The ERS concept, developed by Japanese manufacturers in the 1970s and imported to the United States by Ford Motor Co. a decade later, is disarmingly straightforward. “The purpose of ERS, pure and simple, is nothing more than making AP more efficient by eliminating invoice processing,” says Chris Evanoff, president of Soltec Inc. in Troy, Mich.
Under the ERS process, an organization issues purchase orders with firm, all-inclusive prices and payment terms to partnering vendors. These suppliers, in turn, validate the information and process the orders. Suppliers dissenting from purchase order terms are responsible for proposing revisions; if they fail to do this but fulfill the orders anyway, they assume full responsibility for any resulting underpayments or late payments.
It also is the responsibility of partnering suppliers to provide complete and accurate packing slips with their shipments because under the ERS process, shipping-receiving documents are the basis for payments in lieu of invoices. Conversely, the ordering organization’s receiving function is a critical ERS control point, and it is receiving’s responsibility to meticulously scrutinize packing slip data and resolve any discrepancies with the vendor before assigning a unique identification number to the slip and forwarding it to AP for payment.
Proponents of ERS assert that AP efficiencies accruing from this process typically far outweigh potential challenges of implementation and risks of incorrect payments. “Imagine the AP world if there were no invoices to struggle with,” says Evanoff, whose firm provides ERS consulting and implementation services. “The roles and stature of the people who work in AP would be changed — and elevated — forever.”
Evanoff says he has observed throughout more than 30 years of AP-related work that the majority of purchase orders contain at least some incorrect data and the quality of receiving data is even worse. Under these circumstances, he has concluded, “AP’s inevitable role is catching and correcting the errors, and that is not much fun and adds little apparent value to the organization.” And then there’s the matter of potentially saving money, he says.
The internal labor cost of manually matching paper invoices to purchasing and receiving documents averages $5.22 per transaction, according to Soltec data. The estimated processing cost per invoice drops to $2.14 for organizations that have invested in automated tools such as imaging and electronic data interchange (EDI), and plummets to $0.71 per invoice in enterprises with mature ERS processes in place. Invoice-processing costs are largely a function of AP staff productivity, and Evanoff says his firm’s savings estimates are grounded in the assumptions that one AP professional can annually process about 12,000 invoices using “old school” methods, 26,000 invoices utilizing advanced technology, and 55,000 invoices under ERS.
The siren song of greater AP efficiency at lower cost was loud enough in 2002 to entice Lennox International to heed its new hire’s recommendation and give the ERS process a try at its production facility in Marshalltown, Iowa, which generated lots of ordering, receiving, and invoicing activity. ERS is “so straightforward that it took us only a few days to assess what processes at the facility it would impact and how,” recalls John Ireland, director of worldwide sourcing in Carrolton, Texas. For Lennox, those process changes were relatively minor and few in number because the organization already was scanning, routing, and storing receiving documents electronically for inventory-control purposes. “Based on my experience in the value-add — and non-value-add — associated with paying bills, piloting ERS was just commonsense for us,” Ireland says.
The pilot project was so successful that a year later, the organization rolled out ERS at a plant in Arkansas and still another year later in all other Lennox-branded production facilities. The long-term intent, Ireland says, is to implement ERS across all Lennox International brands enterprise-wide. The ongoing benefit of ERS, Ireland says, is that “it dramatically reduces” the number of discrepancies arising from the ordering-receiving-invoicing cycle. “The process is a dream” for AP,” he says. “Mismatches go away, allowing us to move AP staff to more value-add roles and even eliminate some headcount through attrition.”
Ireland recalls that the organization initially encountered some challenges in getting suppliers interested in participating. Lennox overcame this initial reluctance with a two-day educational event for suppliers before the pilot site went live, he says, “to inform them how we were going to do business going forward — and how it might actually benefit them.”
With some 25,000 employees and $5.8 billion in annual revenues accruing from activities in 61 plants in 26 countries on six continents, The Timken Company based in Canton, Ohio, not only is larger than Lennox International but also has been using ERS even longer. The provider of friction management and power transmission products for numerous industries ranging from aerospace to health care has, in fact, used ERS “heavily” for about 20 years and now proceses approximately 80 percent of its 1 million invoices a year across the enterprise via this methodology, says Disbursements Manager Kim Palmer. “I don’t want to imagine the magnitude of the impact on AP of going back to all-paper invoicing.” That impact, Palmer explains, would inevitably include seeking more headcount for the organization’s centralized AP processing center in Bangalore, India.
The continuing challenge presented by ERS “is getting everyone into alignment,” Palmer observes. “I must constantly preach to staff that the data they generate must be accurate or vendor payments will be wrong and this will generate time-consuming calls to the AP help desk.”
Because the business units — and not AP or purchasing — “own” the receiving function, Palmer says, “we have to go to the vice presidents of those units to clean things up” when ERS is expanded to additional product lines or geographic locations. However, he says, management has been supportive of his ERS-grounded suggestions for strengthening receiving controls and mitigating corresponding risks.
Palmer also notes that Timken’s purchasing function develops and maintains vendor relationships, so it’s purchasing and not AP that bears responsibility for vendor training in the ERS process. “We don’t get a lot of vendor push-back” about adopting the process, he says, and “I don’t hear many subsequent complaints from vendors regarding payment issues.”
Soltec’s Evanoff says this is typical because ERS ultimately improves suppliers’ cash flow. In fact, he observes, suppliers generally embrace the ERS process more readily than internal payables staff.” Nevertheless, he says, Timken is embracing best practices in investing in supplier education: “Sending suppliers a letter will not do.”
