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SCRC Article Library: What is Evaluated Receipt Settlement?

What is Evaluated Receipt Settlement?

Published on: Oct, 14, 2004

by: Mike Johnston, SCRC

Evaluated Receipt Settlement (ERS) is a procedure for the automatic settlement of goods receipts. It was pioneered by General Motors (GM) to save the company time and money (1). Major benefits of ERS include invoice variance prevention (2), the elimination of non-value-added work (like tasks associated with reconciliation), and opportunity cost of capital savings (3).

When GM pioneered the process in 1994, it processed approximately 1.5 million transactions per month. ERS effectively eliminated the need for paper invoices and checks between the company and its suppliers (3). In the years since then, several variations of the original GM procedure have developed.

The ERS has become a more and more widely used electronic data interchange (EDI) transaction since the legal and accounting implications have been addresses.

Supply Chain Managers should become familiar with the purpose and use of the ERS transaction, in particular as a supplier, as you may face a mandate from your customers to utilize this technology.

What is it?

ERS is a business process between trading partners that conduct commerce without invoices. In an ERS transaction, the supplier ships goods based upon an Advance Shipping Notice (ASN), and the purchaser, upon receipt, confirms the existence of a corresponding purchase order or contract, verifies the identity and quantity of the goods, and then pays the supplier.

How does it work?

A supplier and its purchaser enter into an agreement to use evaluated receipts settlement. The supplier keeps the purchaser current with price/sales catalogue data from which the purchaser extracts accurate product and pricing information during the purchasing cycle. The supplier delivers the ASN to the purchaser, permitting loading/receiving docks to be properly scheduled and accurate material receipts to be generated. The purchaser authorizes supplier payment upon confirmation of arrival of goods, making the invoice redundant.

Although there are numerous variations of how ERS specifically works, there are several common elements:

1. Pricing Information – A list or catalogue of products and prices is sent by the supplier to its purchaser. The information has an agreed upon “shelf life” (30 days, 60 days, etc.). This pricing information may be sent to the purchaser electronically, faxed, or in a paper form. In some cases, it becomes a part of the written contract.

2. Products/Goods Ordered – A purchaser using the pricing information sent by the supplier places an order. Usually a purchase order specifying quantity, product type, price, freight, tax, etc. is generated. This purchase order may be sent electronically (EDI), via fax, or paper. This purchase order has a unique number for the specific order. Some purchasers do not issue a purchase order but rather place their goods order pursuant to the specific terms and conditions of a contract. The specific contract number is referenced. The order may be placed via EDI, fax, paper, or orally.

3. Advance Shipping Notice (ASN) – A supplier acknowledges the order by sending an ASN to the purchaser. The ASN is usually sent electronically to the purchaser. In an EDI environment, ANSI X12 Transaction/Data Set 856 (Ship Notice/Manifest) is used. Note that transaction set 856 does not contain pricing or tax information.

4. Goods/Products Shipped – The supplier ships the goods with an itemized bill of lading or packing slip which references the purchase order or contract number.

5. Validation/Matching Process – The purchaser matches the goods receipt (bill of lading, packing slip) to the ASN, purchase order, or contract to validate accuracy.

6. Payment Process – Instead of responding to a supplier’s invoice, the purchaser calculates payment based on price information stored in their computer. Price updates may be logged into the purchaser’s computer either manually or through EDI messages sent by the supplier. The type, quantity, and condition of the goods received are entered either manually into the purchaser’s computer or through the use of bar codes. The computer system calculates the payment amount due by multiplying the unit price times the quantity received, accrual or payment of tax, and also takes pricing terms into account. The goods receipt date is used as the basis for taking discounts and determining the due date of the payment. The payment is made either by electronic funds transfer (EFT) or check (3).

7. Electronic Invoice Presentment and Payment (EIPP) (4) – When EIPP was first introduced a few years ago, it was supplier-focused. However, overtime, corporate demand and the need for cost-cutting and more efficient processing has shifted the focus from suppliers to buyers and the accounts payable function. Corporations seek improved, consistent back-office processing and find that by migrating to EIPP, they are able to process invoice volumes that were previously impossible thanks to the automation that EIPP offers. This is particularly true for highly specialized service industries — such as legal and petroleum. EIPP makes processing these complex and lengthy invoices much simpler.

Many firms have confessed that prior to implementing EIPP they simply approved and paid invoices, as either the volume or complexity of the invoices did not allow ample time for analysis or processing — even within 45 to 60 days. In other cases, payment was up to 120 days late, causing financial challenges for their suppliers. Cash discounts were rarely, if ever, taken in the services industries.

EIPP has given buyers the ability to pay only for authorized purchases and services at agreed-on prices. Due to the incorporation of business rules into the process, the EIPP solutions identify missing invoice data and return the invoice to the supplier for completion prior to review. In some cases, the EIPP solutions identify erroneously billed invoices and items by incorporating two- and three-way matching capabilities (i.e., receipts, purchase orders).

In the case of more service-oriented industries, such as legal and petroleum, invoices are matched to contracts, matters or field tickets as part of the approval process to validate the invoice. In 2003, a major retailer’s legal department saved $2 million in legal bills alone by identifying and not paying erroneous expenses and invoices. Another company found that 3.2 percent of all its invoices required expense adjustments and another 1.5 percent had fee adjustments, resulting in actual savings to the company. Two companies using the Xign EIPP product have also seen better-than-expected results. One large retailer found that it achieved its EIPP FTE goals in the first six months of implementation.

References:

(1) Thomas, C. (September, 1994). Computers streamline GM supplier payments. Automotive News.

(2) SAP INFO Website. (August, 2003). Glossary of terms for SAP users.

(3) Anonymous. (September/October, 1998). Evaluated receipts settlement and tax compliance. Tax Executive.

(4) Electronic Invoice Presentment and Payment: The More Complex the Invoice, the Greater the Benefit, Penny Gillespie Forrester Research, Inc. (2004)

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