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Team-Based Homework Assignment 2: Improving Accounts Payable at Ramsville

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Question;Team-Based Homework Assignment 2;Improving Accounts Payable at Ramsville;Introduction;Sarah;McDougal, Manager of Disbursements at Ramsville thought to herself ?Just a few;more days until the Kaizen event kicks off.?;As Manager of Disbursements, Sarah oversaw four departments in;accounting: the Sales and Use Tax Department, the Payroll, Time and Expense;Reporting Department, the Accounts Payable Department, and the International;Accounting Department.;Ramsville?s new;CEO, Chris Smith, had developed and championed Ramsville?s new Lean Initiative;not long after taking over. After;achieving substantial improvements in cost, lead time and quality from the;application of lean principles on the manufacturing floor, Chris felt it was;time to apply the same principles to other functional areas. Given the importance of Accounts Payable (AP);in maintaining a smooth flow of incoming material and preserving good;relationships with suppliers, Chris felt that the AP area, which had been;experiencing increasing lead times for invoice payment, would be a good place;to start.;With the top;management directive of working on improvements in the AP process, Pat Davis;the Assistant Controller and Sarah?s boss, scheduled a meeting to review the;current situation. ?Just look at this?;Pat said while pointing to a column of numbers in a spreadsheet. ?We?ve got;almost 6.5% of our accounts payable overdue, and our suppliers are not happy;about it! In a few cases, it?s even;impacting further shipments of parts, potentially causing our manufacturing;plant to miss shipping due dates and impacting customers. We must get a handle on this!?;Walking the Process;Following;that meeting, Sarah met with Colleen Martin, Manager of the Accounts Payable;Department, to better understand the entire AP process. Colleen provided a good overview of how the;process should work, but Sarah realized that she would need to walk the process;herself to truly understand the current state of things. She scheduled a walk-through of both the;mailroom and the AP Department, armed with a clipboard, stopwatch, calculator;paper, and pencil to create a formal current state value stream map (VSM).;The AP;process begins at the mailroom which processes incoming mail from all sources;including invoices from suppliers. Once;there, Colleen and Sarah spoke with Bill Hoskins, the Mailroom Manager.;Bill;explained the process to Sarah: ?We?ve noticed, based on the post mark of;incoming mail that it takes about 5 days for most mail to get to us. After the mail is received, it has to be;opened and sorted. We are running a bit;behind, so we usually open the mail the day after we get it. If it doesn?t belong to AP we have to route;it to the right department. We receive;about 300,000 pieces of mail each year. It takes about 1 minute to open and;look at each piece of mail, to determine if it is AP mail. We find that about 35,000 pieces a year do;not belong to AP.?;Sarah: ?Wow, I didn?t realize so many invoices came;in each year. I thought that we had an automatic payment process that was;supposed to reduce incoming invoices.?;Bill: ?We do get a lot of invoices coming in, but;not all of those actually get sent on to AP.;Other processes screen out many of the invoices. First, we have to check mail that is sorted;to be AP mail to see if it has a Purchase Order (PO) listed on the;document. We have about two days of;backlog from the time the mail is opened until the PO check happens. It takes an average of 2 minutes to confirm;the PO number since all of the invoices have different formatting and we have;to enter the PO in our system, and 8 mail room data entry clerks work this;process for 75% of their work day and the rest of their time on other types of;data entry. Fortunately, we don?t really;get any invoices without valid PO numbers on them.?;?As you know;the PFR invoices don?t go through the standard AP system, since they are paid;automatically when the material is received.;I sure wish we could get all our suppliers on to the PFR system, and I;don?t understand why suppliers already set up on the PFR system still send us;paper invoices ? it?s really frustrating! So after we are done checking the PO;number, we have to check to see if the invoice is part of the automatic Pay;From Receipt (PFR) process.?;Colleen: ?You?re right Bill, but the problem is that;some of the suppliers are running on accounting software that forces them to;generate and send an invoice. We?ve;talked to them about this, but it?s just too expensive for some of them;especially our smaller suppliers, to change their systems to meet the needs of;only one customer. Still, it would be;nice for both us and the suppliers if we could come up with a solution.?;Bill: ?There;is an inbox for the PFR check that has about 1 of a day?s invoices in it. When we find that the invoice is part of the;PFR process, we throw the invoice into the paper recycling bin, since the paper;invoice isn?t needed and it is just a duplicate of the automatic PFR. We use the extra money we earn from all the;paper we recycle to pay for refreshments at our softball games. At this point, we throw away about 200,000;invoices per year that are really PFR. We;keep exact track of what we throw away, since we want to be sure that we don?t;throw away something that we shouldn?t.;Since we are really careful, it takes us about 6 minutes to do this, and;we have 25 full time mail room people working only on this. The remaining;invoices are sent to the AP department.;The invoices are divided alphabetically by supplier name while we are;doing the PFR check and sent to the assigned AP person, so that each person;gets approximately the same number of invoices each year. Once we send the paper invoices on to AP, the;mailroom is done with its part of the process.?;Sarah: ?Let me make sure I have this right. First you receive and sort all the mail, with;about 265,000 identified as AP mail.;Then you have to check for a PO. After confirming the PO, you then check;to see if it is on the PFR system. If it;is, you recycle the paper, if it isn?t, you send the invoice to the assigned AP;person. Does that sum it up??;Bill: ?Yep, that?s about it.?;Sarah: ?Thanks Bill, we appreciate your time and;information. Colleen, let?s go find out;what happens after the mailroom passes the invoices along to AP. I?ve asked Sam Wolf to help us with the AP;part of the process, since Sam has been working as an AP analyst for about 5;years and has done a variety of different jobs in the accounting department.?;Colleen: ?Hi Sam, Sarah and I are ready to have you;walk us through the AP process on this side.;We?ve just finished talking with Bill Hoskins, who explained the process;through the point that the mailroom sends the invoices to you. Let?s start with how long it takes the;invoices to get to you from the mailroom.?;Sam: ?Well, they make deliveries three times a;day, at 9:30, at 1:30, and at the end of the day to clear out their area before;the end of the shift. So I guess you;could say that the average invoice takes 1.5 hours to get to us once the;mailroom is done. The mailroom;distributes the invoices to the inbox of the assigned AP analyst. Our inboxes usually have about 2 days worth;of incoming material. We process the;inbox on a FIFO system, and once an invoice comes up to be worked on, the first;thing we do is make sure that they aren?t on the PFR system.?;Sarah: ?Wait a minute, didn?t the mailroom already;check to see if the invoices were PFR and get rid of those that are? Why are you checking for the same thing;again??;Sam: ?Yes, they do check, but we still find about;1,250 per year that they missed. It;really is a pain to check for PFR status, and it takes us 7 minutes to do it;because we have to be extra careful to catch ones that were missed when the;mail room people checked them. Each;analyst has to spend about 25% of their time doing these checks. This is such a time consuming effort that we;have been keeping track of how many we find each week, and I can get that data;for you, if you want.?;Colleen;?We?d like to have that data, thanks.;Okay, you screen the incoming invoices for PFR and then you only work on;the invoices that aren?t PFR, right??;Sam: ?Yes, at;this point, we have only actual invoices that need to be manually processed;through the AP system. Now an analyst;has to determine if the invoice is ready for payment. It could be that the pay-by-date is out in;the future or we have a payment schedule agreement with the supplier. It takes about 5 minutes to sort each invoice;to determine if it is ready for immediate payment or should be set aside to be;paid later. Analysts spend about 20% of;their time sorting for payment readiness.;Invoices that aren?t ready for payment are set aside, which happens to;about 20 