Today I’m wrapping up our mini-series on direct materials and what differentiates it from indirect by looking at the transactional side — also known as procure to pay (P2P). Because traditional P2P solutions are designed for indirect procurement which do not fully translate into the direct materials world, we’ll explore this topic from two perspectives: eProcurement and ePayables.
ERP Is the eProcurement Solution for Direct Materials
While there might be exceptions to this, the ERP system is where purchase orders are created for nearly all enterprises. Regardless of whether an MRP, Kanban, or hybrid approach is used, one or more ERPs act as systems of record and create the PO. Without going into the details and potential exceptions, the vast majority of direct materials POs are not created in an S2P/P2P suite. But this doesn’t mean that these solutions, or their more specialized competitors, don’t have a role in the PO process for direct materials — it just comes later in the process than for indirect materials.
So, the ERP system creates the PO. The problem with ERPs, however, is that they are built for internal efficiency and not collaboration with external parties (in our case, suppliers). For many organizations, significant time in ERPs is spent on supplier communication and updating delivery times and volumes. This equates to better collaboration needed with suppliers. Allowing suppliers to receive, acknowledge, and update POs and delivery notices via self-service supplier portals or procurement/supply chain networks that are integrated with the buyer’s ERP systems, can result in significant efficiencies and improved visibility. After proper approvals and checks, changes and updates can automatically be pushed into the ERP system(s) without manual intervention from the buyer.
As they strive to manage more spend, several large S2P suite providers have already added supply chain-specific PO collaboration capabilities to their P2P/supplier management modules. There are also some specialized solution providers focused on this area, while others are addressing it from a different angle.
Accounts Payable for Direct Materials Is More Complex
While an invoice is an invoice, some unique complexities are more common when it comes to direct materials.
More advanced matching. For indirect materials two-way (approved PO and invoice) or three-way (PO, invoice, and goods receipt) matching is usually considered best practice, with two-way matching used for low-value orders. For direct materials, there is often a need for more complex matching. Most common is adding quality approval to the matching requirements, but other steps can be required as well.
Multiple integrations. Despite the common aspiration to harmonize with a single ERP system, the reality is that most manufacturing organizations have multiple ERPs, quality systems, warehouse management systems, and so on. Thus, an AP system must coalesce with the various systems to exchange relevant data and expedite the payment process. In the indirect world, the relevant data already exists in the P2P solution that created the order (assuming that a PO is created in the first place).
Evaluated receipt settlement (ERS). Pioneered by General Motors, ERS is a method of paying suppliers based on goods receipts, purchase orders, and contracts without requiring supplier-submitted invoices. This reduces the payment cycle and use of paper but requires a higher level of trust between supplier and buyer. However, depending on legal jurisdiction, an invoice may be required for tax reporting and accounting purposes.
There Is Direct Materials P2P, It’s Just Different
There is a P2P process for direct materials, it just looks a bit different and has some unique requirements when compared to the indirect P2P process. In this article, we’ve listed the main differences. However, depending on your industry and geographic location, there are likely additional ones. As always, Ardent Partners are here to help!
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