Reducing Waste: Through Coordinating Purchasing & Accounting

An incredible amount of waste is hidden in poorly coordinated activities between groups such as Procurement, Receiving, and Accounting.

A few years ago I visited a major industrial distributor where packaging personnel demonstrated their process for “picking” and “packaging” orders. A customer had issued the distributor a Purchase Order specifying “5 boxes of 10 light bulbs”. However, the light bulbs were pre-packaged in boxes of 12. The light bulbs were priced as a “box”, without regard for the actual number of light bulbs it contained. So the distributor fulfilled the order as “5 boxes of 12 light bulbs” only to have the customer reject the order for containing an “overage”.

After the distributor explained that the price was the same whether there were 10 or 12 light bulbs in a box, the customer insisted that the boxes must contain only 10 light bulbs. This was because the customer's purchasing system had previously been configured to reflect each box as containing 10 light bulbs (for inventory purposes).

So, in order to promote customer satisfaction, the distributor instructed their packaging personnel to remove two light bulbs from each box… and place them into a trash bin. Incredibly, this obvious waste delighted the customer's accounting function!!

More recently, I visited a company where I interviewed their Receiving personnel. A common issue for them is where the Purchasing function orders varying lengths of wire/cable (e.g., 1,000 feet), but the supplier “Packing List” reflects an excess (e.g., 1,003 feet); which is a common industry practice. Even though the cost remained the same as the original amount of wire/cable ordered, the company's Accounting Dept. will not pay the supplier until the Purchasing function issues a revised “Purchase Order” for the actual amount received. While the cost associated with this administrative function far exceeds the cost of the excess wire/cable, it delights their in-house Accounting function!

The solution is to ensure that intertwined activities, such as Procurement, Receiving, and Accounting, are coordinated in a formalized, structured manner. Establish communication channels to quickly identify and resolve issues (such as those mentioned above). And define responsibilities along with an escalation process to ensure that the same issues are prevented from recurring.

It's amazing how few companies take these simple steps!