Academic journal article The McKinsey Quarterly

Order to Payment

Academic journal article The McKinsey Quarterly

Order to Payment

Article excerpt

More and more, this process distinguishes winners

* The challenge is to link material, information, and monetary flows

* But international organizations cannot be reengineered only from the top

* Building "microcosms" with an action perspective may be the answer

Ask top managers where the order-to-payment process lands among their strategic priorities, and most will tell you it doesn't even make the list. Often, order to payment is delegated to a middle manager with responsibility for operations effectiveness or logistics management. But as companies realize that strong brands and good products are no longer enough to ensure success, and as they begin to see limits to growth in their primary (and even secondary) channels of distribution, the strategic importance of the order-to-payment process is growing.

Most industries are experiencing intensifying cost competition, rising customer sophistication and fragmentation, and converging product performance. Product life cycles are shrinking, and demand is becoming less and less predictable. In such an environment, delivery performance and customer service are becoming as critical as product performance and brands. The way companies make, adapt, sell, and distribute their products is turning into a major source of competitive edge.

Consider Benetton, which changed the game in fashion retailing - not through its designs, but through a completely new approach to making and distributing clothes. Fast, responsive, and accurate, its order-to-payment process allows it to compete with higher margins than the rest of the industry.

Or look at Procter & Gamble and its arrangements with Wal-Mart in the United States. The retailer's electronic link to P&G automatically sends off a replenishment order as soon as an item is sold. Not only does this improve the effectiveness of the order-to-payment process, boosting profits for the two companies to share, but it has also created a special relationship between the partners. When a company's superior delivery service makes it the preferred supplier, it may reap significantly more volume than the second or third supplier.

Despite the growing importance of the order-to-payment process, few companies have been able to capture its full potential. The thought of long reengineering programs and big systems investments understandably puts many managers off. But improving order to payment need not require years of process mapping and exhaustive implementation efforts. In our work with more than 25 companies from a variety of industries during the past two years, we have developed an approach that attacks the problem in microcosms. With the new approach, an improvement program will no longer take several years to deliver impact.

Moreover, the microcosm approach acts directly on the levers that influence return on capital, namely revenues, costs, and capital employed. Companies adopting it have enjoyed impressive results, with revenue increases of between 5 and 15 percent, total costs down by 8 to 12 percent, and capital requirements cut by as much as 50 percent, mostly through reduced finished goods inventory and work in process. Better still, this kind of effort often leads to the identification of new channels of distribution channels that may open up whole new markets or market sectors.

The order-to-payment process

"Order to payment" may be defined as the material, information, and monetary flows that run through a company from raw material to end customer [ILLUSTRATION FOR EXHIBIT 1 OMITTED]. The process thus incorporates most business activities except brand building, after-sales service, and new product development. In contrast, the concept of the supply chain is typically much narrower focusing exclusively on the material flow from factory gate to warehouse or customer door is just one example.

Many companies have devoted substantial process-oriented initiatives to manufacturing and logistics. …

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