Achieve Big Savings With AP Automation

The AP process of invoice handling and payment processing has long been a paper-laden function riddled with inefficiencies. Manually entering data and matching invoice information can often lead to high error rates, opportunity costs (i.e. costs associated with failure to obtain vendor discounts), and reporting inefficiencies. As you pursue different strategies to impact your bottom line, AP automation presents a tangible opportunity to drive efficiency by improving internal controls and generating real-time reports. Zappos.com (Zappos), an e-commerce retailer, saw such an opportunity with its AP and financial reporting system. The retailer has experienced explosive growth, increasing its gross merchandise sales from $587 million in 2006 to more than $1 billion in 2008. In order to manage this growth, Amanda Nevins, chief accounting officer and VP of finance at Zappos, chose to trade in the retailer's spreadsheet-centric AP system for an automated financial management application.

Headquartered in Henderson, NV, Zappos sells clothing, handbags, shoes, accessories, eyewear, watches, and home goods. In addition to Zappos.com, Zappos runs and operates other vertical businesses, or "profit centers," including 6pm.com, a discount merchandise e-commerce company. The retailer also runs the Powered By Zappos (PBZ) program, which designs and manages other retailers' websites, and their customer service, fulfillment, and returns processes. "Back in 1999, we were a small startup company," says Nevins. "By the end of 2006, we had grown to $587 million in gross merchandise sales and had many profit centers. Imagine manually tracking the inventory volume needed to support that sales volume." Indeed, the retailer's largest spreadsheet was its AP matching document, which listed countless receipts and invoices. Keeping up with that volume on spreadsheets presented process challenges, reporting challenges, and control challenges.

Avoid Manual Three-Way AP Match Process Inefficiencies
Zappos matched its inventory receipts to invoices received from vendors. "Our AP team received a download of receipts from our homegrown warehouse management system [WMS] into a spreadsheet," says Nevins. "The AP team manually typed invoice amounts [i.e. cost and quantity] into that spreadsheet, making it manually intensive to match invoices to receipts. At the time, our AP department included seven people who were dedicated to completing this process." The AP team matched invoices against receipts to ensure Zappos paid for the items received at the cost listed on each purchase order (PO). Nevins recounts that while the retailer's AP team completed a three-way match process as efficiently as it could, it was time-consuming and did require a lot of manual checks to ensure accuracy. A three-way match process occurs when, after the invoice arrives, it is matched to the inventory receipt and PO, and if all is in order, the invoice is paid. For example, consider a hypothetical scenario where Zappos created a PO for 1,000 items at $1 each from one of its vendors. When the 1,000 items arrived, the receiving department entered the amount received into the retailer's WMS system, and the WMS system sent a list of receipts to the AP department. This list was downloaded onto a spreadsheet. When the invoice arrived, the AP team compared the amount of items listed on the invoice to the amount listed as received in both the WMS system and on the PO. They also cross-checked the per-unit price on the invoice to the one on the PO. If the invoice showed 1,000 items sent, costing $1 each for a total of $1,000, the invoice was posted (i.e. Zappos mailed a check to the vendor to pay for the items).

The exception reporting process required even more verification and extensive review. The exception items (e.g. vendor substitution, vendor shortage or overage, a cost difference on the PO versus the invoice) had to be resolved before the invoice was posted. The AP team validated the correct price with the merchandising department, corrected the PO, or worked with the vendor to correct the invoice if appropriate, and paid the bill. Depending on the issue, it took up to two days to resolve the exception and post the invoice to allow the check to be processed.

Lack Of Visibility Forfeits Financial And Managerial Reporting
Zappos lacked the capability to systemically report on multiple profit centers. "Our homegrown system was not integrated into the financial system, and therefore the detail needed to report at the profit center level did not exist within the financial system," says Nevins. "Our financial system would only report on one line of business — Zappos.com. Reporting on additional lines of business, such as our profit centers, was done separately by downloading large quantities of data and regrouping it from our proprietary system. The data was then manually entered into spreadsheets; it was a very cumbersome process."

Nevins reports that due to a lack of automation, the finance team could only report on Zappos' performance in a detailed way through manual spreadsheets, which were time- consuming to create. The month-end-closing process required the accounting department to manually collect data (e.g. account balances and budget requirements) from various departments within the company. This data was used to properly generate financial statements in compliance with generally accepted accounting principles, but caused the month-end closing process to take 15 days.

