Applying lean sigma principles to Purchase to Pay
Monday, 27 Feb 2017
Lean methodology focuses on maximizing value for customers and the organization by streamlining processes and eliminating waste. The goal is to deliver results faster, more accurately and at a lower cost. The methodology relies on the organizations employees to identify root causes of problems and to define workable solutions to them.
Lean methodology focuses on maximizing value for customers and the organization by streamlining processes and eliminating waste. The goal is to deliver results faster, more accurately and at a lower cost. The methodology relies on the organizations employees to identify root causes of problems and to define workable solutions to them. Additionally, lean methodology requires measurement of improvements to assess if the expected outcomes are being achieved and to embed a culture of continuous improvement.
Both Lean and Six Sigma methodologies have historically been used in production environments to reduce costs and to deliver outputs to the business quicker. These techniques have also been applied to administrative environments that may experience long cycle times, backlogs of in-process documents, complexity and/or duplicate handling. In the purchase-to-pay (P2P) space where many organizations are looking to capture supplier discounts though decreased cycle times and to automate manual processes, lean methodology has a direct application. And while at a high level lean principles are achievable in administrative environments not all the main principles are easily applied.
For example, one of the main principles in lean is to focus on increasing customer value. But how do you increase customer value when many of these back-office processes are inherently non-value add? The answer is: Through minimizing and eliminating waste. By reducing waste all the other lean principles can be achieved. Lean has identified 8 forms of waste: Transportation, Inventory, Motion, Waiting, Overproduction, Over processing, Defects and Intelligence. How do we see the 8 forms of waste manifested in procure-to-pay?
- Transportation is defined as moving an item from place to place. Moving invoices from queue to queue or from one an approver to another for input demonstrates how transportation waste is manifested in a transactional environment.
- Inventory in a transaction environment is work that is incomplete. Work in Progress; You may find high number of invoices that are waiting on the next step. Or multiple copies of the same document stored on a desk.
- Motion is the unnecessary movement of people or physical motion. For example, looking for documents or searching for data in one system to confirm the information in another system is an example of motion.
- Waiting on information or a signature before something can be moved to the next step is also waste.
- Over-production is doing more than is required. Generating reports or project statuses that are not used.
- Over-processing is having unnecessary process steps; Unnecessary reviews or signatures. As an example, capital projects that require reviews and signatures from 15 people.
- Defects are Bad or wrong data; An inaccurate report that must be redone due to incorrect information. Requisitions that are returned for wrong information are one example.
- Intelligence as a form of waste is not using staff to their full potential. Or having poor management where there is a lack of training and a lack of employee empowerment. This leads to diminished employee engagement and decreased productivity. Be mindful though, particularly when looking at procure-to-pay optimization in isolation, that waste isn’t created by assigning tasks to staff that leads to underutilization of their core skills or purpose.
Understanding the forms of wastes to avoid helps to design efficient processes that meet the organizations goals. Below are just a few ideas to keep in mind when evaluating or setting up new processes.
- Create standardized approval processes that minimize reviews, limits rework, and decreases the lead times that are associated with approval processes.
- Providing adequate training to end users so that when a document is received for review or approval, the user knows how to effectively complete the task. Even though the solution may offer functionality to return documents to a previous step, process steps should be sequenced in a way to minimize rework.
- Not having the correct information to process an exception increases cycle time. Promote collaboration so that exceptions can be resolved quickly. Work with upstream processes to reduce the chances of exceptions.
- Employees are often gathering information and providing statuses to managers or other departments. If your department is providing a report that you are not sure it is used, stop producing it until someone asks for it.
- Implement a procure-to-pay operating model that increases employee engagement, focuses productivity, and drives continuous improvement.
Another key principle in lean is to continuously seek perfection. Once all four lean principles are applied, the fifth principle, seek perfection, encourages the organization to repeat the process of removing all waste and thus increasing customer value. One way to execute this is to measure key processes so that changes in the process are readily identified and reviewed my senior management. A recent study by a leading financial association showed only 53% percent of organizations surveyed tracked KPIs for their Accounts Payable Department. 33% of these organizations expect KPIs to become more important over the next two years. Stay tuned for the next blog that helps organizations drive improvements in AP Shared Services by identifying key KPIs and using Basware Analytics.
Learn how Basware can help optimize your purchase to pay processes. Schedule a Business Consulting assessment today.