O2C: Order Process

The Order to Cash Process, also known as OTC or O2C, is a key business process that covers receiving, process, fulfilling, invoicing and revenue in for a business.  Those key milestones are listed in the infographic below and in this article I’m going to be focusing on the first two sections – PO Receipt and Order Processing.  This is an area I’ve had considerable professional experience with and one that I feel is often overlooked from a Supply Chain and overall business perspective where the focus is often far more on Logistics & Fulfillment.

From a functional perspective it would typically be Sales driving the PO Receipt, Supply Chain owning Processing and Fulfillment, and then Finance for invoicing and revenue recognition to the balance sheet.

One thing I love about O2C is it shows Supply Chain as the enabler of Sales and Revenue Recognition – we are taking the metaphorical baton and passing it along – it also clearly demonstrates the chain concept itself being woven through a whole business.  Without an optimized O2C process a business is not operating as efficiently, and therefore profitably, as it could be.  Each section of the process has identifiable metrics for measurement however the main KPI is as simple as the end-to-end O2C timing, i.e. how long it is taking between the receipt of an order and recognizable revenue.

For PO Receipt, the area of focus is how you receive the Purchase Orders. It blew my mind, when I first move to America in 2015, that many orders were still being sent and received by fax!  I thought this must have been unique to the company and industry I was in at the time but to my absolute shock this was quite a widespread practice still.  You don’t have to be a genius to work out the challenges of receiving PO’s in this method, whether it’s a lack of standardization, missing digital and therefore system integration, a reliance on human input, human error or even simply time consumption, it’s an archaic methodology.

The next step up would be to receive as a PDF or via email, however many of those same problems remain and from a leadership and Supply Chain Management perspective most critically as with fax, there is a lack of visibility of orders, until they are entered into whatever ERP is being used. As far as a customer is concerned they have placed an order but until it is in they system it is irrelevant.

The most common solution is surprisingly around the same age as the fax machine and dates back to the 1960’s:  Electronic Data Interchange, more commonly known as EDI.  One of the reasons for its enduring status as the preferred mode of communication between retailers and vendors is its simplicity and standardization – through a series of numbered transactions.

 For Order Processing the most critical transaction is EDI 850 – Purchase Order which allows the communication of PO’s from a buying party to a vendor, in a pre-set code that can be integrated with ERP systems, allowing orders to be automatically received.  This removes the requirement of manual entry and therefor the risk of human error (at least on the receiving side), it also gives immediate visibility to the business of outstanding orders.  Other transactions that support this area include EDI 855 – Purchase Order Acknowledgement and EDI 860 – Purchase Order Change Request.  The 855 allows the buying party to know that the order has been received (although not necessarily accepted), while the 860 gives the option to make adjustment to orders directly to the system as opposed to sending through manual changes.

A newer solution that is becoming more prevalent is the use of API’s (Application Programming Interfaces) – effectively a standalone translator that can communicate between different systems.  The advantage of API’s is that you can use them to communicate between practically any two systems, a huge win, for example, when dealing with Big Box Retailers who all use in-house systems of varying sophistication.  The flipside is as and when you as a supplier or your buyer change systems the work has to start again, as well as the normal procurement headaches of ensuring that the particular API you’re working with is a long-term solution and not a short-term startup/enterprise that will leave you lacking in support.

 Putting aside the method of receipt, once you have received and Order then the next stage of the O2C process begins – Order Processing.  The role of Supply Chain, in this instance, is to take the thought of an order in a buyer’s mind and translate that into cash on the ledger, to get that product out of a warehouse and into a customer or retailer’s hands

To do this, to process an order, there can be many obstacles in the way.  The first is credit – does the buyer have enough credit (or sufficient credit insurance) that doesn’t put your own organization at risk of not receiving payment?  If they do have enough credit/sufficient credit insurance for this order are they also within their credit limit within your organization?  This could be measured by if they are current with their payments within their terms (e.g. are they Net 30, if so do they have any outstanding invoices over 30 days old) or if they already have orders in that meet or with the new order exceed their maximum allowed total order value.  The credit management aspect is absolutely critical to the O2C process, which itself is a measurement of the efficiency of translating orders to revenue – or in other terms ensuring cashflow.

Once the credit portion has been confirmed, the next hurdle to jump is price accuracy – are the prices on the PO the seller’s expected price?  If the prices are incorrect (either over or under) then typically they will not pass through the ERP system, to avoid underselling or invoice dispute later in the O2C flow.  The price set-up is a key responsibility of the Sales function, ensuring that the buyers are clear on what they are paying - this is a complex ask because it has to take in account volume discounts, promotions and customer specific pricing.

We’ve established the buyer has the means to pay, and we’re agreed on how much they’re going to pay. Another area where the O2C flow can stop is fulfilment set-up – are the shipping details on the Purchase Order accurate and expected?  Customers are typically set up in ERP/CRM systems to have a “Sell-To” and a “Ship-To”, the first effectively being the billing address and the second being where the goods are supposed to go – a critical distinction as it’s unlikely that a Big Box Retailer would like the product they’ve ordered to turn up at their Corporate Offices.  (Side note: this happened to a friend of mine when we were in Mississauga trying to pick up some Nando’s for our lunch and instead showed up at their head office. Lessons were learned…)

The final and, ultimately, most important check is product availability – do you have what the buyer is trying to order, in-stock?  If the answer is no then it is still possible to process an order and move it on to the Fulfilment section of the O2C process, however it cannot be completed.  There are many reasons that an order would be moved on before stock is immediately available, whether it’s down to Just-In-Time (JIT) production or, more frequently seen in the past three years, delays in either product or material arriving to the seller in time.  What is critical in these situations is that visibility and communication is crystal clear – if it isn’t then not only will orders remain unfulfilled but in the context of O2C the time for revenue to be recognized will greatly increase.  While both of these statements are argument enough, the biggest area of concern that I have is that the customer experience will suffer – I argue passionately and will continue to write on the necessity of Supply Chains being Customer Centric – without customers we do not have businesses and we do not have revenue.  I was drawn to Supply Chain as an industry by its relative naivety to Customer Experience and the enormous opportunity I saw within that sphere – thankfully things have moved on a lot but I strongly recommend that asking yourself ‘how does this impact the customer’ as a key tenant of SCM.

So what’s the answer to the question of how to optimize the beginning stages of the O2C process?  First up, throw away the fax machines!  The key to success is to be integrated with your buyers – this is one of the key aims of Supply Chain maturity, from a CPFR standpoint and from an order and fulfilment standpoint too.  Each organization will have individual needs based on their level of maturity, however my preference is to combine the stability and universality of EDI with handpicked API support as necessary with a clear and conscious understanding of the value added across the O2C flow.

(Bonus points if you know which film the still image is from…I’m not sure they were advocating for optimizing O2C but I’ll take it!)

Some great further reading on KPI’s you can put to the whole O2C Process here