Improve Administration Of Internal Controls
When Sarbanes-Oxley (SOX) was passed in 2002, many companies were forced to take an in-depth look at internal controls for financial reporting. Implementing internal controls takes time, but may prove to be a very cost-effective measure if accounting exceptions are detected. Zappos is a privately held company, and therefore, it is not required to be SOX-compliant. However, the retailer achieved SOX compliance in 2007 to demonstrate the company's commitment to standard accounting practices. The retailer's internal audit department regularly tests controls for compliance, building Zappos' investor confidence.

Though Zappos regularly tested controls for compliance, the retailer recognized the need to transition to an automated AP process. "At that time, we lacked the best control in finance — an automated three-way AP match," says Nevins. Since financial management software limits employees to performing only the functions assigned to them, there is no way any one employee can single-handedly make payments to vendors. "Transitioning to an automated AP process would allow us to implement preventative controls, drastically reducing the potential for errors and unauthorized activity," says Nevins.

Suite Of Financial Management Tools Meets Needs
With the decision to purchase an automated financial application underway, Nevins organized a cross-functional team to research vendors. As project sponsor, Nevins enlisted members of the technology, merchandising, and finance departments. The technology department partnered in the process, as they created interfaces from the homegrown WMS system to the SAP Financials system. Merchandising was involved because they create the POs, and the finance department is the application's end user. Involving several departments in the decision-making process makes sense for a retailer of Zappos' size. Even though the finance department will use the application on a daily basis, every department is affected by the data garnered from it.

After researching several vendors, the team selected SAP Financials ECC 6.0 in March 2007. SAP sent a project team that consisted of functional, technical, and project management consultants to work on-site with Zappos employees to complete the implementation. The cross-functional team and SAP worked together on the blueprinting phase, which outlined Zappos reporting, automation, and control needs. SAP developed the application according to those needs and implemented it on IBM X series servers at the retailer's headquarters five months later in July 2007. To date, the retailer has "flipped the switch" on the general ledger, AP, cost center accounting, profit center accounting, and profitability analysis modules.

By early 2010, Zappos will further streamline its operations by integrating SAP for Retail with SAP Financials and other homegrown systems (see sidebar below). SAP for Retail will enable Zappos to integrate functions, such as purchasing, inventory management, and core master data tracking (i.e. vendor, brand, and SKU) with its financial system.

Enhance Corporate Performance, Achieve Faster Closes
Since implementing SAP Financials, Zappos has improved its reporting efficiencies and analytical capabilities. Instead of analyzing a daunting spreadsheet, the AP and finance department now concentrates on growing the business by analyzing which products sell and why. The retailer now reports on all profit centers, and it has increased the number of profit centers from one to many. Additionally, the month-end closing process has been reduced by 10 days. "The people involved with the closing process now spend their time doing value-added projects," says Nevins. "For example, AP team members check vendor statements and pay invoices. General ledger team members now spend more time doing product analysis, which drives business. We have total insight into all data points — we can decide which products are profitable, which ones aren't, which brands are performing well, and which ones aren't." This data has enabled Zappos to improve brand rationalization and to make quick decisions, like when to add inventory of profitable products.

SAP Financials stores data in one location and automatically generates account balances, reducing the time it takes to collect information. For example, in the past, if a product was not selling well, it used to take Zappos one month to analyze the data, whereas now it takes two days. "Our department managers can see how they're performing compared to their budget system-wide," says Nevins. "The finance department is tasked with providing information so all departments have fast, accurate data to make decisions." In retail, reacting to information quickly can save a lot of money. In fact, the retailer has added nearly $2 million to its bottom line by tagging and analyzing data and providing feedback quickly to decision makers. Finally, Zappos has tightened internal controls, as SAP Financials ensures invoices are only approved by someone with an appropriate level of authority as predefined by the application's role-based security.

The average AP staff member processes countless invoices per month, each with numerous fields' worth of information that must be entered to process a single invoice. By automating that process, Zappos reduced processing times, ensured all related information is accessible, and provided complete visibility into vendor transactions and cash positions.