Receiving to Payment
How could a company running Lean production, and with money in the bank, wind up in COD status with their vendors? More importantly, what can be done about it… quickly? This is an implementation story about applying the Theory of Constraints and Lean Thinking to an information value-stream.
Frequently, the continuous improvement methodologies are viewed by the white collar professions as terrific for “those guys on the shop floor,” but not particularly relevant to them. This is at least in part due to the fact that these were applied initially in manufacturing plants. What is less well known to the white-collar crew is that the very same methodologies that work on the shop floor also apply to the white-collar areas.
Notice that the TTZ (pdf) is not entirely or even largely devoted to producing the actual product or service of the organization. One third of the TTZ is devoted to the Problem-solving Task and one third to the Information Management Task. Routinely, when a Physical Transformation or Service Delivery Process smoothes out and becomes very fast and free-flowing, its demands information, material, and supplies much more quickly from the information management tasks and the problem-solving tasks than it had EVER required before. Also routinely, this results in the service delivery or physical transformation tasks operating in a hurry up and wait mode… frequently shifting between incomplete tasks due to lack of information, material, or supplies that are supposed to be triggered and delivered by the very upstream processes that just can’t keep up.
As a typical example I will tell you about a plant that I worked with as a consultant. We had pretty much gone through their entire Physical Transformation process. It was kicking out about twice what it had before… that means a 100% increase in throughput (with no increase in production footprint, and about a 20% to 25% increase in production personnel)! Unfortunately, fabrication and assembly could not get the material needed because the vendors (who were delivering twice as much in the same amount of time as they had before) were not getting paid. Due to the increase in throughput, the company had money in the bank… lots of it! However, the information flow from the time an item arrived at the receiving dock to when it was ready to be paid required 60 to 90 days! This process absolutely ran in batch-and-queue mode!
Since we had been through a number of the process improvement tools with the middle and senior managers in order to increase the velocity in the Physical Transformation flows, they were familiar with many Continuous Process Improvement (CPI) tools and methodologies. So we simply applied the same tools and methodologies to the “Inbound Receiving to Ready for Payment” processes.
Because it was taking so long to pay invoices, some of my client’s vendors had him on COD. They simply would not permit the truck driver to deliver the goods unless there was a check in hand.
In addition to taking so long to get the receiving information to the state where a check was ready to be sent to the vendor, there were other problems with this information process. Periodically, discrepancies would be identified on a given invoice, or bill of lading. For example, the wrong number of items had been received compared to what were invoiced, or the delivery weight was not accurate so the delivery charge was incorrect, or there had been damage to the shipment and so there was a freight claim. And so on. Every week the president of the organization (my client) would get a stack of invoices 60 to 90 days old and 5 inches high that he had to wade through over the course of the week. This was a huge hassle!
Since the middle and senior managers were already familiar with the processes of Value Stream Mapping, Single-Piece-Flow, Cross-Training, quick setup methods, inventory reduction methods, and the other tools of process flow improvement, we simply applied those to this process… over the course of about one month.
Just like any other process flow that has never had this sort of treatment, their process flow looked an awful lot like a watershed with inbound items being handled by assigned employees with large inboxes before they were passed on to the next employees… who also each had large inboxes. Each employee was a specialist in what they did (read that: “Craftsman”), and none of the other employees, or few of the other employees knew how to do that function. Freight claims were handled after-the-fact, by a third department.
The first step was to identify and collect the process stakeholders and then do a Value Stream Mapping project. The stakeholder Kaizen (kai-ZEN – Japanese for “to take apart and make good”) Team included the company president and the managers of the Parts Department, Accounts Payable Department, Customer Service Department, and IT as well as a few key Parts Department staff. Over the next few weeks, they ran a multiple-iteration Helix on the processes involved.
The initial Value Stream Map showed all of the sequential inboxes where the information both got inventoried and delayed. Following the “watershed” model, the inbound material, shipping documents, bills of lading, inbound invoices, inspection forms, and other related receiving documents comprised the water and each individual employee’s inbox comprised the reservoirs. If an employee was sick, or assigned to something else for the day or for the week, then their “reservoir” just sat there… collecting processing time.
The Future State Map of this process consisted of one cross trained Parts Clerk handling the entire process from the receiving dock to the Accounting Department’s open-invoice “in basket” outside the Accounting Department. Since this company used their own in-house developed accounting system, the Parts Department Manager documented the specific steps necessary to do each sequential job in his Department. He created standard work! For each job, this consisted of the very specific steps required to do this function. For example… open the Parts Department Accounting Module; press F4; arrow down three lines; enter “S” into the selection box…. The explicit details were recorded for each information-processing function. He created and iterated about a dozen job-definition documents in tornado-like fashion! (See: the Helix document.)
Next, the Parts Department Manager held training meetings for everyone in his Department… on every single job!
Receiving documents arrived in Accounting from Parts either with or without an included invoice. All receiving documents that did not come with invoices were filed, waiting to be matched with inbound invoices. Every day, Accounts Payable matched the invoices with the receiving documents, as necessary, and finished the process through to “Ready for Payment.”
As stated earlier, it took about one month to establish standard work and cross train all of the Parts Department staff on this new procedure, where any of them could handle the entire process. Through the course of this month, the throughput time gradually dropped from 60 to 90 days down to a range of 5 to 7 days from receiving to ready for payment!
