Inaccuracy in the areas of receiving and supplier return processing impacts your finance team’s efficiency and ability to process payments. “Each match failure costs 4 to 6 times what it costs to efficiently post an invoice,” says Al Barrett, Shared Services Manager at Briggs & Stratton Corporation.
At a time when the AP department at Briggs & Stratton was experiencing challenges with receipt-to-invoice matching, Barrett, working in production control at the time, was offered an open AP manager position. He accepted the position and brought with him a wealth of knowledge about inventory management that allowed him to successfully solve the previously intractable matching problems.
“It made good sense to apply my past experience in production control to identify and solve inventory-related AP issues while continuing to support the inventory accuracy program at Briggs & Stratton,” says Barrett.
“Dealing with the match failures had been consuming valuable AP resources. “With great input and support from our corporate controller as well as internal and external audit lessons learned over the years, I was able to progressively enhance and refine corporate-wide inventory accuracy policies, procedures, and practices,” says Barrett. “And when I was later promoted to Shared Services Manager, it was a great opportunity to continue to assist and promote accuracy in asset management.”
Barrett offers the following advice about avoiding problems with receipt-to-invoice matching and promoting inventory accuracy.
Connecting inventory accuracy and effective cash management
“Anyone can find a way to compare inaccuracy results against other factors to make the inaccuracy appear to be minimal when compared to ‘total sales’ or ‘total purchases,’” Barrett says. “But keep in mind that a small inaccuracy can still result in thousands of dollars loss from the company’s bottom line, resulting in pure waste in expediting, changeovers, late orders, etc.”
“Fewer accuracy issues equate to increased efficiency and more on-time payments, which equals more discounts captured and improved buyer negations opportunities,” he points out. “We have a cash-management strategy which includes negotiating standard payment terms as well as periodic, short-term cash conservation (payment hold-back). We pay close to 95 percent of our invoices on time and pay most suppliers via ACH, so I believe any necessary sort term cash conservation steps are a bit more acceptable to our good suppliers as a result of our track record.”
Be aware of, and avoid, common reasons for inventory inaccuracy
“Inaccurate counting and estimating are a common problem,” Barrett says. “That’s why it’s important to clearly define and educate people in receiving on the importance of accuracy and their part in the process. Some level of estimating may be acceptable, but teaching people how to estimate with skilled judgment is the key to avoiding false or temporary inaccuracy.”
“I educate staff in receiving on the importance of the accuracy of their receiving responsibilities,” he explains. “Briggs & Stratton pays more than 80 percent of its domestic suppliers based on goods receipt (ERS) [evaluated receipt settlement], so I need 100 percent accuracy from receiving.”
Another common reason for inventory inaccuracy is unsupported reduction in operational scrap, Barrett notes. “A five percent unsupported scrap reduction in a department will of course result in a five percent increase in adjustment losses. What helps in this case is education directed toward manufacturing to increase accuracy and quality reporting staff—this along with periodic validity testing at scrap reporting points.”
A third reason is inaccuracy in supplier/interplant shipping. “To address this problem, it helps to audit accuracy levels where appropriate. Then, after justifying the inaccuracy, fine or charge suppliers for their inaccuracy and add accuracy expectations to your supplier handbook and agreements. In addition, include shipping accuracy in the supplier evaluation program,” he advises.
Develop a formal plan
“Developing a formal, published plan with clear policies and procedures is one of the success secrets to effectively managing inventory accuracy,” Barrett says. He boils down the steps he has taken to effectively manage inventory accuracy:
- Solicit top-down program support. Everyone from upper management to front-line staff need to buy into the program and plan.
- Clearly document and distribute a program overview. Include procedures and policies.
- Develop a methodology to formally flag priority on materials to be included in the program. Set count frequency per priority flag (ABC analysis).
- Develop a formal cycle count scheduling plan (move from yearly physical to periodic cycle counting).
- Assign clear responsibility for ownership of accuracy. “This responsibility belongs mainly in production, manufacturing, shipping and receiving, and quality,” Barrett explains.
Educate all involved staff on the program and its importance to financial/ERP planning as well as the costs of inaccuracy. “I always repeat education when I identify chronic or new inaccuracy or failure as well as when new staff are given related responsibility,” says Barrett.
Develop and publish program KPIs and targets such as percentage of dollars confirmed to date, number of counts past due at end of month, net and absolute value of adjustments for month and year to date, and results comparison to the prior year, he advises.
“After agreement with operations management, set clear and challenging improvement targets and goals and include them on the monthly reporting related to each key measurement point (99.5 percent net accuracy, 80 percent of program dollars confirmed by end of first quarter, 90 percent by the second quarter, etc.),” Barrett adds.
Make report updating a high priority. “I issue report updates to all key stakeholders (production control management, plant management, vice president, controller, and CFO),” Barrett says.
“I also suggest reflecting accuracy goals/targets on production control management and key stakeholder performance plans,” he adds. “Operations Management currently include improvement targets as part of our key stakeholders’ yearly performance measurements and tie improvement to performance ratings/raises.”
“AP provides an early warning of inaccuracy when they recognize, and issue timely notice of, issues with invoice-to-receipt matching,” Barrett says.
Advocate for the empowerment and education of production control
“Production control is typically responsible for accuracy but often is not given the power or skill set to impact it,” Barrett says.
“Our inventory accuracy program has matured over the years with stabilized policies, practices, reporting, and monitoring,” Barrett reports. “The resource investment to maintain accuracy is shared between multiple areas of responsibility including but not limited to our plant accountants, production control staff, and shipping and receiving. AP has evolved into a highly efficient operation with a clear focus on financial accuracy, great customer service, on-time payment processing, and cost control and reduction through automation, but that could not be successful without inventory accuracy.”
