A Penny a Unit: How an Old Habit Broke a New ERP

Some problems announce themselves. Others hide behind a number so small nobody thinks to question it. This one hid behind a penny.

A little background

Before AP Impact, I spent a lot of years inside ERP systems. I was the business-process-reengineering manager for a Fortune 1000 company that replaced its legacy systems with SAP, responsible for designing the new processes. I got certified in the FI and MM modules, and I did a stretch of SAP controls and consulting work with E&Y. So when a large brewery called because they’d just implemented SAP and their procure-to-pay controls weren’t working, to the point that they were struggling to produce financial statements, this was squarely in my wheelhouse.

The symptoms

Two things stood out as soon as I got onto their system.

First, they’d implemented a weighted-average cost method for inventory. That’s a little unusual, since most companies I see run a standard-cost approach, and it turned out to matter enormously. Under weighted-average costing, every receipt you post rolls into the average value of that item on hand. Post a bad cost, and you don’t just get one wrong number; you move the average for everything.

Second, AP was badly behind: nearly a two-month backlog getting invoices processed, which everyone attributed to “system issues.”

The penny

I did what I always do: I extracted all of their PO and invoice data into a database and started looking. Within a day, there it was. A unit price of $0.01, all over the place. Purchase order after purchase order, a penny per unit. It just didn’t make sense.

Since I was on-site, I walked over to the buyers who were entering these POs and asked about it. They looked at me with a completely straight face and explained: when we don’t know the unit price yet, we put in $0.01 so we can easily find the POs that need a real price later.

In their old, non-integrated world, that was a perfectly reasonable trick. The purchasing system was its own island; a penny was just a placeholder they’d clean up when the real price came in. But they weren’t in that world anymore. They were on SAP: a fully integrated system where that “placeholder” flowed straight through to places they never thought about.

What a penny actually did

Here’s the chain reaction. When goods were received against those POs, they were received at $0.01 per unit. So inventory was being valued at a penny a unit. Now remember the weighted-average method: those penny receipts dragged down the average cost of the inventory on hand, which invalidated the value of inventory, which flowed into cost of sales, which flowed into the profit-and-loss statement. One purchasing shortcut, and the financials were wrong.

And it got worse, because of the AP backlog. The other side of that entry, the real cost of the items, which shows up when the invoice is finally processed, was sitting in a two-month queue. So the correct cost never made it into inventory on time. The result was a massive timing problem in the financial statements: goods valued at a penny on the books, real costs stuck in a pile of unprocessed invoices, and a finance team that couldn’t understand why nothing tied out.

So what does a penny have to do with AP recovery audit and analytics?

Everything.

This is the point I come back to constantly: systems are integrated now. Unless you’re running something ancient, what happens in one department doesn’t stay in that department. Purchasing enters a price; that price touches inventory, cost of sales, the P&L, and, critically for us, accounts payable. Get the PO price wrong and, if you’re doing two-way matching, you pay the invoice at the wrong rate. Now you need adjustments. Now you need workarounds. Now your AP team is spending its days reconciling problems that were created three steps upstream by a well-meaning habit.

You can’t look at AP in isolation anymore, and you can’t fix AP problems by only looking at AP. The penny wasn’t an AP error, but AP is where a lot of its damage showed up, and AP data is where you can see it. That’s exactly why AP recovery audit and analytics has to be about understanding the whole flow, not just the invoices at the end of it.

The buyers weren’t doing anything malicious. They were doing what had always worked. The system had changed underneath them, and no one had connected the dots. Finding it didn’t take a fancy tool. It took pulling the data, spotting a number that didn’t belong, and knowing enough about how the pieces fit together to understand what a penny could do.