Attacking Invoice Deductions through RFID

Abstract

RFID makes possible extremely accurate ‘point of shipment’ Advance Ship Notices and ‘point of receipt’ Proof of Delivery documents, greatly reducing discrepancies and resultant invoice deductions, thereby restoring some lost balance to the supplier – customer relationship.

Article


RFID tagging gives consumer goods manufacturers a major opportunity: to work with their customers to attack the invoice deduction problem. Even those manufacturers that are choosing the minimalist strategy of ‘slap and ship’ for RFID compliance can attack the invoice deduction issue by RFID-enabling at least one shipping door in the facility shipping to the RFID requestor-retailer. By providing a ‘point of shipment’ advance ship notice (ASN), rather than a pick-list based ASN, to their customers, and by requiring a corresponding ‘point of receipt’ proof of delivery (POD) from their customers, manufacturers will simultaneously drive up the ASN accuracy as measured by their customers and drive down the invoice deductions which they currently suffer.

RFID has the potential to introduce a new level of precision to cross-enterprise business events, fertile ground for cost savings and performance improvements. These processes have been impacted by the past decade’s work in Business Process Reengineering, but that work was predominantly applied to internal corporate processes. The new fertile ground is the activity between entities: the cross-enterprise business processes.

The major cross-enterprise processes–order taking, order shipping, and invoice payment–exchange information, goods (or services), and cash, respectively. But the alignment of these three processes into anything close to congruency is a major source of frustration for businesspeople at all levels in the organizations for both the supplier and the customer.

In 2001 consumer products manufacturers lost 9.9% of their total annual sales due to invoice deductions, up from 8.1% in 1998, according to the Invoice Accuracy study released by the Grocery Manufacturers of America (GMA) in 2002. The study found that 82% of the deductions were resolved in the retailer’s favor, 14% were collected from the retailer, and 4% were written off by the manufacturer. Seventeen percent of deductions were reportedly caused by a combination of shortages or damages in products, coupons and penalties. If only one-half of these 17% can be eliminated through this revised ASN process, manufacturers would regain 72 basis points[1] of net profit percent to sales, without including the impact of any savings in financial operations and customer service. Is there a manufacturer who does not want an additional three-quarters of a point of profit on their bottom line?

How could this opportunity exist? Today many companies create the ASN from their computerized pick-list, since it is an electronic document already extant in their computer system. This leaves a great deal of room for inaccuracies and inconsistencies with the actual shipment as loaded-picking errors caused by putaway or storage errors, mis-picks, damages during the picking and staging processes, incorrect load planning, and physical shipment loading errors, amongst others. Since most error correction procedures are intensely manual and thus subject to mistakes of both accuracy and timing, the resulting ASN that is transmitted is often less than 80% accurate, according to more than one major big-box retailer.

An appropriate customer/supplier agreement to complete the improvement of this particular cross-enterprise process is for customers to receive this RFID tagged shipment through a RFID enabled dock door. The receiving customer would then produce an RFID enabled Proof of Delivery (POD) at the dock, which would be sent to the shipper within moments after the receipt is complete. This POD could then be matched against the ASN by both the shipper and the receiver, and any discrepancies could be investigated resolved long before the invoice comes due for payment. This prompt dispute resolution would have the additional benefit of reducing the post-audit “corrections” 18-24 months after the receipt, and thereby reduce or eliminate yet another cause of friction in the supply chain.

When ASN accuracy as measured by the customer begins to approach the high 90%’s, the retailer’s receiving, payment, and inventory management processes will flow more easily. The more that retailers can use spot checks for receiving rather than 100% check-in, and the more that they can have an invoice which exactly matches their own purchase order (even if the PO is automatically modified by an accurate ASN), the more often they will achieve a ‘perfect match’ in accounts payable and remit 100% payment of the invoice to their suppliers.

The reciprocal benefits for the manufacturer are the substantial reduction of one cause of invoice deductions and the recovery of almost 3/4 of a percent of sales to their profitability. Other benefits such as reduced expense of invoice processing and improved salesforce productivity will be noticeable, but may not be quantifiable. The businesses at each end of the supply chain–shipper and receiver–will reap the benefits of precise information and timely information, thus smoothing their own operating flows and further reducing the need for ‘just-in-case’ inventory, non-standard materials handling procedures, and exception-case financial processing procedures. Process collaboration will yield reduced cost, on both the P&L and on the balance sheet, for both retailer and manufacturer.

