In previous papers in this series, we’ve looked at the broad challenges faced in the supply chain, and at how blockchain technology can address them. We’ve also looked specifically at traceability, and at how blockchain can enhance transparency and accountability between supply chain participants.
This time we’re focusing on procure-to-pay (P2P) processes, which can cause significant problems for everyone in the supply chain. Frequently considered to be slow, inefficient, and prone to error, the P2P process is also exposed to reconciliation problems and the risks of fraud. In this paper, we will examine how blockchain can streamline and automate P2P processes by reconciling purchase orders, invoices and receipt of goods.
First of all, let’s consider potential issues in conventional approaches to P2P from the perspective of purchasers.
A need is identified. The purchaser seeks a supplier to fill it, and asks for a formal quote against which to raise a purchase order. So far, so straightforward. But it may be the wrong supplier – for instance, a company that isn’t approved to provide those goods or services. The quote details may be wrong – or they may be right, but they have been transposed incorrectly. This may result in errors in the address, in the price quoted, or in the quantities involved. It’s also possible the purchase order may have been raised, but not sent. It may have been raised twice, or sent twice, or both.
Next, an invoice is received. It may not quote the relevant PO number. In fact, there may not even be a purchase order at all, either because it has been lost in the process, because the supplier didn’t know the process, or because it is fraudulent. Alternatively, it may contain the wrong information, making it hard to reconcile with the corresponding purchase order.
A goods receipt is created, proving delivery to the purchaser. If it’s for raw materials, it might go to manufacturing on the factory floor. If it’s a finished product, it might be destined for a retail outlet for resale. But perhaps the goods receipt was handed over in a loading bay, and now it’s been lost. Or it doesn’t tally either with the purchase order or the invoice – the wrong product, perhaps, or the wrong quantity, or the wrong delivery address.
The matching process ought to bring everything together, ensuring that the purchase order, the goods receipt, and the invoice all correspond, not just in value, but in other details. But this may not be the case, and besides, the price quoted, accepted, and charged may not reflect a long-standing discount agreed between the purchaser and the supplier. Other contract details may have changed – and a key contact person from one side of the transaction may have moved on.
Finally, there’s the payment stage. All the paperwork thus far has checked out, but now it’s discovered the supplier’s IBAN (bank account details) are wrong. Or the wrong value has been transcribed into the payments system. Or the bank has rejected the payment for some reason. Or it transpires that, rightly or wrongly, the supplier is currently on a blacklist, and even though goods have been received, payment can’t be made.
… supplier challenges…
All of these issues can lead to potential interruptions to the purchaser’s receipt of goods or services. For suppliers, however, the problem might be the far more fundamental one of disruption of income.
Regardless of where responsibilities for problems may lie – with the purchaser, or elsewhere – these various issues are pretty much replicated for the supplier. From this side, they are no longer P2P processes, but order-to-cash (O2C) matters. Once again, there may be errors with the purchase order that prevent the supplier from initiating the delivery of goods or services. The supplier’s own accounts team might make a mistake when raising the invoice, issuing it in the wrong currency, for instance. There could be problems with what was delivered and to where, and also, as before, with the corresponding goods receipt.
The payment recovery process could be impeded by document mismatches, or by those discount discrepancies we mentioned just now. In fact, this could be a bigger issue than it sounds: the bigger the supplier and the purchaser involved, the more discount options there are likely to be.
Finally, once more, there’s the payment stage. In addition to the potential problems of error or of transaction blocks by the bank, there’s also the possibility of reconciliation issues. In short, sometimes it’s not obvious who paid. The supplier then spends time chasing a late payment that the purchaser can’t identify – and it’s all because funds were issued, for instance, in the name of the holding company instead of the operating company.
… and other challenges
So, there are potential problems for purchaser and supplier alike. But all of this is for when only two parties are involved. We’ve already seen that there can be delays and problems at the bank – but there may be other organizations in the supply chain, including resellers and logistics companies. Each one of them constitutes another stage, and therefore another layer of possible issues.
What’s more, thus far, we’ve been talking about each party as though it were a single entity. It isn’t, of course. Each organization is an ecosystem of finance teams, procurement, legal, sales, and more. For things to work properly, they all need to be on the same page.
How blockchain can help
As we’ve observed several times in papers in this series, blockchain technology is “an open, distributed ledger that can record transactions between two parties efficiently, and in a verifiable and permanent way.” It’s clear, it’s dependable, it’s secure, and it’s auditable. What’s more, it’s designed to be automatable, and because it’s API-native, it can be orchestrated by any other app layered on top of it. All of which means it can address the many potential challenges we’ve just considered in the P2P process.
Here’s a summary of the problems, and of the solutions that blockchain can offer:
- Paper-led processes – digitization and secured data sharing establish a single source of truth, right along the process chain. There’s no possibility of transcription errors
- Inefficient, ERP-based, and manual processes – API-native blockchain enables straight-through processing and automation
- Exceptions, causing friction – digitizing conditions creates comprehensive rules on which smart contracts can be based that can cover all cases
- Lack of visibility – a shared ledger means every process step is visible to every party involved. The ownership and status of each transaction is clear to all
- Fraud and identity threats – blockchain establishes trusted identities and credentials, providing a basis for the secure exchange of information
- Compliance risks – blockchain provides an automated, end-to-end audit trail. This can help organizations to demonstrate not just that transactions were completed properly, but that they were completed on time. In some countries, companies need to be able to prove they paid their suppliers within statutory timeframes.
Clarity and simplicity
A case in point is a trusted data exchange solution we developed to help a client organization build a structured approach to intercompany transactions. The solution makes use of UiPath, R3 Corda, and other third-party technologies, and ensures that each party in the supply chain has access to data in a ledger that is specific to that party.
Data is shared by consent – each organization can request and receive information, and can attach relevant documents such as purchase orders and invoices. What’s more, everything is time-stamped, so relevant parties can see not just that everything verifiably happened, but when it happened (see Figure 1).
Figure 1 – P2P intercompany – simplified flow
In this case, the organization was able to digitize and automate 60% of its inter-company P2P processes, and to decommission a 1,200-seat software licence that had been needed in order to make physical cut-and-paste transfers of data from one ERP system to another. The blockchain model is now being rolled out to accommodate even more exceptions.
The benefits are clear – not just in this individual case, but in general. However, this doesn’t mean that blockchain is mandatory. For instance, small suppliers, who may not have sizeable accounts systems or teams, can continue to work for large, blockchain-using customers, uploading and downloading purchase orders and invoices in the usual way.
Blockchain doesn’t exist to replace anything in P2P, but to enhance it. As we’ve seen here, it automates, simplifies, and secures processes, reduces overheads, and makes everything clear, verifiable, and auditable.
In the next paper in this series, we’ll be looking at how blockchain can help digitalize supply chain processes through leveraging secure Internet of Things (IoT) devices. In the meantime, watch a video on “How blockchain can automate procure-to-pay in the supply chain”.