Procurement tutorial: Building on AP software with specialized tools

An analyst explains how to set up a procurement function in accounts payable software.

Procurement is of keen interest to the CFO. It involves acquiring the goods and services that impact the delivery

of products -- further impacting cost of goods sold (COGS) -- as well as purchasing items needed to support administrative functions.

The automation of procurement usually involves the broader category of accounts payable (AP) technology, which many companies run as part of an ERP suite. Since managing and automating the procurement function requires close collaboration between the CFO and CIO, this procurement tutorial addresses both their needs.

AP software is the primary tool you will use to select vendors to buy from, issue purchase orders, receive goods, ensure that goods match what was ordered, deliver goods inside the company and deal with mismatches.

Setting up the vendor file

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It’s a good idea to begin by selecting vendors and defining them in the vendor file. You will want to create a vendor ID, vendor bank account, payment terms, items you can purchase from this vendor and so on. Keep in mind that it is in your best interest to have multiple vendors who can supply the same items. This will be especially useful in managing price and availability.

Financial software is all about empowerment and control. The CFO will have to decide which staff members have permission to create vendor accounts and provide rules about who can enter vendors and when. This will be true of all aspects of procurement that follow. And the CIO's team must help implement these empowerments and controls.

Processing purchase orders

The AP system maintains a purchase order process that is kicked off when a purchase order is delivered electronically to a vendor. A buying agent who has been granted authority to buy must determine the availability of goods and services, prices, discounts, delivery dates, shipment method, etc. The buyer will pay close attention to vendors that offer the same goods and services.

The AP system's purchase order subsystem tracks the movement of goods and services, from the release of the purchase order to delivery of the goods and services.

Handling receipt of goods

The company must also establish a process for receipt of goods. Generally, this involves matching the purchase order, the invoice sent by the vendor and the actual goods received. The company must decide what to do about partial orders and incorrect or damaged items.

Establishing put away guidelines

Once incoming goods are approved, there must be a clear set of guidelines about what happens next, a "put away" process often managed in inventory software. The goods can be for a local office, warehouse or factory, or a remote location. In certain cases the goods are shipped directly to the customer.

Managing returns

The AP software should also have an approach to managing returns that is tied directly to the vendor file and the vendor's guidelines on returns. Some vendors will want damaged goods shipped back to them, while others will want to have the purchasing company dispose of them.

Paying vendors

The terms for vendor payment should be spelled out for each vendor. Typical terms might be 60 days after delivery, but, if the company's customers are taking longer to pay, it may make sense to lengthen supplier payments to 90 days.

Selecting procurement software

Some companies inherit procurement software in their ERP package, but others have more say in the matter. Either way, the CFO and CIO must understand the features they can leverage in existing packages or be aware that they should look for during a new selection process.

It helps to first diagram the company's procure-to-pay cycle, which consists of several distinct business processes. Create a flowchart that starts with the vendor and ends with the payment, and make sure that the software covers all the steps along the way.

Workflow is serious business. It might seem like something that only an auditor could love, but determining who can add vendors and create and approve purchase orders matters a great deal. If an AP system comes with real workflow, great. Otherwise, consider adding it.

Vendor catalogs are another important feature in many AP software packages. They can help keep track of current pricing and availability and make it easier to manage substitutability of similar products across categories.

Optimizing revenue and managing COGS are the keys to profitability, and procurement can play an important role. For example, procurement professionals may choose to buy larger quantities from suppliers. While this reduces the cost per item, it increases interest charges, as supplies turn over less quickly, and ties up inventory. Procurement strategies must be combined with revenue strategies for incisive financial analysis.

Regardless of whether you inherit AP software from your ERP vendor or are installing a new AP package, adopt a rigorous approach. Carefully detailing the procure-to-pay flow will ensure that all major items are covered. Finally, review advanced features closely to see if they truly add value to the procurement process.

About the author
Barry Wilderman has more than 30 years of experience as an industry analyst, researcher and consultant at such companies as META Group, Lawson Software, SalesOps Analytics and McKinsey and Company. He is currently president of Wilderman Associates. Contact him at Barry@WildermanAssociates.com and on Twitter at @BarryWilderman.

This was first published in May 2013

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