The biggest benefit from RFID/ EPC labels is not the collection of internal data by the manufacturer or the retailer. These businesses have already honed their internal processes through bar codes and other means. The earliest and perhaps biggest benefit comes from the use of a common identifier across corporate boundaries, the RFID read EPC Code, and in the refining of cross-enterprise business processes. The closer all parties move towards the use of commonly shared identifiers such as the GTIN, GLAN, and the EPC Code at all steps along the supply chain, as well as sharing the information that is created at each step of a cross-enterprise process such as Supply Chain Management, the smoother and less costly these complex processes will become.

The opportunity to improve ASN accuracy will in some cases require the shipping and/or the receiving companies to modify the current data flow in their shipping or receiving facility. On the manufacturer’s side, by utilizing both a RFID-enabled door for the physical loading of a shipment, and a RFID middleware system that both traps the data and creates the ASN before sending the data to the warehouse management system, a shipper can create a point-of-shipment ASN. This can then be directed simultaneously to multiple points: to the customer as an ASN tied to the PO, to the internal WMS, to the transportation company as the bill of lading, to Accounts Receivable as an ‘authorization to invoice’, and so forth as required by the shipper’s current information architecture. This is a new generation of understanding by the RFID software and RFID service providers, and both BT Auto-ID (www.btautoid.com) and Advanced Software Systems, Inc. (www.assyst.net) have made it available to the market. Other providers may have this capability soon.

What Can Manufacturers Do Today?

There are six actions manufacturers should take today to begin capturing the potential cost savings of RFID-tagged cases and pallets.

  1. Get your own operations in order with RFID-enabled shipping doors and modified data flow to allow the creation of a true ‘point of shipment’ ASN. Enable this document to be sent securely via the web in near-real time, without additional handling or modification by the system.
  2. Create analysis programs to identify and analysis of deviations between the pick-list and the ‘point of shipment’ ASN, and move swiftly to resolve the causes of these deviations.
  3. Require that RFID accepting/requiring customers return a ‘point of receipt’ POD in near real time.
  4. Prepare to receive and utilize the RFID enabled POD from your customers.
  5. Create analysis programs to identify orders in which the ASN and the POD deviate from each other, and move swiftly to resolve the causes of these deviations before the invoice is due.
  6. Create appropriate key performance indicators to measure and then to reward customers for actions which lower and then eliminate this and other root causes of invoice deductions.

What Can Retailers Do Today?

Retailers and other companies that are requiring or requesting that their supply chain partners RFID enable the shipments have their own list of six activities which they should undertake in the immediate future. This is simply the reciprocal process to their own requirements for RFID.

  1. Enable your systems to receive and process the new ASN from your RFID-enabled suppliers.
  2. RFID enable at least one dock door for receiving the RFID tagged shipments from the suppliers on whom you have placed this requirement. More RFID doors may be necessary to prevent receiving process congestion, since the RFID shipments are probably from the most major of your suppliers.
  3. Create a data flow architecture which will allow you to create a ‘point of receipt’ Proof of Delivery which can be securely transmitted in real time to the supplier and the transport company. Accelerate plans to send this document to your suppliers, perhaps even as soon as fall, 2005.
  4. Analyze opportunities to use the newly accurate ASN in your replenishment and other ordering processes, to increase the possibilities of a 100% “perfect match” of PO, receipt, and invoice.
  5. Create analysis programs to identify receipts on which the ASN and the POD deviate from each other, and move swiftly to resolve the causes of these deviations before the invoice comes due.
  6. Create appropriate key performance indicators to measure and to reward suppliers for actions which lower and eliminate ASN and other shipment inaccuracies which cause your company to create invoice deductions and to have less than 100% “perfect match” in Accounts Payable.

Conclusion

Several large retailers are pushing their suppliers to incur new cost and ship RFID tagged shipments. To allow their manufacturing partners to recover this cost, they should immediately move towards eliminating at least one cause of invoice deductions, the receiving quantity discrepancies. They could also require ASNs, but require them to be generated at the shipping door to improve their accuracy and business value.

Consumer Goods manufacturers can negotiate from a position of strength and request/require that their demanding customers begin to collaborate in this key cross-enterprise business process, in which collaboration can lower costs but contention can only create expense and waste. This is an opportunity to recapture some of the cost that your customers are demanding you to incur and restore some equilibrium to the relationship. Smart CPGs who are meeting the compliance mandates need to be earnest about maintaining a true partnership relationship. Light a fire in your belly and put retailers on notice: there’s quid pro quo.

(Condensed version published in: RFID News and Solutions, January/February 2005 )

[1] Equation: .099*[(.17/2)*(.82+.04)]=.007237

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