12/31/03
Evaluated
Receipt Settlement –
Making Progress?
Compiled
by:
Erik Kruse, SCRC |
Supply
Management at Progress Energy is seeking to increase
the efficacy of an Evaluated Receipt Settlement
(ERS) process. Vendor relationship management
is a key part of this effort.
This point was demonstrated during a conference
call in which representatives from Strategic Sourcing
and Accounts Payable spoke with a vendor that
was having difficulty applying payment during
reconciliation. To communicate the importance
of ERS to the supplier, Strategic Sourcing made
it clear to the vendor that “the contract
was at risk if it did not get it together.”
Why did Progress Energy decide it was necessary
to temporarily add more resources and work with
the supplier’s accounts receivable staff
to build a stronger process? Because information
flow problems (e.g. mismatched packing-slip numbers)
were keeping Progress Energy and its vendor from
realizing the ERS process’s full potential.
ERS is designed to “automatically” settle
goods receipts with many of its suppliers. As
it was demonstrated by Kumaraguruparan, author
of a Strategic Finance article (1), there are
two primary areas of savings associated with ERS:
time and money. The author studied ERS implementation
at LAB D, a multinational distributor of scientific
and laboratory products with revenues of approximately
one billion dollars.
In summary, ERS was expected to save the company
a total of approximately one million dollars per
year. To come up with that number, LAB D had to
understand the existing process. Kumaraguruparan
described the company’s incumbent process
as follows: “LAB D paid vendors when it received
the invoice, which was typically before it received
the shipment of goods. Once it received the goods,
someone checked them out, noted any differences
between what was invoiced and what was received,
and made a note of it in the next payment.”
Kumaraguruparan then noted areas for improvement.
Regarding operational effectiveness, he wrote:
“We discovered that each invoice was handled
multiple times before payment was approved. Needless
to say, the accounts payable and inventory control
people were busy entering and reconciling invoices
and wasting a lot of time with redundant tasks.”
After Kumaraguruparan wrote about the prospect
to streamline the existing process, he then presented
LAB D’s opportunity to obtain further savings.
With the old process, the company carried someone
else’s debt (in fact, the debt of many vendors)
for at least an entire payment cycle, month after
month. Because ERS would eliminate this, LAB D
anticipated a savings of $800,000 to $1 million
annually when the new process was fully phased-in.
But how did they arrive at this number?
The author noted that LAB D had planned to use
ERS for $900 million in aggregate annual purchases.
He then calculated the savings by figuring in
a six percent opportunity cost of capital with
between five and seven days of additional float.
So, it was estimated that LAB D could save around
one million dollars.
In
a Tax Executive article, the author summarized
the benefits of ERS as follows (2):
| • |
More
timely payments
Because of the streamlining of the process
the supplier receives payment sooner. |
| • |
Maximized
discounts
ERS results in fewer problems to resolve,
thus allowing purchasers to take full advantage
of prompt payment discounts. |
| • |
Lower
prices from suppliers
Less human intervention, no paper invoices,
fewer payment problems and no reconciliation
issues result in reduced prices for the supplier
as well as the purchaser. Many purchasers
use this as leverage to negotiate lower prices
with their key suppliers. |
But getting the full benefit of a new process
usually does not happen without some resistance.
For that reason, Kumaraguruparan provided the
following list of key relationships and actions
regarding ERS implementation (1):
| • |
Vendor
relationship management |
| • |
Process
redesign, organizational redesign, and change
management |
| • |
Software
application and development |
| • |
Training |
| • |
Deployment |
In
the above list, Kumaraguruparan highlighted vendor
relationships as being an absolutely critical
success factor for ERS implementation. The author
of the Tax Executive article wrote that a major
benefit associated with ERS implementation is
“better relationships with suppliers.”
If one were to synthesize these two ideas, they
would conclude that it takes good vendor relationships
to get better vendor relationships. While many
would probably regard this bit of information
as common sense, the value of this statement lies
in the fact that it reinforces the assertion that
vendor relationships are important.
Supply Management at Progress Energy is focused
on improving supplier relationships… but
only with a group of suppliers that can demonstrate
dedication to continuous improvement. Progress
Energy is realigning itself with sourcing partners
who are reliable and willing to resolve issues
as they arise. ERS performance is just one category
that it views in high regard.
References:
(1) Kumaraguruparan, C. (September, 2000). A million
saved is a million earned: ERS saves time and
money. Strategic Finance.
(2) Anonymous. (September/October, 1998). Evaluated
receipts settlement and tax compliance. Tax Executive.
top
|