“We have our arms around ERS now, and we like it,” Palmer says. “Overall, in my eyes, it works well for us, and I would not want to entertain doing anything different.” Still, even ERS proponents such as Ireland, Evanoff, and Palmer readily acknowledge that ERS is not an AP panacea.
“In most cases, ERS is an easy thing to do well when we’re buying physical products,” says Palmer. “However, when we started running down the ERS avenue, our enthusiasm and momentum led us to apply ERS processes to some service purchases; we probably would have been better off not doing this.” For example, he believes, procurement of services such as landscape maintenance whose final price is determined only after the activity is complete is best left to the three-way match payment process.
Evanoff estimates that about one-third of Fortune 100 companies now use ERS in some or all of the enterprise and that the overall business adoption rate is about 10 percent. Therefore, it seems logical to conclude that some organizations that have evaluated the promises and potential pitfalls of ERS have determined it unsuitable for one reason or another. Consider, for example, the case of Baker & Taylor, a leading global distributor of physical and digital books and entertainment products to libraries, institutions, and retailers.
This nearly two-century-old enterprise, based in Charlotte, N.C., knows a thing or two about ordering, receiving, and inventory management: The firm ships more than 1 million unique products annually and maintains about 385,000 book, video, and music titles in inventory with more than 1.5 million titles available for special order.
Timothy Seitz, accounts payable director for Baker & Taylor, says the firm has periodically considered ERS and explored its use with with a few larger suppliers. However, he says, the IT systems work required to implement the ERS process at Baker & Taylor in the absence of an integrated enterprise resource planning (ERP) application was judged too costly with too little payback. “Technology costs and the need to [negotiate a new] agreement with each supplier have been insurmountable obstacles,” Seitz says.
It should not be surprising that many organizations that study the pros and cons of ERS adoption come to the same conclusion as Baker & Taylor, says Eric Jones, who has more than 20 years of experience not only in AP management but also in public accounting and internal auditing. “Although some organizations think ERS can fix all AP ills, I don’t believe that’s the case,” says Jones, director of corporate payables for Lowe’s Companies Inc., based in Mooresville, N.C.
Instead, Jones asserts, many of the tantalizing efficiency enhancements and cost savings touted by ERS proponents also could be realized through holistic adoption of other AP best practices such as document imaging and workflow automation and electronic data interchange. “As AP professionals have more fully automated our function, a lot of the potential value of ERS has slipped away,” says Jones, who has served as chairman of IAPP since 2006. However, he adds, “that’s not to say that ERS does not have a place; it is something every organization needs to look at.”
The most costly aspect of maintaining the three-way match process is reconciling documentation discrepancies, and adopting ERS in an imperfect procurement or receiving environment will not eliminate mismatches, Jones notes. “Discrepancies will not go away just because you eliminate invoicing. You will still have them and so the only difference is when they are noticed — when you get an invoice, which today is pretty quickly after shipment — or 30 or more days later, when the seller’s AR staff notices they did not get paid for what they believe they shipped.”
Adopting ERS also will not relieve AP of the burden of reconciling these inevitable discrepancies, Jones believes. “Ultimately, the resolution of payment disagreement inevitably falls to the buyer’s AP function and the seller’s AR function to coordinate,” he says. “Personally, I feel that paper or electronic invoicing is a great way to check early on whether everyone and everything is in sync.”
If there is one point on which everyone appears to agree it is that missteps in the receiving process are the Achilles heel of ERS. “If you’re paying on the basis of what you receive,” says Jones, “then the quality of the receiving function presents significant risk. If receiving is not highly accurate, you could be just as easily overpaying as underpaying your suppliers.”
Soltec’s Evanoff laments that in most organizations, receiving still is not viewed as a value-added function and staff members performing this role are not highly skilled or trained. Organizations even considering ERS adoption would be well-served, he says, to reconsider the importance of receiving roles and responsibilities and re-engineer them as appropriate. “The entire receiving process, from unloading a truck, to accurately putting the materials away, to reporting to AP” should be critically examined, he says. “There is no underestimating the importance of developing and implementing effective receiving procedures for detecting and handling every possible shipping exception including shortages, overages, wrong items, partial shipments, wrong or no purchase order, and no packing slip, just to name a few.”
Timken’s Palmer reinforces, “You have to have good receiving policies and practices and training in place,” or it will be harder than not to use ERS.
Even if you’re not planning to move to ERS, concurs Lennox’s Ireland, AP professionals should address the purchasing and receiving discrepancies that routinely occur in the enterprise. Ask the probing questions whose answers will uncover the root causes of these discrepancies and then fix them, he says, “don’t merely accept discrepancies as a fact of life just because your current AP procedures support finding and reconciling them.”
Questions to ask before choosing ERS
· Is physical security in place to prevent employees from taking received products before they are properly logged in?
· Have effective processes been implemented for returning damaged or otherwise deficient shipments before they are formally received?
· Are safeguards in place to detect inevitable “fat finger” keyboarding errors such as typing 100 instead of 10 units received?
· Do receiving processes include labeling each packing slip or other receiving document with a unique identifier to facilitate the accuracy of payments by the vendor?
Invoice processing costs, per transaction*
Manual: $5.22
Automated: $2.14
ERS: $0.71
Annual invoice volumes
Manual: 12,000
Automated: 26,000
ERS: 55,000
*According to Soltec, Inc.
