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Team-Based Homework Assignment 2:

Improving Accounts Payable at Hilliard Manufacturing


Abigail Jackson, Manager
of Disbursements at Hilliard Manufacturing thought to herself “Just a few more
days until the Kaizen event kicks off.”
As Manager of Disbursements, Abigail oversaw four departments in
accounting: the Sales and Use Tax Department; the Payroll, Time and Expense
Reporting Department; the Accounts Payable Department; and the International
Accounting Department.

Hilliard Manufacturing’s
new CEO, Al Cooper, had developed and championed Hilliard Manufacturing’s new
Lean Initiative not long after taking over.
After achieving substantial improvements in cost, lead time and quality
from the application of lean principles on the manufacturing floor, Al felt it
was time to apply the same principles to other functional areas. Given the importance of Accounts Payable (AP)
in maintaining a smooth flow of incoming material and preserving good
relationships with suppliers, Al felt that the AP area, which had been
experiencing increasing lead times for invoice payment, would be a good place
to start.

With the top management
directive of working on improvements in the AP process, Pat Davis, the
Assistant Controller and Abigail’s boss, scheduled a meeting to review the
current situation. “Just look at this”
Pat said while pointing to a column of numbers in a spreadsheet. “We’ve got
almost 6.5% of our accounts payable overdue, and our suppliers are not happy
about it! In a few cases, it’s even
impacting further shipments of parts, potentially causing our manufacturing
plant to miss shipping due dates and impacting customers. We must get a handle on this!”

the Process

Following that meeting, Abigail
met with Paula Martin, Manager of the Accounts Payable Department, to better
understand the entire AP process. Paula
provided a good overview of how the process should work, but Abigail realized
that she would need to walk the process herself to truly understand the current
state of things. She scheduled a
walk-through of both the mailroom and the AP Department, armed with a
clipboard, stopwatch, calculator, paper, and pencil to create a formal current
state value stream map (VSM).

The AP process begins at
the mailroom which processes incoming mail from all sources, including invoices
from suppliers. Once there, Paula and Abigail
spoke with Fred Stevens, the Mailroom Manager.

Fred explained the
process to Abigail: “We’ve noticed, based on the post mark of incoming mail
that it takes about 7 days for most mail to get to us. After the mail is received, it has to be
opened and sorted. We are running a bit
behind, so we usually open the mail two days after we get it. If it doesn’t belong to AP we have to route
it to the right department. We receive
about 300,000 pieces of mail each year. It takes about 1 minute to open and
look at each piece of mail, to determine if it is AP mail. We find that about 35,000 pieces a year do
not belong to AP.”

Abigail: “Wow, I didn’t realize so many invoices came
in each year. I thought that we had an automatic payment process that was
supposed to reduce incoming invoices.”

Fred: “We do get a lot of invoices coming in, but
not all of those actually get sent on to AP.
Other processes screen out many of the invoices. First, we have to check mail that is sorted
to be AP mail to see if it has a Purchase Order (PO) listed on the
document. We have about three days of
backlog from the time the mail is opened until the PO check happens. It takes an average of 2 minutes to confirm
the PO number since all of the invoices have different formatting and we have
to enter the PO in our system, and 8 mail room data entry clerks work this process
for 75% of their work day and the rest of their time on other types of data
entry. Fortunately, we don’t really get
any invoices without valid PO numbers on them.”

“As you know, the PFR
invoices don’t go through the standard AP system, since they are paid
automatically when the material is received.
I sure wish we could get all our suppliers on to the PFR system; and I
don’t understand why suppliers already set up on the PFR system still send us
paper invoices – it’s really frustrating! So after we are done checking the PO
number, we have to check to see if the invoice is part of the automatic Pay
From Receipt (PFR) process.”

Paula: “You’re right Fred, but the problem is that
some of the suppliers are running on accounting software that forces them to
generate and send an invoice. We’ve
talked to them about this, but it’s just too expensive for some of them,
especially our smaller suppliers, to change their systems to meet the needs of
only one customer. Still, it would be
nice for both us and the suppliers if we could come up with a solution.”

Fred: “There is an inbox
for the PFR check that has about half of a day’s invoices in it. When we find that the invoice is part of the
PFR process, we throw the invoice into the paper recycling bin, since the paper
invoice isn’t needed and it is just a duplicate of the automatic PFR. We use the extra money we earn from all the
paper we recycle to pay for refreshments at our softball games. At this point, we throw away about 200,000
invoices per year that are really PFR.
We keep exact track of what we throw away, since we want to be sure that
we don’t throw away something that we shouldn’t. Since we are really careful, it takes us
about 6 minutes to do this, and we have 25 full time mail room people working
only on this. The remaining invoices are sent to the AP department. The invoices are divided alphabetically by
supplier name while we are doing the PFR check and sent to the assigned AP
person, so that each person gets approximately the same number of invoices each
year. Once we send the paper invoices on
to AP, the mailroom is done with its part of the process.”

