FOCUS: Improve processing invoices to take advantage of early payment discounts.
A company’s finance department was not able to capitalize on a 2% discount offered by vendors for processing invoices within ten business days. Over a two year period the company failed to benefit from the discounts 50% of the time. This resulted in a loss of almost $1 million in savings.
The improvement team followed the DMAIC methodology. The measurement of importance was determined to be the time elapsed from stamping the invoice in the marketing department until the check is issued and mailed by the accounts payable system. Records revealed that the time took anywhere from 9 to 223 days. Supplier-Input-Process-Output-Customer (SIPOC) analysis was completed along with a high-level process map. Using a fishbone diagram in the Measure Phase the team determined that it first needed to put an accurate measurement system in place. The system had to track transactions from 24 different buyers as well as invoices generated by 28 different vendors. The data collected over a three month period showed that there were no real differences between the vendors. Although one buyer produced a large portion of the purchase order errors, it was not seen as a significant factor. The team turned its attention to the actual cycle time to process invoices. In the Analyze Phase the three component times were analyzed: the marketing process time, the Accounts Payable (AP) department process time, and the AP system. It was determined that the AP system did not reflect the two-percent discount policy (i.e. the program to calculate the 10-day window was based on the invoice date rather than on the receipt date). The logic in the system was changed to base the start time on the receipt date of the invoice. In addition, the team looked at causes of variation and reduced them. Multiple policies and procedures were written into one comprehensive yet simplified Standard Operating Procedure. Mistake-proofing was utilized and the process was put in the Control Phase for three months.
The new process was statistically better than the previous process. The prompt-paid invoice payment process realized $1.78 million dollars in annualized hard savings. Overall there was a 78% improvement in the process.
* For additional information, see iSixSigma Magazine, May/June 2005, pgs 53-59, “Accounts Payable Revenue Generation Project” by Jackie Cazar.