3/1/2001 | 4 MINUTE READ

The Past-Due Problem

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As vehicle sales slow, all suppliers are getting hit with a cash crunch. Greatly aggravating the cash problem is that prompt payment for shipments is a rarity for many of them. This is due in large measure to the industry’s excessively complicated trading-partner practices. As the industry enters a downturn, such inefficiencies will become intolerable.

Current payment practices make sound financial management a major challenge. Too many suppliers have accounts more than 90 days past due. Even when a payment has already been received, accounting departments may not know what shipments or originating plants it should be applied toward. General management, therefore, operates half blindly. It simply does not know with any accuracy the current financial positions of its production lines and business units.

Fortunately a solution is on the horizon. A central, Web-based repository can hold all the information related to billing and, hence, allows rapid settlement of bills. Using browsers, both buyer and seller have continuous access to this information. In this method both parties are spared the current practice of countless hours phoning each other trying to reconcile billing differences.

The industry’s current problems with settlement are insidious and deep. Three steps define the trading partner relationship: sourcing, order fulfillment, and settlement. Considerable attention traditionally has been given to the first two stages that define a total transaction: procurement and order fulfillment. The last stage, financial settlement, is almost a forgotten stepchild. Unfortunately, neglecting the settlement stage when crafting the earlier processes creates a monster for the accounting departments of both trading partners.

Correct, expeditious settlement is almost impossible due to the complex information exchanges and mistakes made in communication during the first two stages. Between OEM and Tier-One supplier this occurs via electronic data interchange (EDI) exchanges. For instance, settlement is based on price lists and discount schedules of blanket purchase agreements. These are often crafted uniquely for each customer and product. Likewise, both trading partners must know the number units shipped to date (“cums”) in order to appropriately price each shipment. For instance, Toyota demands a discount when more than 1 million units have been shipped.

The real chaos begins, however, in the order process. This process begins when a customer releases an order (EDI 830) specifying the desired part numbers and quantities. The seller responds with an advanced ship notice (EDI 856); this ASN alerts the buyer that this shipment is on the way. The OEM obviously wants to pay based on what it orders. Problems occur right at this point, however. For instance, a supplier may ship only a partial shipment. Hence, the 830 and 856 don’t match in unit quantities. This has been a major problem for Honda of America, for instance, because it wants to pay off the ASNs. Unfortunately, suppliers for a quarter of these ASNs were sending bad information (e.g., wrong unit counts and/or part numbers) to Honda. Chuck Mick of Uni Boring (Howell, MI) , a $150-million/year supplier, said that the confusion surrounding the receipt of materials ultimately sabotages any quick, eventual settlement.

What happens next is a convoluted exchange of electronic documents as both parties try to fix the mess. The aim here is to get both buyer and seller in agreement on what was shipped and ultimately what the final settlement covers. The exchanged documents include shipping discrepancy reports (EDI 861), remittance advice (EDI 820), purchase order changes (EDI 860), ad nauseum.

Often it is exceedingly difficult to trace and connect this flurry of documents, reports Don Prechard of Covisint (Southfield, MI). Multiple departments must participate but often inadvertently add to the confusion. These include sales, material management, purchasing, shipping, and accounting. Davis Industries (Plymouth, MI), a supplier, for instance, has more than 75 systems feeding its accounts-receivable application alone.

Furthermore, each manufacturer must often have two completely different settlement systems. This is necessary because, in addition to the general, release-accounting practice used for production parts, firms also do spot buying and selling. Invoicing and billing for aftermarket parts, tooling, etc. follow a completely different procedure, namely one centered around a purchase order.

Also aggravating matters is that each customer uses different business and billing practices. For instance, Ford and GM each have their own conventions. Suppliers like Saturn best, believes Bill McGee of Future 3 (Northville, MI). Saturn pays suppliers based on production. Its payments are centered on the kanban numbers used in shipments. Because of the fixed lot sizes in kanbans, there is no dispute regarding quantity sizes; hence, Saturn has a unique,“ASN-less” payment technique. The industry appears to be moving in the direction of this style of practice.

In terms of solutions, Bottomline Technologies (Portsmouth, NH) is an e-settlement vendor now entering the automotive market. It offers an Internet-based approach to aggregating all the information pertaining to settlements. Eaton Corp. is a current Bottomline customer. Such an Internet solution avoids many of the problems generated by trying to trace the jumble of EDI documents now flowing back and forth between trading partners. Covisint is likely to participate in this area in the future.

Future 3, in partnership with Efinnet, is also streamlining the settlement process. Efinnet, for instance, will allow suppliers to factor their accounts receivables. This is done directly from Future 3’s Eclipz, a demand management system; both are hosted on the Web.

In sum, the auto industry could significantly smooth its cash flow and reduce administrative costs if it streamlined its business practices in this arena. Web-based approaches can help reduce the exceptions and other problems that plague accounting.