Routing Out the Hidden Money in the Day to Day

There are all kinds of hidden opportunities for saving money in your business. Identifying them especially in the routine day to day tasks, can be challenging, but with the right questions these opportunities can be easily captured.
During a recent engagement I was reviewing the accounts payable area and in conversation with the manager I was asking about errors on invoices from vendors that ship product direct to the stores. He told me that the process is very good as there were limited errors (red flag!). He added that on occasion there are some quantity discrepancies but rarely any cost disputes. “Really”, I said. So I probed a little further:
Q (me): So who checks quantities?
A: (AP manager): Well the store does when they receive the goods.
Q: Well that makes sense. So who checks prices?
A: The stores do.
Q: How do they do that?
A:  Well they have access to the system and can check it on line or if they want they can print the cost sheets. If there is an error they fill in a form and send it into us for review.
Q: So you expect that people in each of your 400 stores are checking each cost on every item on each invoice?
A: Yes, that is their responsibility.
Well it didn’t take me long to flush out the store’s version of this process.  During my visits I asked the store managers, “Tell me about the invoice cost checking process”.  They painted quite a different scenario!  Firstly, they were not even aware that this was supposed to be their responsibility.  Secondly, and more importantly, it would be far too much work, and just not practical. The systems are difficult to access for this purpose, and if an error is found, reporting it is a manual process. It would require an extra 10 – 15 hours per week to do the checking, reporting, and follow up.
So I went back to the accounts payable manager and encouraged him to do the checking for a week on selected vendors. The invoices were being received electronically so with the use of Excel and some data downloads we reviewed the comparison report of vendor costs and internal approved costs. Well, as you have probably guessed, it was quite the surprise!
There were 100’s of items that did not match, clearly indicating a challenge in verifying costs. We then manually corrected the misalignment and reapplied the comparison of costs. Numerous price discrepancies appeared. We then expanded the scope to include all vendors.
The results showed discrepancies averaging $10,000 a week ($520,000 annually) in excess charges! As you can imagine, both the manager and his boss were astonished.   
So what are the lessons learned?
Many times you need to look beyond process efficiencies and review process effectiveness. In this case it was a broken process because work was assigned to those that could not execute it and hence, it was not being done.  A hidden loss-pretty important stuff!
One of the many questions that arose was “how did this get assigned to the stores in the first place?”  Well, all too often work is assigned to those who are responsible for the outcome, i.e. the stores were expected to check the costs since they are responsible for  gross margin (product sales less product cost).The objective however is to assign work instead to those that are in the best position to execute. In this case, accounts payable had the data and so performing  this task at the department level for all 400 stores would not only be more efficient, but far more effective than having each store doing it separately.
The reward? A hidden loss uncovered. In this case, over ½ million dollars in additional gross margin, and all with very little effort. 

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