Top 6 Issues in the Procurement Process and How Blockchain can Resolve Them
Every organization needs to purchase the raw materials and services needed to operate. To ensure an optimal return on investment (ROI), you need a well thought out and verified Procure-to-Pay (P2P) process that connects the procurement function with the accounts payable department seamlessly.
An efficient P2P process is imperative to the financial health and competitive strength of an enterprise. When setting up such a process, the focus should be on building value while reducing costs. Whatever be the size of the company, defining the P2P process is imperative.
All manufacturers, retailers, and service providers need a reliable P2P process to manage purchasing and cash flow. Developing a strong procurement plan helps in optimizing the P2P process.
Challenges faced by businesses following the conventional P2P process
The manual P2P process was fraught with several issues, making lots of data inaccurate and leading to fund leakage. From the days when every detail was diligently entered into bulky registers by bespectacled clerks to ERPs, the P2P process has come a long way. Yet, the fundamentals remain unchanged. Optimum procurement is hinged to a carefully chosen set of processes.
You have to make sure that things go well at every level — from contract management to supplier relationship management. The following are the problems in the traditional P2P process.
1. Compliance with Government and industry regulations
Your P2P process needs to comply with the Government and industry regulations. However, continual training and re-training of staff regarding the often changing regulations are never easy. It is not uncommon for most companies to be at odds with regulatory agencies despite their best efforts to be at the right side of the law.
The scope of compliance also includes economic sanctions that may be imposed by the Governments to restrict the flow of goods/services to or from certain countries.
On the other hand, you also have to keep your P2P process aligned to the broader company policies as uncontrolled spending has to be kept in check, else it can create a hole into the cash flow, thus reducing your working capital.
2. Fraud risks
A long supply chain, with a continued inflow of goods and services, always carries a risk of invoice frauds, money laundering, etc. Leaving these risks undetected and unmanaged can seriously damage your bottom line.
Types of frauds include:
a) Financial — You have to keep tabs on several types of financial frauds that may include falsified transactions and/or inappropriate payments. Billing frauds and inventory frauds are very common. The former occurs when a vendor issues multiple invoices for work that was incurred only once or submits false/inflated invoices. The latter may involve the theft or misstatement of inventory items.
b) Misrepresentation of goods/services — This is a situation when a vendor advertently represents wrong or fraudulent information regarding the products/services offered. For instance, a vendor may deliver products/services that do not meet your contract specifications, and then hide or misrepresent the facts in their full knowledge.
c) Briberies — Vendor organizations, their employees, or your own staff may get involved in bribes or kickbacks in several forms like cash, favours, gifts, etc. For personal aggrandizement, they may overpay for certain goods/services, onboard an unqualified supplier, or accept goods/services of substandard quality.
3. Procedural inefficiencies
For almost all enterprises, procuring is a manageable blend of planned purchases and urgent ones. For an efficient system, they have to give attention to robust process development that would include approval hierarchies and contingency plans. You need to move away from strategic spending and avoid last-minute buys.
The challenge is to put in place a system that enables you to derive value from early payment on scheduled buys, vendor incentives, and negotiated discounts. Unplanned procurement results in uncertain vendor reliability and inconsistent delivery schedules. You may also end up facing supplier-related issues like inadequate policy and capacity.
4. Lack of Adoption
Suppliers today expect a simple, intuitive, and seamless experience on the procurement systems. In case your ERP (enterprise resource planning) system doesn’t meet their expectations, they may not be too happy using it. Many procurement software systems come heavy on complexities and list of features, but lack an easy interface, making it hard to adopt.
You need to take into account ease of use when getting procurement software. It will ensure you don’t end up facing what is termed ‘lack of adoption’.
5. Slow invoice processing time
Though most companies use digital ERP systems for P2P, there are some that are still stuck to manual routing, processing, and sign-off procedures, which slows down the cycle significantly. Companies following manual processes fail to take advantage of early payment discounts and may even find themselves doling out late payment penalties. Such continued hiccups may ruin these companies’ relationships with their suppliers.
Retrieving data also becomes hard for these companies. As invoices and POs are all stored and recorded manually, retrieving any data becomes almost impossible when any specific information is required.
6. Inaccurate information
Reliance on manual data entry makes the information error-prone. Companies relying on the age-old system even in the age of technology are most likely to face hassles because of inaccurate data entry. It may even impact their working capital and also get them into legal trouble. Wrong data entries would fail to meet regulatory compliance, which forces these enterprises to get external audits of the data.
No need to mention that processing errors require resolution, scaling up the cost per invoice. The organizations also have to arrange for physical storage of invoices and purchase orders (POs).
Enter blockchain to redefine procure-to-pay operations
Has blockchain solution for procure to pay the potential to redefine the operations of the procurement process? Thanks to immutable blocks and decentralized character, the technology provides inherent transparency in business processes and transactions. The adoption of blockchain technology for P2P programs enables enterprises in fraud control, reducing costs sustainably through intermediation, transparency enhancement, and efficiency improvement.
Better compliance and adherence to company policies
The immutability feature of blockchain can be leveraged for compliance with regulations and company policies. Recording actions and their outputs in a tamper-free manner creates an audit trail, enabling regulators and top management in a company to verify transactions with ease.
a) Reduced risks
Blockchain-based smart contracts automate operations and processes to a great extent. These algorithms cannot be interfered with. Moreover, all transactions are recorded immutably in the block, eliminating any chance of tampering.
b) Process efficiency
Three blockchain applications bring value to the P2P process and improve efficiency — Implementing authorization, Improving validation and authentication, and Acceleration of purchase order management.
c) Easy adoption
You need not dispose off your existing ERPs, procurement modules and store management systems to hook blockchain with your P2P procedure. Rather, developers can integrate the blockchain solution with your existing system and you can get going right away.
d) Faster invoicing
When using blockchain, the invoice is submitted by a supplier in-chain and the buyers can make instant acknowledgement, leading to faster invoicing.
e) Accurate information
The introduction of blockchain eliminates all paperwork and even the need for 3-point matching as PO (Purchase Order), GR (Goods Receipt), and Invoice are already verified. Immutability also rules out any possibility of data manipulation.
Hailed as a game-changer in financial services, blockchain can introduce transparency, security, and efficiency in the P2P process. When it comes to pulling in transparency and fraud-prevention in the systems, credentials of the distributed ledger technology are well-established. The technology can make your day-to-day operations hassle-free.
At Antier Solutions, we conduct in-depth research and deploy an innovative approach to roll out blockchain-based supply chain solution successfully. As a forward-thinking organization, we adopt the latest technologies that can offer immense benefits to businesses. We are working on providing blockchain solutions to the clients for improved security, accuracy, and reliability.
If you are planning to build a blockchain solution for procure to pay, connect with our subject matter experts to share your business needs.