, providing supply chain finance capabilities, connecting suppliers and buyers to provide collaborative functions between them, automation among others.
The Cost of Non-Automation
Companies that fail to automate their procurement and invoices have to contend with human errors and incur non-value-add labor costs. Moreover, it becomes difficult to set up early discount programs for suppliers and for the organization to take advantage of early discounts offered by suppliers.
Early discount programs are important in the manufacturing sector as they help build relationships and forge formidable partnerships that are focused on higher returns in the long run over short-term profits. Without automation, setting up dynamic discount programs becomes complicated.
Automation obviously reduces the cost of manual labor processes. However, perhaps more importantly, it reduces the cost of errors. For example, shipping errors usually add to a company’s shipping costs. Usually, the company has to ship the item back and ship the correct item again, often with expedited charges to get it to the factory on time. Such shipping errors can disrupt the production process, which may have to be halted as the buyer awaits the arrival of the correct part. P2P automation can help to avoid such errors.
Organizations can benefit from faster, precise and more cost-effective business processes by automating their direct materials procurement. Automating direct P2P also helps in labor savings, spend reduction, and cost reduction.