invoices each day. On average;?pay later invoices? aren?t processed for 15 working days. It takes about 1 minute (and the equivalent;of ? of a full time person) to look at a ?pay later invoice? and move it over;to payment processing when it is due.;When a payment is ready to be paid, regardless of whether it is a ?pay;now? or one of the ?pay later? invoices that is now due, it takes about 2;minutes to enter it into the payment processing software. We take turns and;have one AP person work on this all day.?;Sarah: ?So all of the invoices end up going through;payment processing, although some go straight there if they are ready for;payment, but some wait for a while until they are due, is that right??;Sam: ?Yes, they all have to go through the full;payment processing, eventually. After;they have been entered into the payment processing system, they have to go;through a batch process, which runs 4 times per day so an average invoice waits;1 hour for processing. We want to be;sure that nothing is getting paid incorrectly, so we actually spend another 2;minutes per invoice doing a final inspection of the payment before the batch is;released. We take turns doing this with one person working on it per day.?;?At this;point the payment should be on the way to the supplier. However, we still have to file the paper;invoice along with proof of payment. It;takes about 4 minutes per invoice to file the paper documents. But we usually do all the filing at the end;of the day, so an average invoice waits for about ? day until it is filed. It would take the equivalent of 3 full time;people to do all the filing, but each analyst is supposed to do their own;before they leave for the day.?;Sarah: ?Okay Sam, let me make sure that I have the;process straight. You get the paper;invoices from the mailroom. Then an;analyst does a PFR check. If the invoice;is PFR, it is thrown away, if not, it moves through the system for payment;processing. You have to determine if it;is ready to pay now, or should be set aside to be paid later. When an invoice is ready to pay, you input it;into the system, process the batch and then file the paper documents. Does that about cover it??;Sam: ?Yes, that?s about what we do.?;Sarah and;Colleen met later in the day to review the data they had collected and to begin;drawing their current state VSM.;Sarah: ?It looks like we?ve gotten a lot of good;data on the current process, and it seems that there are several opportunities;for improvement. Let?s finish up with;the current VSM and then run it by Bill and Sam to make sure that we?ve;captured everything correctly. Then we;can call a meeting to begin working on our future state map.?;Colleen: ?That sounds good. One other thing that didn?t come up when we;were talking with Sam, but that I think is a problem that we should also look;into, is the number of invoices that are paid incorrectly. The AP analysts are actually spending a lot;of time trying to troubleshoot and fix invoices that suppliers have called to;complain about. We?ve begun keeping;track of the reasons that suppliers are calling about incorrect invoices, and;it would sure be nice to use that data to try to find some root causes that;could fix the problems we are having.;Not only would fixing the problems free up a lot of time for our;analysts, but suppliers would also be a lot happier. It?s hard to encourage them to be more;accurate in the invoicing process when we aren?t accurate in the payment process. Another thing that is important, a lot of the;calls we get are because we are somehow short or late with a payment, but I;suspect that we may be over-paying some invoices and suppliers may not be;calling us about those errors.?;Sarah: ?Wow, I didn?t realize that we were having so;many problems. We certainly want to fix;them to encourage good relationships with our suppliers, and we sure don?t want;to be over-paying invoices! What kind of data have you been gathering on the;incorrectly paid invoices??;Colleen: ?I?ve asked the analysts to keep track of the;reasons for the invoice errors over the past couple of months using some check;sheets that we?ve created. I can get a;copy of the data to you right after we finish with the current state VSM.?;Summary of Ramsville Work Day;Number of clerks: 36;Number of AP analysts: 18;Average annual vacation days: 5;Number of company holidays: 5;Work day: 7:30am to 5:00pm M-F;Breaks 2 @ 15 mins;each (paid);Lunch 30 mins;(unpaid);Daily;Meeting 15 mins;Housekeeping/5S 15 