90% Throughput Time Reduction
At the end of that one month period, the state of affairs for the receiving process was that all current receiving documents were either matched with their invoice or waiting for their invoice within 5 to 7 days. However, invoices that had been received before this improvement process commenced were still being processed in batch-and-queue mode, and were still taking 60 to 90 days. So we had some extremely current and some very old receiving documents that were yet to be paid! After 90 days from starting the project, only contested outstanding invoices remained.
20% Staff Reduction
A direct result of standardizing the job descriptions and cross training was that the Parts Department was able to absorb a 20% reduction in its staff due to attrition and still keep the 5 to 7 day throughput times.
“Firing” the President
One of the tools applied to the inbound receiving documents stream was to split the information-streams into high-volume and low-volume production. On the one hand, 80% of the entire inbound document flow consisted of receiving documents that had nothing wrong with them: the correct quantity was received, there was no damage, the freight was correct, we actually needed the material, the correct amount was charged, and so forth. Instead of going to the Company President, these documents went to the Customer Service Manager who was authorized to pay them… without consulting anybody! If there was nothing wrong… there was nothing wrong… pay them! (The Customer Service Manager had been on the process improvement team for this project and had shown both an interest and an aptitude at process improvement. He actually volunteered for the assignment!)
The vendors started getting paid very quickly, even before the usual “net-30” terms. This very quickly resulted in the Purchasing Department being able to negotiate better prices with these vendors, because the vendors learned they were going to get paid… quickly.
Changing these procedures also resulted in my client receiving 2 to 3 invoices per day that were 5 to 7 days old… instead of a 5 inch-high pile of 60 to 90 day old invoices per week! The change in lead time put my client in a very different position! A seven-day-old customer billing inquiry goes to the vendor’s Customer Service Department… Yes Sir… we would love to keep your business… how can we solve this issue together? However, after 60 to 90 days, the same customer billing inquiry goes to the vendor’s Collection Department… who doesn’t care if there’s a problem or about keeping your business! Their primary focus looks like this, “Pay us now… or else.” Suffice it to say that not only were there significantly fewer phone calls, they were much less stressful!
Essentially, we “fired” the president of the firm from most of the clerical overhead of this receiving-information flow! We eliminated 10 to 15 hassle-ridden hours of frustration from his week… all of his weeks… forever… which he previously viewed as “just part of the job.” Now, he could actually do strategic development with this time instead of chasing down three-month-old invoices!
Freight Claim Bonus
A fascinating and unexpected outcome of this process was the precipitous drop of freight claims. Full load and less than load truck drivers are trained in techniques to hand the clipboard containing the shipping documents to the receiving clerk with a big smile and a “So, how’s your day going?” comment or an “I’m getting heat from my dispatcher to get to my next delivery, can you help me out?” plea or some similar comment so that the receiving clerk, who is typically overworked, signs the shipping documents without carefully inspecting the shipment… thus transferring legal title of the material in question from the trucking company to the buyer!
In the previous receiving information flow system, a different department handled freight claims. In this system, if there was freight damage, the clerk who did the receiving had to baby sit that freight damage claim for the next two to three months… themselves! They DID NOT LIKE doing this! It was a massive waste and an ongoing interrupter of their time. So… they became bloodhounds… hunting for damage to the packaging, and errors on the documents for the items that came in! If there was any damage or discrepancy, they would be sure to note it on the bill of lading and receiving documents along with which specific items they did accept and which specific items they did not accept.
Not having received the damaged items, it was not the problem of my client’s company, or the clerk, to handle the freight damage claim… it was the freight company’s problem! The only time that my client would accept something that had been freight damaged is if they urgently needed a portion of that shipment for a current order. Even then, the damage was noted on the receiving documents and bills of lading so the freight claim was much easier to process for the person doing the receiving. We did not anticipate this serendipity, and only noticed it after-the-fact… concluding that the Parts Department receiving clerks just did not want to deal with the hassle of freight claims!
Prior to the switch from batch-and-queue to single-piece-flow for receiving information, the person doing the receiving simply took time out of whatever else they were doing in order to handle this “interruption to their real job.” After the switch, for the time that they were the receiving agent, this was very much their real job! They were finally recognized as being the legal agent of my client’s company for the exchange of legal title for the material that the common carriers brought to my client’s site. Therefore, they began being much more tenacious with their inbound quality inspections.
Whereas before, they would simply accept the number that was on the invoice, or receiving document, they now began counting things that they had any question on. Before, they were concerned that the “driver had to wait.” Now, if they had a question… they no longer cared that the driver had to wait. The “waiting driver” was not their problem. It was the driver’s problem, or more accurately the driver’s company’s problem. No longer were they susceptible to the methods the drivers had been trained with to distract them into signing the legal transfer of title so quickly. Hence the precipitous drop in the number of freight damage claims!
A couple of predictable things happened following this process improvement.
- First and foremost, product was being delivered to Manufacturing in a timely fashion.
- Second, as this inbound-receiving-to-ready-for-payment process smoothed out, additional demand for “Flow” landed squarely upstream in the (heretofore disjointed) Bill of Materials Department and the Engineering Department! “Receiving” was no longer an information black hole. This progression follows the Chiropractic School of Lean Implementation model as illustrated in the Dock to Marketing case.
In addition, this case is an illustration that “a process is a process is a process.” It does not matter if that process is in Problem Solving, in Information Management, or in Production. It does not even matter if the “process” is in the Legal Department… which brings us to our next SUCCES story: Lean-Sigma tools applied to Intellectual Property processing!