E-guide

Vast Benefits of a
Partnership with
Your Finance Dept.
Your expert guide to business solutions that demonstrate the value of
a relationship between IT and finance
 E-guide
In this e-guide
Procurement and finance: Be
partners, not enemies
Finance and IT collaboration
needed for successful LMOF
Page 1 of 12
In this e-guide:
Finance has a unique relationship to all aspects of an
organizations daily business. Through understanding the vital
role and connection finance has to other departments such as
IT, corporations can make business decisions with this
relationship in mind. Collaboration between finance and IT
leads to more efficiency for day to day operations of a
corporation. Through simple purchasing considerations,
corporations can ensure that finance faces fewer challenges
when negotiating with other departments.
 E-guide
In this e-guide
Procurement and finance: Be
partners, not enemies
Finance and IT collaboration
needed for successful LMOF
Page 2 of 12
Procurement and finance: Be partners, not
enemies
David Trubide, Independent Consultant and Author
Finance and procurement must be partners, working together to
contribute to a company's goals, including operational and financial
performance objectives
Procurement, the purchase of materials and parts to support production, is a
major function within a manufacturing business and a large consumer of a
company's cash. As such, the procurement department must work closely with
finance and accounting to ensure that the company's cash is used wisely.
The primary function of procurement is to acquire the parts
and materials needed, in the proper quantity and on time. Secondary
considerations are maintaining minimum inventory (just enough to avoid
shortages) and keeping costs down. Procurement professionals understand the
relationship between cost and supplier quality, reliability and performance, and
constantly strive for the perfect balance among these factors.
Fortunately, procurement professionals have help in meeting this perfect
balance. Every ERP system in existence contains procurement and purchasing
 E-guide
In this e-guide
Procurement and finance: Be
partners, not enemies
Finance and IT collaboration
needed for successful LMOF
Page 3 of 12
functionality, integrated with planning, production and customer fulfillment
applications. These purchasing apps collect a full and complete record of all
purchasing activities from quotes to contracts, requisitions, POs, deliveries and
receipts, acceptance activities, invoices, and payments. Through this history,
the systems are able to produce detailed reports for general accounting, cost
accounting, purchase price variance and detailed analysis. Most can also
generate automatic journal entries tied directly to the activities and transactions
for a complete audit trail. Through their integration with quality and traceability
functions, these ERP purchasing applications support quality documentation
and quality improvement efforts, and establish the infrastructure needed to
manage quality problems and recalls.
Third-party procurement software is also available, particularly for indirect
supplies, tooling and expendables. Spend management software is another
product category that falls within the procurement arena and likely offers most
or all of the functionality associated with integrated purchasing modules in ERP
with additional management and reporting and analysis capabilities.
Drawing on these ERP tools, procurement and finance and accounting can work
together to effectively balance materials needs and cost in the procurement
process. Let's examine how a procurement specialist might approach this
balancing act and how a partnership between procurement and finance and
accounting might look.
 E-guide
In this e-guide
Procurement and finance: Be
partners, not enemies
Finance and IT collaboration
needed for successful LMOF
Page 4 of 12
In times past, procurement specialists were cost-driven and highly motivated to
reduce purchase cost and purchase cost variance, or PPV, no matter what. As
a consequence, suppliers were often forced to cut corners to maintain profit
margins and quality was often suspect, supplier reliability was questionable, and
sometimes suppliers went out of business because they couldn't maintain a
viable business at the prices they were forced to accept in order to get the
business. Buyers and suppliers had an adversarial relationship, with little or no
common vision or shared risk.
Modern supply chain thinking emphasizes collaborative and cooperative
relationships with suppliers in the proverbial "win-win" scenario where both
parties are dedicated to providing great products and services to the ultimate
customer, and both build a profitable business for the long term. But this ideal is
simply not practical to accomplish with all of the many suppliers that a typical
manufacturer uses. Procurement specialists therefore divide suppliers into
categories and set up the necessary relationships and controls accordingly:
Commodities are readily available from a number of sources and are not
a critical concern for either quality (most competitive suppliers meet
industry expectations) or importance to the company or product (not a big
part of cost-of-goods and not a critical function). These items are usually
purchased on open markets on an arms-length, one-time basis, with no
supplier relationship beyond the individual transactions.
 E-guide

In this e-guide
Procurement and finance: Be
partners, not enemies
Finance and IT collaboration
needed for successful LMOF
A continuing relationship may exist for items available from only a limited
number of sources or more critical to the product or production process.
The relationship exists in the form of blanket orders, buying agreements
or contracts to ensure availability of the items and locks in the price,
which might be more favorable than it would be in one-time smaller-
quantity pricing.
Leverage items are important (high cost or critical part of the product) but
are available from a number of suppliers. Procurement can exploit the
competitive market to get high quality and reliability at a competitive
price. The relationship with the supplier might be more intense than the
ones listed above and include some data sharing, collaboration or
supplier certification.

Strategic suppliers get the full partnership treatment with long-term

contracts, collaboration and data sharing, joint development for product
and performance improvement and more.

Strategic relationships like this are warranted for critical items that are a
large part of the cost-of-goods or are exclusive or important parts of the
product and may be available from only one or a few possible sources.

