Automating Order to Cash

Order to Cash – An Overview

A typical organization has different sets of business processes, sometimes referred to as cycles, which address different areas and functions of the business. A few examples are Procure to Pay (P2P), Hire to Retire (H2R), Quote to Order (Q20) and Order to Cash (OTC), sometimes referred to as O2C.

Order to Cash (OTC) stands out as arguably the most important set of business processes. Why? This is perhaps best explained with a true story.

While implementing a new ERP system for a Fortune 500 client, which included the entire OTC set of business processes, the implementation partner was told by the CEO that the ERP implementation could go over budget or be delayed, but if it ever stopped the company from shipping product out the door, the implementation team would be removed.

This message demonstrated the importance of OTC and how OTC represents the “heart of the business.” Think of the human heart providing life-giving blood to the vital parts of the body so the body can function. Now think of OTC as the heart of a business, providing information and revenue to the other vital areas of the business so these areas have accurate information and resources to function.

Once an order is placed, the ability to deliver that order to the customer in order to receive payment for products or services plays a large part in the overall success of the company. If orders can’t ship, it’s as if the heart is no longer pumping blood, creating an adverse impact on other parts of the business.

OTC also plays a large role in driving an organization’s relationship with the customer. On-time delivery of a quality product or service plays a large part in the customer experience. OTC processes impact operations throughout the organization, including Supply Chain Management, Inventory Management and labor. These other areas can experience bottlenecks caused by a sub-optimal, error-prone OTC process.

Because of the importance of this process, OTC will always be a prime candidate for process improvement.

Question: How can organizations today improve the OTC process?

Answer: Automation.

The Eight Business Processes of Order to Cash

OTC is a set of business processes that encompasses the entirety of a company’s order processing system. It begins when a customer places an order and ends with the reporting of these processes.

OTC consists of eight business processes, and within these eight business processes some organizations will have as many as 27 sub-processes, adding to the complexity of OTC.

1. Order Management

The OTC process begins when an order is placed by a customer. Orders may be placed different ways, such as email, e-commerce, salesperson, fax or Electronic Data Interchange (EDI).

This step is arguably the most important step in OTC, as any errors at this point will create problems for all the other steps in the process.

If a company performs manual data entry of the order, the accuracy of the data being entered is crucial, as data entry errors in this step will cause mistakes and rework in other steps in the process, impacting other areas of the organization and potentially straining the customer relationship.

Other departments are notified immediately upon an order being placed, and these notifications will kick off a series of actions required to ultimately deliver the order. The customer is notified that the order has been received along with the appropriate detail, including the expected delivery date (ETA) of the order, if available.

2. Credit Management

Credit management is a process that analyzes a customer’s financial health to determine whether to extend business credit. This process takes place immediately after an order has been entered. This minimizes the risk of issues later in the OTC process, for example Accounts Receivable with late payments or defaults.

New customers are sent through a credit approval process, which determines if they are credit worthy. This process will also assign the new customer default payment terms and a credit limit.

Existing customers go through a credit check. This process checks if the customer has recently been flagged as a credit risk, such as from overdue invoices, and also checks if the specific order exceeds the assigned credit limit.

Once a customer’s credit has been approved, the order moves to the fulfillment step.

3. Order Fulfillment

Orders to be fulfilled rely on a real-time inventory management system, identifying when products are available to pick and pack in preparation for shipping. When the order was originally placed, available inventory was checked for each line item in the order, and the quantity ordered was either allocated or backlogged for shipment later, if the customer agrees to this.

The order is prepared for shipment and the appropriate shipping or service department is notified. If the products ordered are not available to pick, pack and ship as promised, the customer is notified immediately and given the option to cancel the order or wait to receive the products at a later date.

Shipping labels are prepared in this process, and the order moves to the Shipping and Transportation step.

4. Shipping and Transportation

Shipping and Transportation consists of choosing a mode of transportation for shipping, the actual delivery of the products to the customer, and notifications to the appropriate departments, the customer, and the shipping companies that are used for shipping.

The shipping team will plan shipments around a carrier pickup schedule. The order is tracked for both outgoing goods and returns, so the location of the order is known throughout the process.

Notifications with the shipping company and the customer continue throughout the shipping process in the event of changes in estimated shipping times.

This step requires constant monitoring, especially if an external company is used for shipping. In-transit inventory costs are considered in this step, and finance and accounting will determine how to account for the costs.

5. Invoicing

Fulfilling and shipping the order in most cases results in the next step, invoicing the customer. Automated systems eliminate the need for the Accounts Receivable department to check for fulfilled orders in order to generate an invoice. These same systems generate an invoice automatically and notify the AR department.

The invoice will contain all details of the order plus payment terms, PO numbers, freight charges, taxes, other fees, and billing and shipping information. Invoices are reviewed for accuracy before being sent to the customer, as the invoice serves as the request for payment.

The invoice can be delivered to the customer through different methods, including email with a PDF attachment. Some customers may have specific requirements for receiving invoices, such as logging into their portal and entering billing and invoice information.

6. Accounts Receivable

If an order was not paid in full at the time of placing the order, it goes through the Accounts Receivable process, requiring the customer to pay the invoice within the agreed amount of time specified in the payment terms.

The Accounts Receivable process consists of tracking the invoice until payment in full has been received. This involves interacting with the customer regarding errors or disputes, monitoring overdue invoices and reporting to other departments, such as finance and sales.

