Applying Lean Accounting Methods To The Accounts Payable Process
Prior to the introduction of lean thinking this company had taken the approach to centralize their accounting processes. The Accounts Payable department has 40 people and processes approximately 36,000 transactions each month. The company is in the process of implementing Lean Accounting but there has been little progress within the centralized service center because the people had not been included in any of the lean training or lean accounting workshops. As a first step, a kaizen event was organized within the shared services Accounts Payable department with the goal of eliminating waste, improving productivity, and reducing the processing lead time.
The process flow prior to any of the improvements is shown below:
The flow rate of the average AP invoice was 22 days and the “first time through” (FTT) quality was 80% because 20% of the invoices were mismatched and required special attention. The productivity of the operation is 900 documents per person (36000 / 40 people).
During the first kaizen event the team decided to introduce supplier contracts whereby instead of creating a purchase order (PO) for each requirement, the company agreed long term contracts with the suppliers and introduced daily pull to replenish the materials used in production. Tied in with the supplier contracts was an ability to voucher AP on receipt of the material from the supplier. This voucher on receipt process greatly simplified the AP process because these items were received directly as an expense into the value stream and no longer required a supplier invoice because the AP voucher is created based upon the price (and other) information contained in the supplier contract. 12,000 of the documents are now processed this way.
The map of the new process is shown below:
This new process reduced the overall lead time for the documents from 22 days to 19 days and the quality of the process improved from 20% mismatches to 10% mismatches. These results are shown in a Box Score below:
During the second kaizen the team created some “AP cells”. These cells contained small cross-functionally trained teams and the documents flow through the cells using lean single-piece-flow without any batching of the invoices. This greatly improved the speed of the flow and simplified the process. Here’s what the new process looks like:
In addition to improving the flow these changes also reduced some of the costs of the process because the cells required less room, simplified some aspects of the information systems, and reduced a lot of the documentation and paperwork associated with the previous lengthy flow of the documents. Here’s the new Box Score.
The real cost savings came as a result of redeploying some of the people to other processes within the company. The increased productivity of the new AP process cut the number of people required to perform the tasks nearly in half.
The kaizen team decided to establish five 4-person AP cells, to retain an AP Manager, and a Continuous Improvement person. This required 22 people in total.
The cells were designed to enable simple flow and excellent communications. The cells contain a desk for each team-member and a meeting table with “heijunka wheel” used to level the demand on the team.
The workload within the cells was studied and compared to the cell takt time. The workload was leveled across the four team-members within the cells. Team-members 1 & 2 perform the invoice entry, matching, and authorization process. Team-member 3 resolves the mismatches and also works on one problem solving project each day. A problem solving projects typically required 4 hours of work. Team-member 4 handles the printing and mailing of checks. When the team members are fully cross-trained, they will rotate tasks each day. The workload charts are shown below.
The most heavily loaded person is team-member 4 whose cycle time exactly equals the cell takt time. The other team-members are on the lookout for team-member 4 becoming overloaded and jeopardizing the flow rate. The other team-members help #4 when the load increases. Visual methods are used to monitor team-member 4's workload.
The final box score for the processes designed by the kaizen team is shown below.
This is not, of course, the end of the story.
All Accounts Payable is waste and our purpose is not to improve the AP process but to substantially eliminate it. To further eliminate the need for AP will require working closely on the broader process. This includes the purchase contracts, pull systems with the suppliers, visual inventory management of raw materials and purchased components, and moving to more voucher-on-receipt, expense-on-receipt, and (perhaps) payment-on-receipt.
. Total documents in the flow = 39,600. There is an average of 1800 invoices processed per day. Average flow rate = 39,600/1800 = 22 days.