Tonka Manufacturing Accounts Payable Benchmark Project

Case Background

You are a Staff Auditor in the Business Advisory group of Coopers, Young & Andersen ("CYA"), a large international accounting firm. Tonka Manufacturing is a CYA client and is in need of a business process improvement project in its accounting department.

CYA is well known for using Six Sigma ("DMAIC") to help clients achieve significant cost savings on business improvement projects. A CYA business advisory partner met with the Tonka Manufacturing corporate controller to "Define" the project. The controller stated that the Company perceives the greatest process improvement opportunities are in the Accounts Payable process. Since the partner has "Defined" the project, your task is to "Measure" the size of the opportunity.

CYA is a member of the American Productivity and Quality Center in Houston, Texas. That membership allows your firm to access performance data (statistics/benchmarks) about financial processes.

You download some accounts payable financial process benchmarks onto an Excel spreadsheet. (The spreadsheet you will need is on a separate file document.) After you review the data, you contact several accounting managers and supervisors at Tonka who have active roles in the Accounts Payable process.

Part I

You learn from the Accounts Payable supervisor, there are seven accounts payable clerks who process vendor invoices. In 2016, the accounts payable department processed 51,000 invoices in total among the seven clerks. The process steps require the clerk to match the vendor's invoice price to the price stated on the Tonka Manufacturing purchase order. If the prices match, the clerk then matches the quantity billed by the vendor as stated on the vendor invoice to the quantity received in the warehouse. The warehouse clerks complete a receiving report for all shipments received from vendors. If the price and quantity match on each of the three documents, the accounts payable clerk approves the invoice for payment.

Oracle automatically prepares a check for each approved invoice 30 days after the invoice date. Tonka does not take vendor discounts if offered. Electronic payment processes are not used since the supervisor does not trust sending payment information over the internet. The supervisor volunteers that about 1% of all checks issued contain a clerical error that must be resolved with the payee. In the majority of cases, the errors are insignificant in amount and usually represent transposition errors made by the accounts payable clerk.

From your meeting with the Tonka Accounts Payable Supervisor, you also learn about processing inefficiencies or delays. The supervisor tells you that the number of differences between quantity billed and quantity received is very low. However, there are a number of discrepancies between the invoice price and the price on the purchase order. You ask about the frequency of such occurrences. The supervisor shows you a 2016 report indicating her department had to resolve 6150 price differences between the purchasing department and the vendor. Since it is cumbersome to coordinate a resolution among three parties, the average time to resolve a discrepancy approximates 5 business days.

You ask the supervisor in whose favor are most of the price discrepancies resolved? She said that 49% of the mistakes are made by Tonka, and the vendor errors approximate 51% of occurrences. The supervisor also noted that because of the volume of unresolved discrepancies at month end, she is reluctant to close out accounts payable with so many transactions in question. She stated that she will wait two days beyond month end to close accounts payable, but she admitted that she is frequently running to accounting with closing adjustments as discrepancies get resolved.

PART II -- REQUIRED

From the above information, calculate the benchmark data for Tonka Manufacturing and compare the Tonka results to the benchmark data received from the APQC. You should be able to calculate all the benchmarks shown on the spreadsheet.

From your analysis, summarize the process issues and examples of "waste" you believe exist in the Accounts Payable department.

Based on the information provided and your analytical skills, develop achievable process improvement targets for Tonka's accounts payable department? State your answer and explain why you believe the target is achievable.

Bonus Questions

What performance measures would you to install to measure and determine if your suggestions are working and targets are being met? Name 3 total measures addressing the three categories/attributes we discussed in class.
EXCEL SHEET:
Accounts Payable
Statistics (139 companies)
Minimum Median Maximum Tonka Manufacturing

1 Average Time to Resolve Errors (elapsed time) in hours 0.1 1 4 8 40

2 Internal Tonka Processing Error Rate 0.003% 0.494% 1.519% 7.904% 48.980%

3 Annual Number of Invoices Processed per employee 798 3,688 7,632 14,071 46,939

4 Average Number of Invoices per Payment 0.6 1.6 2.3 3.4 12.4

5 Incoming Invoice Error Rate 0.00% 1.51% 3.68% 12.00% 60.00%

6 Check Error Rate 0.00% 0.39% 0.70% 1.49% 6.94%