This process directly impacts cash flow along with other important functions of the organization.

Before an overdue invoice is sent to collections, the AR department might choose to send notifications to the customer requesting payment and making the customer aware the invoice is overdue.

7. Collections

Collections, like the previous steps in the OTC cycle, requires data integrity, as incorrectly informing a customer they have been placed in collections will have an adverse impact on the customer experience and the relationship.

Some companies handle the collections process internally, and some outsource the collections process to firms specialized in collections.

Part of the collections process is to put the customer on credit hold, if this has not happened in the Accounts Receivable step. Interest and penalties are used as motivation to get the customer to pay, but not necessarily enforced.

Finance and accounting need to be notified on a timely basis of overdue invoices and invoices in collections. This helps them in required adjustments to cash flow and bad debt forecasts.

8. Reporting

Comprehensive, accurate reporting can identify bottlenecks and determine if issues and slowdowns in one area are adversely impacting other areas. Even small problems in one area can result in bigger problems in other downstream steps.

OTC reporting is actionable by providing visibility to OTC KPIs and, in a broader sense, overall organizational goals.

Order to Cash Best Practices

1. Real-time notifications to internal departments, the customer and third parties throughout the entire OTC cycle where appropriate.
2. Automate the invoice entry process as much as possible. Research compiled by the Aberdeen Group determined that companies that excel at OTC require manual invoice data entry for only 16.2% of their invoices, while companies in the bottom tier of OTC efficiency require manual data entry for up to 80% of their invoices.
3. Have a system in place to flag deliveries that are taking longer than expected, to notify sales, shipping, the customer and, if applicable, the shipping company used.
4. Measure the health and performance of the OTC cycle. Measure the end-to-end cycle and the individual processes that comprise the OTC cycle. At a minimum, measure Days Sales Outstanding (DSO), Average Days Delinquent (ADD), on-time delivery performance and Perfect Order Performance.
5. Use tools for automated assessment and cleansing of customer and product master data.

A study by IBM showed that automated assessment and cleansing of customer and product master data improves FTE performance for managing sales orders by 81% over companies that do not do this, with improvements of 83% for invoicing, 54% for Accounts Receivable and 62% for collections.

Order to Cash Challenges

1. Manually entered sales orders and invoices: Labor costs and costs for data entry errors are significant in companies with high-volume transactions. Data entry errors on the sales order will adversely impact the following OTC processes.
2. Credit quality: If credit analysis for new customers is performed manually, approval becomes time-consuming and subject to error. Due diligence in this step can eliminate downstream issues regarding the entire revenue cycle.
3. Non-integrated systems: An optimal OTC cycle would include systems integration of CRM, Order Management & Inventory and Finance and Accounting. If these systems are not integrated, customer and sales orders are more subject to error and can potentially cause bottlenecks.
4. Manual cash applications: Entering cash applications manually involves re-keying remittances, reconciling and fetching data, and matching invoices, resulting in slow process times, high FTE costs and data integrity issues.
5. Reporting: Visibility to the entire OTC process requires optimal reporting tools that provide actionable data, KPIs and other OTC-related information.

According to the American Productivity & Quality Center, top-performing companies spend significantly less to process sales orders and invoices than lower-performing companies. Automation can substantially reduce these processing costs.

An automated cash application system significantly reduces FTE costs and bank lockbox fees. Automated cash applications can ensure up to 95% straight-through cash posting rates.

How to Improve Order to Cash with Automation

OTC is perhaps the most complex process in an organization. Any changes to existing OTC systems are expensive and time-consuming. So rather than change the existing system, a practical approach would be to simply automate individual processes in the OTC cycle without changing them, using proven automation technologies that are a good fit.

An example of this approach would be automating the first step, Order Management. Robotic Process Automation (RPA) is a proven technology that would be a good fit for this step. RPA can emulate the data entry that is currently being performed manually and can be programmed to handle business rules for entering the order, errors and exceptions, and other requirements for entering a sales order.

Benefits include reduced FTE costs, improved data integrity, faster throughput, availability 24/7/365, and freeing up your team for innovation, analysis, and more interaction with customers and team members.

Assess each of the eight processes in OTC and determine which one is a good fit for automation for your organization.

Drivers in determining this include time spent, data integrity, labor and other costs, issues with the process and the potential impact on other processes downstream, attrition, complexity, and input data. Structured data is generally easiest to automate, such as a spreadsheet, as opposed to scanned images.

Note that other cycles may be easier to automate, but automating the OTC cycle will generally produce a significant return on investment.

Order to Cash Key Performance Indicators (KPIs)

• Average time for Order Entry – Time from order received to entered into Order Management
• Average time to Order Fulfillment (Lead time) – Step 1 – Order Management through and including Step 5 – Invoicing
• Average cost to process a sales order – Divide total cost to perform the process by number of sales orders placed
• Total Order to Cash process cost as a percentage of revenue
• Number of days between shipment and billing
• Order to Cash cycle time
• Days Sales Outstanding (DSO)
• Perfect Sales Orders
• Customer backorder rate
• Total inventory accounting cost as a percentage of revenue
• Annual inventory turnover
• Days inventory on hand
• Cases picked and shipped
• On-time shipment readiness
• Total accounts receivable cost as a percentage of revenue
• Average days unapplied cash
• Bad debt expense as a percentage of revenue
• Average number of days until an invoice would be considered past due