Ford Motor Company's Accounts Payable Processes
Extracted from "Reengineering Work: Don't Automate, Obliterate" written by Michael Hammer
In the early 1980s, when the American automotive industry was in a depression, Ford's top management put accounts payable-along with many other departments-under the microscope in search of ways to cut costs. Accounts payable in North America alone employed more than 500 people. Management thought that by rationalizing processes and installing new computer systems, it could reduce the head count by some 20%.
Ford was enthusiastic about its plan to tighten accounts payable-until it looked at Mazada. While Ford was aspiring to a 400-person department, Mazda's accounts payable organization consisted of a total of 5 people. The difference in absolute numbers was astounding, and even after adjusting for Mazda's smaller size, Ford figured that its accounts payable organization was five times the size it should be. The Ford team knew better than to attribute the discrepancy to calisthenics, company songs, or low interest rates.
Ford managers ratcheted up their goal: accounts payable would perform with not just a hundred but many hundreds fewer clerks. It then set out to achieve it. First, managers analyzed the existing system. When Ford's purchasing department wrote a purchase order, it sent a copy to accounts payable. Later, when material control received the goods, it sent a copy of the receiving document to accounts payable. Meanwhile, the vendor sent an invoice to accounts payable. It was up to accounts payable, then, to match the purchase order against the receiving document and the invoice. If they matched, the department issued payment.
The department spent most of its time on mismatches, instances where the purchase order, receiving document, and invoice disagreed. In these cases, an accounts payable clerk would investigate the discrepancy, hold up payment, generate documents, and all in gum up the works.
One way to improve things might have been to help the accounts payable clerk investigate more efficiently, but a better choice was to prevent the mismatches in the first place. To this end, Ford instituted "invoiceless processing." Now when the purchasing department initiates an order, it enters the information into an on-line database. It doesn't send a copy of the purchase order to anyone. When the goods arrive at the receiving dock, the receiving clerk checks the database to see if they correspond to an outstanding purchase order. If so, he or she accepts them and enters the transaction into the computer system. (If receiving can't find a database entry for the received goods, it simply returns the order.)
Under the old procedures, the accounting department had to match 14 data items between the receipt record, the purchase order, and the invoice before it could issue payment to the vendor. The new approach requires matching only three items-part number, unit of measure, and supplier code-between the purchase order and the receipt record. The matching is done automatically, and the computer prepares the clerk, which accounts payable sends to the vendor. There are no invoices to worry about since Ford has asked its vendors not to send them.
Ford didn't settle for the modest increases it first envisioned. It opted for radical change-and achieved dramatic improvement. Where it has instituted this new process, Ford has achieved a 75% reduction in head count, not the 20% it would have gotten with a conventional program. And since there are no discrepancies between the financial record and the physical record, material control is simpler and financial information is more accurate.