Procure to Pay for Process Industries
Procure to Pay is a standard business flow in any Organization. In Manufacturing Sector, It is a typical business requirement to pay supplier based on goods finally delivered after inspection. All ERP Systems handles this requirement. This serves Discrete Manufacturer pretty well. But, what about the Process Manufacturer, does it serve well for them too? Let’s see.
One of the major challenges, Process manufacturer face, is handling inherent variability in raw material. The raw material which generally sourced from organic sources varies from lot to lot. In Process Industries, it is common to base the price of material on various technical parameters. Since, these parameters known only after the quality department’s testing, it is really hard to decide in advance the price of material that supplier is going to supply in future. So how does Procure to Pay work in Process industries?
Following is Procure to Pay business process in typical process industry:
Company enters into purchase agreement with supplier. In this agreement, a base price is mutually agreed, which is based on standard values of typical technical parameters applicable to that material.
Supplier supplies the material against this purchase order.
After receipt, Quality Department tests the material, and provides actual value of technical parameters.
Based on standard parameter value in Agreement & actual parameter value, a differential amount is arrived at, after some calculation.
Company applies this differential amount to agreed PO Price and pay the net amount to supplier.
How is it different from Discrete Manufacturing?
It is not just the quantity which affects the Invoice value !
The calculation for differential amount may vary from Industry to Industry, Company to Company & even Supplier to Supplier !!
Generation of Invoice Price Variance (IPV) will become more of routine rather then specific case. In General, IPV point to specific cases and require analysis. Process Manufacturers usually don’t want those IPV which are result of difference in quality from agreed quality in Agreement, as it is considered part of normal business activity.
Typical challenges faced by Implementer in Procure to Pay Cycle for Process Industry are:
Capturing of Technical Parameter Value at the time of Receipt. This requires integration of Receiving module with Quality Module with appropriate real time notifications.
Calculation of Amount to be deducted due to quality differences while paying to supplier
If possible, avoid the IPV generation due to above.
As we can see, Procure-to-Pay Business flow which was fitting so well for Discrete Manufacturer, now looking more complicated for Process Industries. When evaluating any package, we advise process manufacturer to just don’t go by the Vendor Claims or Research Findings, as most of them are done on discrete manufacturing. They would do well by asking vendor about Procure to Pay process mapping in the system beforehand.