Section X. Payments Made to Suppliers Not Optimized

X. Payments Made to Suppliers Not Optimized

Overview

All businesses pay suppliers for products and services in one form or another. At any given time, there is an amount outstanding to suppliers typically known as accounts payable. The goal in this type of project is one of fine balance: keeping hold of the money for as long as possible without going beyond the terms agreed with the supplier.

Examples

Accounts payable for any business that buys products or services from suppliers.

Measuring Performance

Accounts payable is measured in dollars outstanding to suppliers. This can be increased by extending terms with suppliers, which is just a function of the purchasing group. Here the project needs a subtly different approach and examines the payment process. The best metric is to look at performance in terms of time.

For example, if the payment terms are 30 days, move the origin to that point. If payment is made late at say, 32 days, that would be recorded as +2 days. Likewise, if payment is made early, at say 27 days, that would be written as 3 days. This is replicated across all suppliers and agreed terms, resulting in a payment distribution as in Figure 3.2.

Figure 3.2. Measuring accounts payable: distribution of payments made.

The goal is to never go above zero, but to pay as late as possible (i.e., to record as small a negative number as possible). This is done by minimizing δ, σ and the area of graph overlapping the terms line in Figure 3.2, which in turn maximizes the accounts payable dollars and minimizes failure to meet payment terms.

The secondary metric will be to look at payment accuracy. (Did we pay correctly for what we got?) This is measured as a percentage of payments made correctly (number correct x 100/total).

Tool Approach

	Focus should just be on measuring validitya sound operational definition and consistent measure of Payment Time versus a detailed investigation of Gage R&R. For more details see "MSAValidity" in Chapter 7, "Tools."
	The data is typically captured over a period of one week to one month (depending on process drumbeat) to get a reasonable estimate of Capability. For more details see "CapabilityContinuous" in Chapter 7. Historical data will more than likely be sufficient for the purpose.
	Conduct a Measure Systems Analysis on the ability to judge accuracy of payment. This will be an Attribute type MSA. For additional details, see "MSAAttribute," in Chapter 7.
	Take a sample of 150200 payments and check for accuracy to give an approximate baseline. This will be an Attribute Capability study. For more details see "CapabilityAttribute" in Chapter 7.
	Construct a Value Stream Map of the process to identify all of the steps in the process from suppliers' product used to payment sent. The Primary Entity can be considered to be the need for payment.
	Apply a Multi-Cycle Analysis to the Value Stream Map to determine where the time is being spent in the process, along with an indication of variation in times. Usually it is the variability in step times that causes the problems.

The solution is usually found in the reduction of NVA activity and subsequently variation in the process, followed by installing a very clear, reliable trigger for payment at the appropriate place in the process.

At this point, it becomes a matter of controlling the process, so the next step is to move to the Control tools in Chapter 5.