Nothing screams INEFFICIENCY louder than an employee flipping through a foot-high stack of papers, one piece at a time, searching for an important document. Worse yet, imagine that employee is a member of the finance organization, sifting through a pile of month-old invoices looking for possible revenue opportunities. Operating a business this way is a recipe for missing out on potential revenue.
Summit Electric Supply knows this fact well. Until a few years ago, the electrical products distributor was impeded by an inefficient business process for identifying sales that qualified for chargebacks.
A chargeback is a unique mechanism that distributors use to minimize their risk of buying a product for more than they sell it for. Say a distributor contracts to sell a product to a retail customer for less money than it agreed to pay the manufacturer wholesale for it. A chargeback agreement allows the distributor to then turn around and bill the manufacturer an additional contracted amount in order to make some profit on the deal. While a chargeback is an effective business tool, it requires a very close comparison of sales to contracts; depending on the customer and the manufacturer, there can be myriad different contracted deals.
“These chargeback deals contribute to a significant amount of our business,” says David Wascom, CIO and Vice President of IT at Summit Electric Supply. “The challenge is not just in identifying these deals, but also in providing the manufacturer with sufficient documentation that clearly defines which contract we’re claiming a specific chargeback against and why.”
Missing Chargeback Opportunities
Prior to 2007, the outdated legacy system that Summit was operating restricted the amount and complexity of chargeback agreements that business users could load into the system. Also, the limited reporting capabilities and lack of visibility into system data meant employees were hampered by a significant amount of manual processing.
“We literally would have to comb through customer invoices for specific manufacturers to find out where we sold their products each month and to identify, from our understanding of the contract, which chargebacks we could claim,” Wascom says. “Then we would process that information through Microsoft Excel and generate reams of paperwork behind that. Just the copies of the invoices to give a vendor, for example, would consume a case — not a ream, a case — of paper every month.”
In fact, Summit’s chargeback process assumed that the business would inevitably miss some chargeback opportunities — literally leaving money on the table. And the chargebacks that the business did identify were often processed sluggishly. The process of gathering and reviewing the invoices sometimes took an entire month, so by the time the vendor received them, they were already a month old. And by the time vendors responded, the invoices sometimes were two or three months old.
Summit’s decision to migrate to an SAP ERP system provided the opportunity to automate and accelerate the chargeback process. During the ERP implementation, Wascom began researching ways that the new environment could address this unique process.1 He narrowed the options down to two: develop a custom solution, or implement the SAP Paybacks and Chargebacks application by Vistex, which was developed specifically for the distribution industry. The business decided on the solution extension from SAP and Vistex, and has seen nothing but benefits since.
“Today, even our worst-case scenario is better than our best-case scenario from the legacy system days.”
— David Wascom, CIO and Vice President of IT, Summit Electric Supply
How Chargebacks Work Today
Now, at the end of each Summit business day, the SAP Paybacks and Chargebacks application automatically sweeps through all of the billing activity for that day and compares it to all chargeback agreements loaded in the SAP system.
“The application looks at every customer-material combination and compares that data to every chargeback agreement to see if there is a match where a chargeback can be claimed,” says Wascom. “If there is a claim, the application creates a separate chargeback document outside of the customer invoice. This document, which is unique to the chargebacks application, allows us to track the life cycle of that chargeback as it is processed.”
The application consolidates the identified chargebacks by vendor either daily or monthly, depending on the type of vendor, and automatically submits the information to the vendor with the appropriate backup from the chargeback document. The vendor then can approve the chargeback or make any changes, which are reconciled against the individual chargeback document.
With this automated process, the chargebacks not only are processed more quickly, but they also are reviewed more frequently, streamlining the cash flow for Summit. The turnaround time from vendors varies based on their chosen method of response — for example, whether or not they are using electronic data interchange (EDI) systems.
“In our best cases where vendors are using EDI, we’re now making our chargeback claim and getting our approval from the vendor the same day we execute the sale,” Wascom says. “Today, even our worst-case scenario is better than our best-case scenario from the legacy system days.”
The chargeback process is streamlined even further for vendors that also are running SAP software, according to Wascom, because everyone is speaking the same language. Some vendors choose to respond to the claims each night, no matter how minimal they are, while others choose to wait until a certain dollar amount is reached before responding.
One of the chargeback application’s configuration settings lets Summit hold claims to a certain vendor until the chargebacks reach a target dollar threshold.
“Essentially, the application pools the claims up to that threshold, and then it kicks off a summary document that details the claim information,” Wascom says. “But even a chargeback from a vendor that’s a mere $10 is still a huge win for us because now we’re getting the money the day of or the day after the sale, instead of three months later.”
The SAP Paybacks and Chargebacks application also allows Summit to search for chargebacks retroactively. For example, a business user might not load a chargeback agreement into the system immediately, and sales could happen against that contract before the user loads the agreement. For those cases, the application allows users to input validity dates and then search for chargebacks retroactively based on those dates.
Measuring Success — and Enjoying Automation Perks
The increase in chargeback revenue as a percent of sales has jumped off the balance sheet, winning praise from Summit’s IT and finance departments. It certainly helped in proving the benefits of an integrated ERP system as well. “That’s net revenue to us that drops right to the bottom line,” Wascom says.
By integrating with SAP ERP, the SAP Paybacks and Chargebacks application brings a new level of chargeback reporting capability that was not available previously. For example, Summit can now see which vendors, customers, and products are producing the most chargeback revenue, which is valuable information for Summit’s sales team.
As an unexpected perk, Summit also uses SAP Paybacks and Chargebacks for its commission-based sales force, capitalizing on the application’s process and reporting capabilities. “The same sort of insight that we have on chargebacks now applies to commissions as well,” says Wascom. “And the functionality was there. We just had to turn it on.”
The automation is also providing huge productivity improvements in the finance department. Instead of sifting through reams of paper, Summit’s finance employees can now focus on identifying where potential chargebacks may come into new customer accounts based on the visibility into past accounts.
Instead of letting potential earnings go unclaimed, today Summit is bringing more revenue to the table.
1 To learn more about Summit Electric Supply’s SAP ERP implementation, see “Finding the Right ERP Fit” in the January-March 2011 issue of insiderPROFILES. [back]