Abigail: “Let me make sure I have this right. First you receive and sort all the mail, with
about 265,000 identified as AP mail.
Then you have to check for a PO. After confirming the PO, you then check
to see if it is on the PFR system. If it
is, you recycle the paper; if it isn’t, you send the invoice to the assigned AP
person. Does that sum it up?”

Fred: “Yep, that’s about it.”

Abigail: “Thanks Fred, we appreciate your time and
information. Paula, let’s go find out
what happens after the mailroom passes the invoices along to AP. I’ve asked Gene Peterson to help us with the
AP part of the process, since Gene has been working as an AP analyst for about
5 years and has done a variety of different jobs in the accounting department.”

Paula: “Hi Gene, Abigail and I are ready to have you
walk us through the AP process on this side.
We’ve just finished talking with Fred Stevens, who explained the process
through the point that the mailroom sends the invoices to you. Let’s start with how long it takes the
invoices to get to you from the mailroom.”

Gene: “Well, they make deliveries three times a
day; at 9:30, at 1:30, and at the end of the day to clear out their area before
the end of the shift. So I guess you
could say that the average invoice takes 1.5 hours to get to us once the
mailroom is done. The mailroom
distributes the invoices to the inbox of the assigned AP analyst. Our inboxes usually have about 1days worth of
incoming material. We process the inbox
on a FIFO system, and once an invoice comes up to be worked on, the first thing
we do is make sure that they aren’t on the PFR system.”

Abigail: “Wait a minute, didn’t the mailroom already
check to see if the invoices were PFR and get rid of those that are? Why are you checking for the same thing

Gene: “Yes, they do check, but we still find about
1,250 per year that they missed. It
really is a pain to check for PFR status, and it takes us 7 minutes to do it
because we have to be extra careful to catch ones that were missed when the
mail room people checked them. Each
analyst has to spend about 25% of their time doing these checks. This is such a time consuming effort that we
have been keeping track of how many we find each week, and I can get that data
for you, if you want.”

Paula: “We’d like to
have that data, thanks. Okay, you screen
the incoming invoices for PFR and then you only work on the invoices that aren’t
PFR, right?”

Gene: “Yes, at this
point, we have only actual invoices that need to be manually processed through
the AP system. Now an analyst has to
determine if the invoice is ready for payment.
It could be that the pay-by-date is out in the future or we have a
payment schedule agreement with the supplier.
It takes about 5 minutes to sort each invoice to determine if it is
ready for immediate payment or should be set aside to be paid later. Analysts spend about 20% of their time
sorting for payment readiness. Invoices
that aren’t ready for payment are set aside, which happens to about 20 invoices
each day. On average, ‘pay later
invoices’ aren’t processed for 15 working days.
It takes about 1 minute (and the equivalent of ¼ of a full time person)
to look at a ‘pay later invoice’ and move it over to payment processing when it
is due. When a payment is ready to be
paid, regardless of whether it is a ‘pay now’ or one of the ‘pay later’
invoices that is now due, it takes about 2 minutes to enter it into the payment
processing software. We take turns and have one AP person work on this all

Abigail: “So all of the invoices end up going through
payment processing, although some go straight there if they are ready for
payment, but some wait for a while until they are due, is that right?”

Gene: “Yes, they all have to go through the full
payment processing, eventually. After
they have been entered into the payment processing system, they have to go
through a batch process, which runs 4 times per day so an average invoice waits
1 hour for processing. We want to be
sure that nothing is getting paid incorrectly, so we actually spend another 2
minutes per invoice doing a final inspection of the payment before the batch is
released. We take turns doing this with one person working on it per day.”

“At this point the
payment should be on the way to the supplier.
However, we still have to file the paper invoice along with proof of
payment. It takes about 4 minutes per
invoice to file the paper documents. But
we usually do all the filing at the end of the day, so an average invoice waits
for about ½ day until it is filed. It
would take the equivalent of 3 full time people to do all the filing, but each
analyst is supposed to do their own before they leave for the day.”

Abigail: “Okay Gene, let me make sure that I have the
process straight. You get the paper
invoices from the mailroom. Then an
analyst does a PFR check. If the invoice
is PFR, it is thrown away; if not, it moves through the system for payment
processing. You have to determine if it
is ready to pay now, or should be set aside to be paid later. When an invoice is ready to pay, you input it
into the system, process the batch and then file the paper documents. Does that about cover it?”

Gene: “Yes, that’s about what we do.”

Abigail and Paula met
later in the day to review the data they had collected and to begin drawing
their current state VSM.

Abigail: “It looks like we’ve gotten a lot of good
data on the current process, and it seems that there are several opportunities
for improvement. Let’s finish up with
the current VSM and then run it by Fred and Gene to make sure that we’ve
captured everything correctly. Then we
can call a meeting to begin working on our future state map.”

