Evaluated Receipt Settlement – Making Progress?
Published on: Dec, 31, 2003
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.
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
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.
(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.
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