Manufacturing companies often have hundreds or even thousands of suppliers. In addition to the usual service and business supplies that every company deals with, manufacturers must acquire the components necessary to build their products. They even sometimes contract for outside services to expand capacity or capabilities beyond what they have in house. As a result, they generally process a high number of purchase orders, which generates a high number of invoices that must be paid. This activity falls to the accounts payable department.
Basic Accounts Payable Responsibilities
Accounts payable is a critical operation in a manufacturing company as it has a direct effect on the company’s cash flow. The accounts payable team is required to ensure that supplier invoices match the terms on the associate purchase order. Everything from the item ordered, delivery date window, price and even the payment terms must match. They must also ensure that the quantity invoiced matches the quantity received, and that the items are not on hold due to quality issues.
Accounts payable is also responsible for issuing debit and credit memos to cover returned goods, scrapped quantities, allowable rebates and post-purchase price incentives.
Historical Accounting Methodologies
Before modern ERP solutions came about, purchase orders were printed on multiple part forms. One copy of the purchase order went to the accounts payable team, where it was filed awaiting a potential invoice. As material was received on the dock, they also received a copy of the receiving notice, and filed that with the purchase order.
When an invoice was received, someone would pull the purchase order copy from the files and manually verify the information on the invoice to ensure it matched the information on the order as well as on the receiving slip. The person doing the “three-way match” had to check the item number, the quantity ordered, the quantity received, the price, the payment terms, and possibly validate that the supplier had not shipped more items than authorized or shipped sooner than authorized.
In some industries, accounts payable was also responsible for keeping track of the total items invoiced against a contract to see whether the company was eligible for volume-based price breaks, rebates or promotional goods or credits. This activity was usually done manually, on long tally sheets or large “accounting” paper.
If everything matched, the invoice was released for payment. It then became part of a “check run,” which might be processed manually or possibly printed by a standalone financial system.
Recent Accounting Methodologies Using Traditional ERP
One of the greatest efficiencies provided by traditional ERP was the elimination of the paper-based three way match. The system alone could verify that the purchase order, receiver, and invoice matched, and more evolved systems sometimes included parameters for payment of early deliveries and over/under receipt quantities.
This was a huge time saver as it eliminated filing paper copies of POs and invoices. However, it wasn’t until the second or even third generation ERP solutions came on the scene that ERP was able to deal with contractual pricing, or rebates and promotional payments. In most cases, those processes were still done manually.
Next Generation ERP Methodologies
Next generation ERP solutions such as QAD Adaptive ERP enable manufacturers to keep a tight rein on cash, and their financial applications include capabilities that support that objective.
One of the most important capabilities is the recognition of buying groups—coalitions of related companies that purchase goods as a clock to achieve better pricing.
Promotional pricing, contracts that include quantity-based price changes or rebates, time-based pricing, rebates, and other pricing rules that are ubiquitous in the modern business world are easily handled by an adaptive ERP solution with a trade activity management module designed to handle these complexities.
As a result, when a manufacturing company uses an adaptive ERP designed for manufacturing, the entire payables process is simplified. The trade activity management solution automatically handles the complexities of contracts and buying groups and may even generate credit memos to ensure the company achieves every price break it has earned.
Not only does this streamline and simplify the entire purchasing and accounts payable process, it also improves the company’s cash flow.
Is Your Company an Adaptive Manufacturing Enterprise?
Not every company needs the capabilities of a global trade management module, but every manufacturing company needs to ensure that they can deal with the intricacies of a global supply chain. QAD Adaptive ERP ensures that the company stays current with international business practices and that their suppliers are affording them the appropriate pricing and purchase incentives. If you’d like to learn more about how to become an adaptive manufacturing enterprise, visit our website.