Paula: “That sounds good. One other thing that didn’t come up when we
were talking with Gene, but that I think is a problem that we should also look
into, is the number of invoices that are paid incorrectly. The AP analysts are actually spending a lot
of time trying to troubleshoot and fix invoices that suppliers have called to
complain about. We’ve begun keeping
track of the reasons that suppliers are calling about incorrect invoices, and
it would sure be nice to use that data to try to find some root causes that
could fix the problems we are having.
Not only would fixing the problems free up a lot of time for our
analysts, but suppliers would also be a lot happier. It’s hard to encourage them to be more
accurate in the invoicing process when we aren’t accurate in the payment
process. Another thing that is
important, a lot of the calls we get are because we are somehow short or late
with a payment, but I suspect that we may be over-paying some invoices and
suppliers may not be calling us about those errors.”

Abigail: “Wow, I didn’t realize that we were having so
many problems. We certainly want to fix
them to encourage good relationships with our suppliers, and we sure don’t want
to be over-paying invoices! What kind of data have you been gathering on the
incorrectly paid invoices?”

Paula: “I’ve asked the analysts to keep track of the
reasons for the invoice errors over the past couple of months using some check
sheets that we’ve created. I can get a
copy of the data to you right after we finish with the current state VSM.”

of Hilliard Manufacturing Work Day

Number of clerks: 36

Number of AP analysts: 18

Average annual vacation days: 5

Number of company holidays: 5

Work day: 7:30am to 5:00pm M-F

Breaks 2 @ 15 mins
each (paid)

Lunch 30 mins (unpaid)

Meeting 15 mins

Housekeeping/5S 15 mins

of Invoices Found per Week to be PFRs by AP Analysts


found each week





















































Results of Invoices Paid with Errors per Supplier Complaint (6 months of data)

Check sent without signature 18

Check sent without invoice reference 42

Sent to the right company but wrong
address 21

Wrong invoice referenced 29

Paid short 27

Over paid 9

Paid paper invoice twice 7

Paid PFR invoice 8

Paid on a canceled purchase order

Payment sent to the wrong company 11

Payment returned for unknown reason 6

Two company’s payments sent in one
envelope 9

Paid late 342

Payment never made 35

Payment sent for material that was
returned 9

Other 46


Your team has been asked
by Abigail Jackson, Manager of Disbursements at Hilliard Manufacturing, to come
up with recommendations. As your team
analyzes the problem with overdue payments to suppliers at Hilliard
Manufacturing, be sure to consider:

  • The
    current state VSM for the AP process and its performance
    • What are the total lead time, total processing
      time, and percentage of time waiting for the “pay now” versus “pay later”
    • Is there a bottleneck in the current AP process?
    • Which activities are value-added and which are not?
    • Is there a future state VSM you propose?
  • The
    number of PFRs found by AP analysts
    • Is the task of checking PFRs by the mailroom in
      statistical control? How can you
      tell? Which control chart(s)
      support your conclusion?
  • The
    supplier complaint data
    • Which types of errors account for 80% of the
      complaints by suppliers? How can
      you tell?

Note that each of these
considerations should lead to a recommendation for Abigail Jackson to
consider. It is also possible that a
recommendation is supported by more than one type of analysis.


may “exit” the AP process

invoices exit the AP process, “demand” changes for the consequent processing
tasks and, therefore, Takt times may change as well

performing calculations, take all computations to 2 decimal points

about the bigger picture and the situation BEFORE trying to do the VSM
calculations . . draw the VSM first
before doing the computations

that one year = 52 weeks

calculating the number of days per year, account for both holidays and
vacations for this business that runs 5 days per week

can add to waiting time in the AP process for invoices

not confuse the queue for processing and actual processing

parallel processing tasks develop, you will need to show more than one time

that data entry clerks are mail clerks for PO check but 25% of their time
involves delivering mail to other areas

time for delivering mail to other areas is not of the AP process so do not try
to add them back into the current or improved VSM for the AP process

that there are 18 AP analysts in total but they rotate working on some of the
processes and may have duties not detailed in this VSM so do not try to account
for all 18 people using FTE


team-based assignment should be written in the format of a memorandum
addressed to Abigail Jackson

the “How to Write a Memorandum” file for helpful tips

the “How to Analyze and Write Up a Case Assignment” file for helpful tips

memorandum should look professionally appealing, be concise, be grammatically
correct, and be free of spelling errors

memorandum itself should not be more than two (2) pages, single-spaced, with
1-inch margins (top, bottom, left, and right)

font and font size for the memorandum should be Times Roman 12

tables, computations, etc. are to be attached as exhibits to the memorandum and
be properly referred in the memorandum itself

general, do not attach an exhibit that is not mentioned in the memorandum

number of exhibits that can be attached to the memorandum is restricted to no
more than ten (10) exhibits

discuss your team-based assignment with only your teammates . . . remember that
discussing graded assignments with students who are not your teammates
constitutes two types of academic misconduct: (1) unauthorized collaboration
and (2) giving and/or receiving aid in an unauthorized manner

copy of your team-based assignment with names of all team members must be
submitted by the date and time detailed in the syllabus

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