Supply Chain Best Practices: The Long-Term Effect of Small Errors

    Accuracy is one of the hallmarks of EDI transactions. So how is it possible that invoices do not match payments? While the theory of matching invoices to receipts is obvious, there can be instances in which there are differences.

    The most obvious differences are from invoice deductions applied to orders that somehow didn’t meet the customer’s standards. These penalties have their own detrimental effect on profits and relationships, but in general are something that can be dealt with on future orders. In fact, if they are not dealt with they can mushroom into significant problems that ruin the business relationship. And if the customer represents a large portion of the customer base, it can mean the end of the business itself.

    Other invoice mismatch problems can cause issues ranging from minor annoyances, like requiring numerous phone or email interactions between payables clerks and customers, to hidden losses over a period of time. In short, small differences between the purchase order and invoice can create errors that are very difficult to reconcile—and they can amount to big losses.

    Three-way matching DiCentral supply chain best practices

    Of course, the standard for reconciling orders and payments is the three-way match system. Three-way matching can do a great job for customers receiving invoices from their suppliers. When orders match invoices, payments are automated and the customer is able to manage their payment process easily and without intervention.

    That is, without intervention unless problems arise in matching the items. At that point, additional people get involved in the process and jump in to resolve whatever issues may be causing the problem. In most cases, they are able to find and fix the issues. That process can require emails, phone calls, or research into the orders that are causing the problem. But those are not the issues that cause problems for suppliers.

    Special circumstances

    More complex problems can begin with the initial contract that launched the order process in the first place. It’s the nature of the sales process that special pricing and specific arrangements are made on a customer by customer basis. For example, a sales person arranges for an additional discount on orders above a certain quantity and placed within a certain time frame. Both the customer and the sales person are happy with the agreement, and the company is satisfied with the business arrangement.

    Generally, the business rules that govern that special circumstance are recorded properly in the company’s ERP system and the customer places their orders in accordance with the agreement. Purchase orders are created that reflect the standard pricing and also include the discounted prices.

    The differences in how discounts are applied can vary from company to company. Some may apply discounts per line item, some to subtotaled groups, and some as a separate line item. While the companies may have agreed on the methodology for  the discounts, not all ERP systems can handle them in the same way.

    In addition, the ERP systems used by the customer and the supplier are almost always different. That means the likelihood of matching the methods is rare. The supplier’s ERP generates an invoice matching the purchase order in terms of products and pricing, but the discount calculation may be shown differently from what the customer’s purchase order shows even if the order total matches the purchase order total.

    Reconciling the invoice

    When the invoice is matched with the purchase order for payment processing, the customer’s system may flag the invoice as not matching even if the totals are identical. At the very least this means delayed processing of the payment. It can also require conversations between the two companies, and may trigger invoice deductions.

    In the best case scenario, the customer will pay the invoice based on their records and create a remittance advice, again based on their records and processing rules. When that payment arrives at the supplier’s offices with its remittance advice the payment will match the invoice, but the line items may be shown at different prices than were on the invoice because of the differences in the calculation/display methods of the two companies.

    In short, there is a mismatch that needs to be handled manually. Manual reconciliation adds extra costs to the overall process, but when there are small differences in the line item calculations that are less than one cent, the problem can be impossible to correct if the ERP doesn’t handle fractional pricing.

    Avoid the tiny errors

    The best practice is to predefine the methods of calculating discounts with your trading partners up front, and understand the limitations of your ERP systems before that first purchase order arrives. 

    -Daniel Ford, DiCentral                     

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