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The amount of purchasing activity required to keep modern factories going makes their accounts payable and procurement teams some of the busiest on the planet. Without a steady stream of raw materials and components, manufacturing would come to a screeching halt.
That’s why supplier relationships are vital. In lean times, however, you have to protect margin and make sure every supplier you purchase from is keeping to agreed terms, capturing and applying credits due, adhering to pricing, and using reliable invoicing processes.
If those basics aren’t airtight, money can walk out the door. Our experience shows that the cumulative impact of every accounts payable error and process failure can be between 5-10% of a manufacturer’s total supplier spend.
Recovery audits have become a standard way for manufacturing companies to claim back erroneous payments. But for today’s audits to deliver maximum value, they have to devote as much effort to fixing the causes of erroneous payments as they do on recouping actual losses.
Getting to the root of the problem
Advances in audit analytics mean manufacturing audits can now go beyond historical recoveries, using the data collected to reveal hidden issues that let overpayments slip through.
Called Root Cause Analysis (RCA), it’s the process auditors now use to discover the underlying sources of profit leakage and identify solutions. It begins with a top-level review of past claims, evaluating why errors occurred and developing recommendations for closing the gaps to achieve future cost savings.
Once those basics are established, RCA looks deeper, creating year-over-year breakdowns of claims that make trends more visible.
Has one factory, supplier, or type of raw material generated an above-average volume of claims? If so, auditors would focus on these outliers and conduct a granular analysis into every area where a spike has occurred.
Once a systemic or process issue is found to be causing multiple claims, root cause analysis can locate the points where losses occur. From a few initial findings, significant savings can result.
Four steps to recovery audit success in manufacturing
For RCA to deliver results, the audit itself has to be a success. Here are four key steps manufacturers should follow to run their audit engagements effectively:
- Secure buy-in: Having top-down support for the audit from procurement and finance leadership in any manufacturing recovery audit program is critical.
- Focus on the long term: A flexible approach to claims makes it easier to address any sensitivities in supplier relationships and avoid unnecessary disruptions.
- Treat claims with care: Recovery audits eventually require asking a supplier to return monies already paid. It’s essential to keep the business relationship in mind and take the time necessary to secure their cooperation and support.
- Engage and be visible: While patience is a virtue when working through the claims process with any supplier, it may also be necessary to engage on a more personal level.
Partner with the experts
Recovery audits have historically been a reliable way for manufacturing finance teams to protect margin and recoup payments made erroneously. But in today’s unpredictable production environment, ensuring processes are correct at the outset — stopping losses before they occur — is even more critical.
By combining decades of experience with the latest technology tools, PRGX can make complex tasks like ERS, identifying duplicates, and even securing supplier agreement on recoveries easier to achieve.
There’s money to be saved and efficiencies to be gained.
View our on-demand webinar, “Building Blocks: What A Successful Recovery Audit Looks Like In Manufacturing” to learn more. And ask us how we can help you grasp the opportunity.