Notice that the emphasis is on the parts, the quality and the delivery reliability,
with cost as a secondary consideration. Cost is certainly important, however,
and procurement specialists are well aware of the need to minimize cost, but

Page 5 of 12
 E-guide
In this e-guide
Procurement and finance: Be
partners, not enemies
Finance and IT collaboration
needed for successful LMOF
Page 6 of 12
that consideration cannot be allowed to compromise their basic mission.
Reduced cost or purchase price variance should not be primary measurements
or incentives.
A focus on cost reduction might drive procurement to favor larger purchases
that yield price breaks and reduce the shipping cost; however, larger purchases
drive higher inventory levels; more storage and handling costs; higher
consumption of working capital; and increased risk of loss, damage or
obsolescence. Lean operations, which many companies are pursuing, also
emphasize inventory reduction. As a company becomes more "lean," expect
inventory reductions but higher unit cost (fewer quantity price breaks) and
increased shipping and handling costs. Look at the total cost for procurement
and inventory rather than at individual costs for the various elements of the
procurement and inventory processes.
In negotiations with suppliers, procurement professionals can also trade off lead
time (shorter lead time increases flexibility and reduces inventory, but might cost
more); payment terms; delivery reliability (guarantees); quality; and other
performance factors. They should be encouraged to confer with finance and
accounting to ensure that company objectives are being met and financial
performance is given due consideration in making these trade-off decisions.
Just as collaboration with suppliers is a part of the modern approach to
procurement, collaboration with finance and accounting should be a part of a
holistic approach to company performance management. Finance should not be
 E-guide

In this e-guide
Procurement and finance: Be
partners, not enemies
Finance and IT collaboration
needed for successful LMOF
the enemy of procurement or vice versa. These two critical business functions
must work together continually to enable the procurement function to fully
contribute to all the company's goals, including operational and financial
performance objectives. Finance should not be the disciplinarian, trying to find
fault; it should be the partner, with an equal stake in elevating the company's
success and profitability.

Next article

Page 7 of 12
 E-guide
In this e-guide
Procurement and finance: Be
partners, not enemies
Finance and IT collaboration
needed for successful LMOF
Page 8 of 12
Finance and IT collaboration needed for
successful LMOF
Barry Wilderman, Wilderman Associates
Automating the last mile of finance, or LMOF, process can help
finance and IT create an efficient closing process and ensure that
meaningful data sets are created.
The last mile of finance (LMOF) deals with all the activities required to create,
analyze and publish a final set of financial results monthly, quarterly or annually.
The initial inputs to the LMOF are the business transactions for the month,
quarter or year.
Four steps are required to complete the LMOF. First is the financial close, when
transactions are created that best reflect the state of a corporation at month,
quarter or year end. These transactions might include the allocation of overhead
to individual accounts or an allowance for bad debt.
The second step is financial consolidation. In this step, different lines of
business or geographies may have gone through a financial close, and the
consolidation is used to create a financial statement that aggregates across all
business units.
 E-guide
In this e-guide
Procurement and finance: Be
partners, not enemies
Finance and IT collaboration
needed for successful LMOF
Page 9 of 12
The third step is financial reporting, which allows for the creation of financial
statements for use internally, as well as by lenders and external shareholders.
Moreover, done correctly, financial reporting helps give the management team
key insights into how to run the business more effectively in the future.
The fourth step is financial disclosure, which provides guidelines for the
externalization of financial documents, often using the XBRL markup language.
To optimize the LMOF, finance and IT should understand the following points.
Processes in the LOMF. Once the standard business transactions have been
completed, a complex set of activities are required to close the books.
Closing activities include allocations, eliminations and various account
reconciliations. In terms of successful automation, both IT and finance must
understand the closing transaction activities, where they are made and how
they are approved by financial management.
Consolidation activities represent the last set of activities to create the final set
of financial transactions. Here too, there needs to be a clear understanding of
how each business unit creates its final close, and what steps are required to
create a consolidated set of financial statements. With proper closings and
consolidations, a corporation can close the month, quarter or year with a set of
transactions that best reflects its financial health.
 E-guide
In this e-guide
Procurement and finance: Be
partners, not enemies
Finance and IT collaboration
needed for successful LMOF
Page 10 of 12
Financial reporting and management insight. The closed and consolidated
sets of transactions are now ready for financial reporting. Part of the reporting
process involves publishing financial statements (P&L, balance sheet, source
and application of funds) that follow generally accepted accounting principles.
Increasingly, the publication of statements requires the use of the XBRL markup
language and follows approaches including International Financial Reporting
Standard (IFRS) and Sarbanes-Oxley(SOX).
But often overlooked is the use of analytics on the consolidated set of
transactions. There is a great opportunity to derive insights into how better to
run the company. The analytics can be followed by simulations (financial
modeling) to pursue future strategic alternatives.
Improving LMOF metrics. The LMOF, as a set of internal processes, should
be subject to constant scrutiny for improvement. Key metrics are:
Faster. A corporation, for example, should set ambitious goals for the
number of days after month end it takes to close, consolidate and report
financial results. Some companies take so long to achieve the LMOF, the
next month is upon them.
Less costly. Without constant scrutiny, the LMOF can take on a
"manual" life of its own, and use more person days to complete its
activities than are required. This adds unnecessary costs.
 E-guide
In this e-guide
Procurement and finance: Be
partners, not enemies
Finance and IT collaboration
needed for successful LMOF
Page 11 of 12
Better. A better LMOF results in a final set of transactions that can
satisfy internal and external stakeholders. In particular, better financial
results can lead to better insights for management.
The last mile of finance is important for statuary reporting and for financial
analysis. Finance and IT must collaborate to ensure that the closing process is
efficient and that meaningful financial data sets are created. Consider vendors
that offer suites of LMOF software as well as specific functions.
 E-guide
In this e-guide
Procurement and finance: Be
partners, not enemies
Finance and IT collaboration
needed for successful LMOF
Page 12 of 12
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