In health care supply chain, there are often discussions about procure-to-pay (P2P) and the benefits that can be gained with the integration of procurement and accounts payable (AP). With supply chain representing the second largest expense after labor, hospital leadership expects to see tangible savings in this area and it can be a challenge to show a return on investment through process efficiency alone.
A streamlined P2P process eliminates the negative downstream effects that drain opportunities to reduce costs and build value. For hospitals to effectively track and measure much-needed savings, I recommend focusing on the following three areas.
1. Price/receipt exceptions. While exceptions are a key pain point for both procurement and AP, getting to the root cause of those exceptions can become secondary when faced with the volume of data being passed between the two departments. Instead of continuing to override exceptions, only to have to address it after the fact, develop and facilitate process changes to ensure the contract price, purchase order (PO) price, vendor acknowledgement price and invoice price all match.
The time wasted chasing down and correcting exceptions can easily be tracked by conducting a time/labor study. Start by selecting different examples of typical exceptions within both procurement and AP. Then calculate the actual time spent against the labor cost to fix these issues. Not only can added savings be recognized when you start to eliminate the unnecessary back and forth spent resolving these discrepancies, there are added assurances that the correct price is being paid.
2. Received/Not Invoiced report. Ownership of the information on this report is often in question, but instead of just assigning clean-up duties, consider performing a root cause analysis to address why these items are on the report. You may discover that products were auto-received during delivery and physical counts were not performed. Or maybe AP paid an invoice that should have been linked to a PO. Supplier statements should be worked in conjunction with high-dollar balances and high transaction counts on the report. Recently, Vizient worked with a hospital in the Midwest where a root cause analysis was implemented, resulting in a savings of more than $3M and nearly complete elimination of credit hold calls. A dedicated focus will result in a reduced liability every month – that’s an immediate impact to the bottom line!
3. Invoiced/Not Received report. Many times, the buyer becomes the middleman in these instances between AP and receiving, regardless of whether the issue is a missing receipt or a quantity discrepancy. These discrepancies create delays in payment, frustrations with suppliers and non-value-added activities within all three departments. Again, a time/labor study would help quantify the effects of eliminating these discrepancies, but there are also steps that can be taken to drive down these exceptions. Consider electronic receipts from key suppliers and distributors and manage only the exceptions. Scan packing lists that are accessible to the AP team after physical counts are complete. Lastly, review the process to ensure exceptions are directed to the receiving department, eliminating the non-value-added middleman step!
While these three areas can be measured for reportable savings, one final recommendation is harder to measure but still provides value: Create an environment with open dialogue. As with every other industry and department, communication and collaboration play roles in ensuring the cost effectiveness of an organization. There is tremendous value in procurement and AP understanding the impact an errant keystroke has in the process and how changes in behavior can eliminate unnecessary costs.
Attention to these areas can reveal opportunities to address non-value-added activities that lead to an inefficient supply chain. A solid, integrated P2P process creates better alignment between procurement and AP, leads to greater financial and operational efficiency and can help your organization attain long-term supply chain goals.
For learn more about how an integrated P2P process can help you meet your supply chain goals, contact Denise Hester.
About the author. Denise Hester uses her more than 25 years of diversified procure-to-pay experience across multiple industry sectors to assist Vizient member organizations in implementing cost-savings opportunities through their supply chain operations. Ms. Hester has worked with various organizations to develop industry-leading operations, including the development of shared service centers, the evaluation of business process outsourcing opportunities and the implementation of large-scale ERP software. Prior to joining Vizient, she was the process lead for the global implementation of Oracle on both the procurement and AP modules.