mins;Number of Invoices Found per Week to;be PFRs by AP Analysts;Week;PFRs found each week;1;30;2;27;3;24;4;23;5;22;6;21;7;19;8;38;9;21;10;22;11;23;12;6;13;25;14;25;15;26;16;25;17;25;18;25;19;20;20;24;21;23;22;26;23;24;24;25;25;23;26;26;Checklist Results of Invoices Paid;with Errors per Supplier Complaint (6 months of data);Check sent without signature 18;Check sent without invoice reference 42;Sent to the right company but wrong;address 21;Wrong invoice referenced 29;Paid short 27;Over paid 9;Paid paper invoice twice 7;Paid PFR invoice 8;Paid on a canceled purchase order;12;Payment sent to the wrong company 11;Payment returned for unknown reason 6;Two company?s payments sent in one;envelope 9;Paid late 342;Payment never made 35;Payment sent for material that was;returned 9;Other 46;Your Mission;Your team has;been asked by Sarah McDougal, Manager of Disbursements at Ramsville, to come up;with recommendations. As your team;analyzes the problem with overdue payments to suppliers at Ramsville, be sure;to consider;The;current VSM for the AP process and its performance;What are the total lead time;total processing time, and percentage of time waiting for the ?pay now?;versus ?pay later? invoices?;Is there a bottleneck in the;current AP process?;Which activities are value-added;and which are not?;The;number of PFRs found by AP analysts;Is the task of checking PFRs by;the mailroom in statistical control?;How can you tell? Which;control chart(s) support your conclusion?;The;supplier complaint data;Which types of errors account;for 80% of the complaints by suppliers?;How can you tell?;Note that;each of these considerations should lead to a recommendation for Sarah McDougal;to consider. It is also possible that a;recommendation is supported by more than one type of analysis.;HINTS;?;Invoices;may "exit" the AP process;o;As;invoices exit the AP process, ?demand? changes for the consequent processing;tasks and, therefore, Takt times may change as well;?;When;performing calculations, take all computations to 2 decimal points;o;Think;about the bigger picture and the situation BEFORE trying to do the VSM;calculations.. draw the VSM first;before doing the computations;o;Note;that one year = 52 weeks;o;When;calculating the number of days per year, account for both holidays and;vacations for this business that runs 5 days per week;o;Transportation;can add to waiting time in the AP process for invoices;o;Do;not confuse the queue for processing and actual processing;?;When;parallel processing tasks develop, you will need to show more than one time;line;?;Note;that data entry clerks are mail clerks for PO check but 25% of their time;involves delivering mail to other areas;o;The;time for delivering mail to other areas is not of the AP process so do not try;to add them back into the current or improved VSM for the AP process;?;Note;that there are 18 AP analysts in total but they rotate working on some of the;processes and may have duties not detailed in this VSM so do not try to account;for all 18 people using FTE;Submission Requirements;?;Your;team-based assignment should be written in the format of a memorandum;addressed to Sarah McDougal;o;Download;the ?How to Write a Memorandum? file for helpful tips;o;Download;the ?How to Analyze and Write Up a Case Assignment? file for helpful tips;?;The;memorandum should look professionally appealing, be concise, be grammatically;correct, and be free of spelling errors;?;The;memorandum itself should not be more than two (2) pages, single-spaced, with;1-inch margins (top, bottom, left, and right);?;The;font and font size for the memorandum should be Times Roman 12;?;Figures;tables, computations, etc. are to be attached as exhibits to the memorandum and;be properly referred in the memorandum itself;o;In;general, do not attach an exhibit that is not mentioned in the memorandum;o;The;number of exhibits that can be attached to the memorandum is restricted to no;more than ten (10) exhibits;?;Please;discuss your team-based assignment with only your teammates... remember that;discussing graded assignments with students who are not your teammates;constitutes two types of academic misconduct: (1) unauthorized collaboration;and (2) giving and/or receiving aid in an unauthorized manner;?;One;copy of your team-based assignment with names of all team members must be;submitted by the date and time detailed in the syllabus

 

Paper#45878 | Written in 18-Jul-2015

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