The 3-Way Match, eProcurement, & Pain

PurchTips - Edition #90 December 13, 2005

By Charles Dominick, C.P.M., SPSM

How Can You Get End Users To Record Receipts?

A student recently shared a problem: Her company could not get its end users to record receipts in their eProcurement system. What could she do?

This is a common problem that usually arises when an organization moves to an eProcurement-based process from a more traditional process. So here’s my view, based on my observations in the field as well as my personal success in solving the problem as a practitioner.

The traditional process involves orders being placed by a central buyer and the goods being received by a central warehouse for internal distribution to the end user. Organizations using the traditional structure often use a 3-way match to pay suppliers: the purchase order details must match the invoice details which must match the receiving details.

When organizations switch to an eProcurement-based process, the orders are placed directly by end users to suppliers and the goods are delivered directly to end users. That's fine until it is time to pay suppliers. The purchase order matches the invoice, but many a company has struggled to get its end users to record receipts for that third necessary match. End users are thinking: "Is it really worth my time to record a receipt for this $1.99 package of pens?" Without a receipt, the invoice doesn't get paid. Before you know it, suppliers are refusing to ship because you haven't paid them in months!

Some companies fight to get their end users to record receipts in the eProcurement system. And, many times, they are unsuccessful. Any time you are dealing with human involvement in a process, there is the opportunity for variation. So how are organizations solving this problem?

They are doing away with the 3-way match for eProcurement orders.

That's right - a 2-way match is becoming more common. If the invoice matches the purchase order, the invoice gets paid. This concept usually sends auditor and accountant types into a panic, fearing that they will be writing checks for things that are never received. But, you know what? It works very well under specific conditions!

There are certain controls that you have to have in place for this to succeed. They include:

1. There has to be some monetary threshold when receipt is required. For example, you may want to require a formal receipt for orders over $2,000. The Pareto Principle may apply here - 20% of the orders account for 80% of the spend. If so, worry about receiving the significant few orders, not the trivial many.
2. The end user must employ diligence in ensuring that what they ordered gets delivered. Usually, this is "built in" because the user is ordering goods because they have a need to fill. An unfulfilled need usually keeps their attention. And department budget watchers are usually good at making sure that budget dollars are used appropriately.
3. eProcurement suppliers must be able to provide summaries of shipments and proofs of delivery for every order upon request. You may even want to use their records if you are measuring on-time delivery performance on a periodic basis.
4. Concern about fraud is greatly reduced if the end users can only purchase from suppliers that are selected by a centralized purchasing staff, as opposed to allowing end users to “free form” an order to anyone they wish.

Will this approach cause something to be paid for that is never received? It could. But from real-world experience, this is actually a very rare occurrence and one that can be handled rather easily between the buying organization and the supplier.

At the end of the day, there are fewer problems with this approach than with the 3-way-match approach. Fewer resources are used to solve problems which means a lower cost of doing business for the buying organization.

Now auditors and accountants are tough. How can you convince them to accept this new strategy?

Well, many organizations who have implemented eProcurement had implemented a purchasing card (P-Card) program years before. Then they say to the auditor/accountant types: "We've really been doing this for years. We don't record receipts for P-Card purchases." If compliance with laws, such as the Sarbanes-Oxley Act, is a concern, figure out how P-Card purchases earned an exemption from receiving, and apply the same logic to eProcurement.

Combined with the aforementioned controls, that's usually sufficient ammunition.

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