Sorting ( 4% of AP time) Every morning the day's mail is delivered to AP. AP personnel open the mail, sorting and stacking all invoices by vendor. The employee who opened the mail delivers the mail stacks to the appropriate AP person. AP personnel divide their work up by letters of the alphabet (for example, one employee may process all invoices for vendors whose company name begins with the letters A-D). The length of time it takes to open and sort the mail is directly correlated with the volume of invoices being processed. Three-Way Matching ( 50% of AP Time) An AP employee takes his or her stack of mail and first checks each invoice for typical problems such as math errors and correctness of sales tax inclusion or calculation. Invoice data are then checked for agreement with the PO on quantity and price elements. If the invoice and the PO agree, AP personnel then exarhine the receiving documentation to determine if the company received the quantity ordered. If all the documents properly match, the information is input into the computer for batch payment. AP personnel estimate that it takes about 15 minutes to process an invoice when there are no discrepancies between invoice, PO, and receiver. Approximately 25% of the time there is a discrepancy across the three documents. When a discrepancy occurs, the AP person calls the most likely candidate to straighten out the particular problem, which could be the vendor, a person from the receiving department, or a person from the purchasing department. The phone calls to AutoTek personnel typically end up as voice mail messages that are returned in two to six days. Payment for Services ( 15% of AP Time) Oftentimes, the invoices received are for services such as machine repairs, leases, consulting services, lawn care, and temporary help. In these cases, AP mails the invoice back to the Department Manager or other appropriate supervisor for an approval. Payment approvals for services rendered also require the manager to verify that the services covered by the invoice were performed in complete conformity with company policies and the initiating agreement. New Vendor Set-Ups ( 6% of AP Time) Invoices from new vendors require that the vendor be "set up" on the computer system. This can take from 10 to 30 minutes. Vendor Communications ( 15% of AP Time) AP personnel are frequently interrupted by telephone calls from vendors or from employees from other departments. Typically, the calls concern late payment on invoices. The vendors usually call when they are having cash flow problems or have a question concerning payments. Check Runs, Signatures, Filing, and Other Clerical Detalls (10\% of AP Time) Checks are processed weekly for all data relating to the involces, expense reports, or check requests input onto the batch system. AP personnel will run checks that are less than $5,000 through the MRO items were being purchased, the frequency with which AutoTek made purchases from these suppliers, the average amount time required to complete a requisition and receive a shipment of MRO goods, and the average wage rates of employees performing process activities. Exhibit 3 presents a verbal account of the daily AP activities and the estimated amount of time devoted to those activities. Benchmarking Accounts Payable Kulesza is concerned about how to make a fair evaluation of the cost and efficiency of the AP department. Recently, he came across a business article that provided "benchmark" figures for AP operations compiled from over 70 manufacturing organizations. He thinks the figures may help him make a more objective evaluation of the AP function. The benchmark figures are as follows: Accounts Payable (AP) Performance Benchmark Figures for 70 Manufacturers Exhibit 2. Information on AutoTek Non-Production (Maintenance, Repair, and Operating Expense) Purchases A. MRO Invoice Activity in Relation to MRO Spending (270,000 invoices) B. Supplier Utilization Information C. Miscellaneous Time and Payroll-Related Data Problem 5 ( 20 points). AutoTek Manufacturing, is a $2.1 billion supplier in the hyper-competitive automotive components and systems industry. AutoTek has 27 North American facilities located in Mexico, Canada, and seven states in the United States. These facilities produce various products, including: motors, precision die castings, fluid handling systems, seating systems, wiper systems, switehes, sensors, lamps, foundation brakes, brake actuation, and anti-locking brake systems. The AutoTek corporate headquarters, located in Auburn Hills, Michigan oversees the activities of its 27 plants. The purchasing and financial activities are centralized at the Corporate Headquarters. Bud Kulesza, Senior Vice-President at AutoTek established "AutoTek Automotive 2025" improvement teams. These teams, made up of Finance personnel, were asked to increase the efficiency of each area of Finance group responsibility, including payroll, accounts receivable, general