Objective:
To improve accuracy in the information contained in purchase orders, receiving slips and supplier invoices
Calculation:
| Number of perfect invoice matches | ||
| x 100% | ||
| Total number of invoices |
Target:
≥ 95% perfect invoice matches
Background Details
Rationale
Three-way matching is the process of reconciling each invoice with its related purchase order and receiving receipt. Any discrepancies between the three mean that an error has occurred and it must be investigated and corrected. Fixing even a single mistake can be time-consuming and costly. To the extent that organizations are able to minimize or eliminate errors, they can redirect resources to more strategic activities.
There are numerous causes of invoice matching failure, including:
- Data-entry errors by:
- Supply chain staff in creating the purchase order;
- Suppliers in creating the shipping receipt or invoice;
- Receiving staff in entering receiving information; or
- Accounts payable staff in entering the invoice into the system;
- Pick/ship errors by supplier staff;
- Count errors by receiving staff;
- Expired, incorrect or incomplete pricing information in either the item master or in the supplier’s system; and
- Incomplete/incorrect documenting of miscellaneous costs (e.g., transportation charges, tax coding) on purchase orders.
Benefits
Financial Stewardship
Increasing the number of perfect invoice matches will generate savings by reducing the number of items purchased at incorrect prices. Perfect invoice matching also supports attaining early payment discounts from suppliers.
Process Efficiency
Increasing the number of perfect invoice matches will create efficiencies by reducing time spent by supply chain and accounts payable staff resolving errors.
Underlying Leading Practices
Contract Centre of Excellence
When contracts are developed with centralized contracting expertise, a process can be put in place to ensure accurate pricing and miscellaneous charges are automatically included in POs.
Logistics Process Automation
Automated logging and processing of deliveries improves the accuracy of receipt information.
Tight Supply Chain/Accounts Payable Organizational Relationship
Strong relationships and regular communication between departments help to resolve any issues quickly and identify root causes to prevent repeated issues.
“End to End” eSupply Chain
Implementing electronic and automated procurement processes for requisitioning, issuing purchase orders and processing invoices reduces potential data-entry errors. Electronic commerce (EDI/XML) transactions enable accurate transfer of information between organizations and suppliers, eliminating the need for re-keying, which is another potential source of data-entry errors.
Target Considerations
Effect of Tolerance
Accounts payable typically establishes match variance tolerance levels to reduce the effort spent resolving small-dollar-value errors. The target will change depending on the tolerance levels set by the organization. For the metric to be implemented and used effectively, standard tolerance levels must be set appropriately and closely monitored.
Typically, a percent discrepancy and a dollar value discrepancy are assigned for tolerances. Tolerances are sometimes set by category and/or purchase type. For instance, for non-stock one-time orders, the tolerance could be $25 or five per cent, but for a contract stock item, the tolerance could be zero.
Each organization should set tolerances that balance risk versus cost to manage.
- If tolerance levels are too generous, the percentage of perfect-match invoices will be improved, but the organization will miss out on savings.
- Conversely, if tolerance levels are too stringent, the organization will avoid paying incorrect invoice, but the time and cost spent resolving issues could outweigh the savings.
The Working Group recommends that the metric be reviewed after six to twelve months once a baseline has been established to re-evaluate the target and make recommendations for tolerance levels to enable comparability between organizations.
Future Opportunities
It is important that existing tolerance levels are reviewed and updated periodically.
Impact of Other Metrics
The higher the average number of purchase order lines per purchase order, the greater the difficulty in achieving a perfect match. Initiatives to improve metric 3.4 Average Lines per Purchase Order may have a detrimental effect on this metric. Targets need to be considered for both metrics in conjunction.
Related Metrics and Standards
| Related Metrics: | Related Standards: |
|---|---|
| 1.1 Percentage of Active Items under Contract 3.4 Average Lines per Purchase Order 5.1 Percentage of Invoices Paid within Due Date |
1.1 Purchasing Policies and Procedures 2.1 Segregated Approval and Authority Schedules 3.1 Contracts Database 4.2 Item Master Management Policy and Processes |
Implementation
Calculation Parameters
Calculation:
| Number of perfect invoice matches | ||
| x 100% | ||
| Total number of invoices |
| Variable | Include | Exclude |
|---|---|---|
| Number of perfect invoice matches | Include for a one-month period all purchase order invoices where the three-way matching agrees within the tolerance levels as set by the organization (see Target Considerations for guidance) AND for the types of orders and categories below | Do not include invoices with pricing, quantity, miscellaneous charges and tax discrepancies that are outside the tolerance levels OR the types of orders and categories below |
| Total number of invoices | Include all purchase order invoices that are both for the following types of orders:
|
Do not include invoices that are either for the following types of orders:
|
Data Accessibility Rating
CHALLENGING – Data are available but require analysis and custom reporting
Possible Data Sources
Electronic
Accounts Payable Module:
Most financial reporting systems will provide the Total number of invoices received by an organization. Some financial reporting systems will be able to track data on the number of three-way-match exceptions, which can be subtracted from the Total number of invoices to determine the Number of perfect invoice matches.
Manual
If electronic reporting is unavailable, the organization could consider conducting manual counts, selecting a representative sample, or using a logging method throughout the month. Organizations should select the option that balances the cost of collecting the data and the associated accuracy with the benefit of reporting the metric.
Implementation Challenges
Challenges:
- Organizations may be tempted to increase the tolerance levels for invoice match exceptions to meet targets. This would introduce unnecessary risk to the organization. To support consistency across the province, standard tolerance levels may be recommended as part of this metric at a later date.
- Accounts payable staff may view invoice mismatches as a failure of the supply chain department. Accounts payable department should be encouraged to participate in the improvement initiative. Senior management commitment and support may be required for implementation across existing departmental boundaries.
- Organizations that issue a large number of zero-cost purchase orders will have difficulty meeting the targets; they should consider reviewing their reasons for issuing these types of orders and consider adopting alternate methods.
- To achieve good results on this metric, it is critical that the item master is cleansed and then properly maintained to keep all product, supplier and contract information as well as tax-code data up to date.