ledger, budgeting, cost accounting, and accounts payable. In the process of analyzing operations, the Accounts Payable (AP) Improvement Team had identified two major areas of opportunity. First, they had identified and improved the company's process for handling production invoices, which accounted for 90% of the dollar volume of purchased goods. This new method enabled a computerized matching of production invoices and purchase order (PO), but had little impact on non-production invoices. Thus, the AP Improvement Team wanted to increase the efficiency of its process to acquire and pay for non-inventory goods, usually referred to as MRO (maintenance, repair, and operating expense) items. Analysis of MRO Early analysis by the team showed that significant increases in AP efficiency would be realized only after problems with MRO invoice processing were addressed. MRO invoices represented 10% of the dollar volume of goods purchased but created over 80% of the invoice paperwork process by AP. MRO goods are diverse in nature and often ordered in unpredictable patterns. Examples of MRO items include: office supplies and equipment, machine shop tools and supplies, maintenance equipment and supplies, uniforms, utilities, freight, postage, florists, publications, rental and lease payments, insurance, subscriptions, business cards, communications equipment, advertising, catering, lab supplies, printing services, graphic supplies, and capital equipment. Overview of the MRO Goods Acquisition Process Purchasing and AP personnel are located at AutoTek Corporate Headquarters. Requisitions for MRO goods are e-mailed to the Purchasing Department in Auburn Hills. The Purchasing Department then assesses the MRO requisition, consolidates the requisition with other similar requisitions when possible, and assigns a buyer to purchase the good(s). The buyer identifies several suppliers that can meet the quality, service, and price demands of AutoTek, calls and negotiates with the suppliers to obtain the best value price and terms, and issues a purchase order (PO) to the supplier selected to provide the goods. On average, ten days clapse from the time an individual requisitions an MRO item to the time Purchasing issues the order to the supplier. Suppliers send invoices and manufacturing plants send receiving documentation directly to AP in Auburn Hills. AutoTek tries to take advantage of discounts offered by most of their suppliers (usually 5% if invoice is paid within 10 days), but often fails to get the payments processed in time to take advantage of the offer. Normally, suppliers are simply paid 45 days after the purchase. Exhibit 1 presents internal AutoTek information from a recent one year period compiled by the Accounts Payable Improvement Team which provides an overview of the number of people and activities performed in the Purchasing and AP departments. Since MRO purchases constituted 81% of the invoice-processing activity, Kulesxa requested additional information about MRO purchases. This information, presented in Exhibit 2, includes the types and number of MRO items bought, the cost of the MRO items, the number of suppliers from which Exhibit 1. General Information on AutoTek Manufacturing Purchasing and Payables Activity and Cost A. Accounts Payable Headcount, Total Direct Labor and Fringe Costs B. Purchasing Headcount, Total Direct Labor and Fringe Costs C. Number of Invoices and Purchase Orders ( PO ) 3. Identify two steps that AutoTek can take to improve its process to acquire and pay for MRO items (4 points) 4. Please identify the impact that your proposed changes in (3) will have on AutoTek operations. Specifically, explain how your plan will help AP or Purchasing to reduce cost, reduce procurement cycle times, or improve process quality. (5 points) signature imprint machine. Checks above $5,000 will be passed along to two different managers for manual signatures. Copies of the vouchers and checks will then be matched to the invoice for correctness. Then the total voucher package (invoice, receiver, PO, voucher, and check copy) will be manually filed. Finally, AP personnel stuff envelopes with the remittance detail and signed checks and place them in the out-basket for mailroom personnel to pick-up. YOUR ANSWERS 1. Assess how well AutoTek. AP currently functions by comparing its Account Payable performance to benchmark figures provided in case. (5 points) 2. Calculate an "end-to-end" cost to procure and pay for an item at AutoTek. (Hint: This should include the cost of the time to fill out a requisition, issue a PO, process the receipt of the good at the receiving dock, and process the invoice for payment in AP. Exhibit 2, Table C provides wage rates of dock workers and requisitioners and the amount of time needed to process procurement-related activities. Note also that for every PO there is, on average, 3 invoices due to the use of blanket POs which cover an entire year's purchases). (6 points)