Banishing Doubts

Retailers have long struggled with the pain of reconciling purchasing contracts with their suppliers. With an invoice carrying hundreds or thousands of line items, making sure each item matches the original purchase order often requires a long and complicated approval workflow. Managers representing multiple departments at both retailer and supplier may have to review each item, creating a lengthy back-and-forth that can take weeks or months as each side of the contract challenges details and requests changes.

“It’s a major problem for retailers as well as their suppliers,” says Paula Rosenblum, director of retail research at research and analysis firm Aberdeen Group Inc. “Retailers wind up having to operate a vendor-relations department that can cost more than it saves in reviewing contracts.”

The ripple effect

The problem is aggravated by the fact that original documents can be difficult to find. “If there’s a dispute, it creates a whole ripple effect,” says Paul Connolly, vice president of marketing for Notiva Corp., provider of web-based software for managing contracts. “To get approval of line-item detail, retailers and suppliers start a tennis match of phone calls and e-mails.”

But now web-based systems are bringing a new kind of order to the contract settlement process. Instead of relying on a hodgepodge of communications and searches for original documents, web-based applications provide universal and simultaneous access to conduct a three-way match and reconciliation of electronically stored and organized purchase orders, invoices and delivery receipts. The applications are designed to automatically match data in the three types of business documents, and, based on rules set by users, send automated alerts to managers of any discrepancies.

“They manage the trade cycle from the time a purchase order is made to when a supplier receives payment, providing a consistent view for retailers and manufacturers,” says Rob Garf, analyst with AMR Research Inc.

Web-based trade settlement is still at the head of the curve in its adoption by the retail industry, as many retailers concentrate on other more traditional technologies like CRM and POS systems, experts say. But several retailers are in initial stages of testing and deploying web-based trade settlement and are realizing the technology will save them large amounts of costs in managing the purchasing process, according to analysts and vendors involved with the deployments.

They’re not talking

But don’t expect to hear retailers talking about them any time soon, vendors and analysts say. The few who have jumped early into web-based trade settlement software did so because they believe it can give them a competitive advantage in the form of lower operating costs and so they aren’t eager to tell others about it, analysts say. “They’re all looking for a leg up on the competition,” says Lois Bruu, vice president of market development for TradeCard Inc., provider of web-based trade settlement software to multi-channel home furnishings retailer Linens ‘n Things.

Todd Kolber, vice president of retail solutions for TradeCard, says a retailer can expect to save millions of dollars per year once its TradeCard trade settlement system is completely rolled out with an integrated import financing tool. Those savings, he adds, will come from three areas: faster and more accurate review of purchase orders, invoices and delivery receipts, resulting in a more productive accounts-payable department; discounts in payments resulting from invoices that get paid sooner due to the faster document review process; and reduced costs in bank fees related to import transactions handled through TradeCard instead of through traditional bank letters of credit. Linens ‘n Things is expecting major process and cost improvements, TradeCard says.

The three leading providers of trade settlement software cited by Aberdeen—Notiva Corp., TradeCard and Lawson Software Inc.—all have retailer clients, among them at least one major general merchandiser and several specialty chains, in early stages of deployment.

As information gets out on how trade settlement can expedite the purchasing process, more retailers are likely to follow, Rosenblum says. “Web-based trade settlement is an immature market, but there’s no reason why retailers shouldn’t be using it,” she says. “I’m surprised all three of these companies aren’t getting more traction in the retail industry because trade settlement is such a major problem.”

As retailers grow and take on more products, increasing their workload of processing purchase orders and related documents, she adds, web-based trade settlement makes it possible to grow the number of product offerings and sales without growing the vendor-review department. “The challenge is having the ability to grow without having to also grow general administrative expense,” Rosenblum says.

Automating reviews

Reviewing purchase orders, invoices and delivery receipts has traditionally been a laborious process. At the retail operation, the merchandise buyer, the accounts payable clerk, logistics and warehouse managers, managers of vendor operations and others review invoice and delivery receipt details to match them against original orders. And when the retailer finds what it believes is a discrepancy—for example, the price or description of products in an invoice or the quantity of items in a delivery receipt don’t match the purchase order—it may demand an invoice deduction, setting off further review by the supplier’s managers, who must decide whether to accept the deduction or reject it.

“One big problem is overpayment due to invoice errors, which can require bringing in an extra party to re-examine audits,” says Aberdeen analyst Kent Allen.

The time-consuming research required by multiple managers and clerks at both retailer and supplier can often be bogged down by missing purchase orders or other business documents. In many cases, retailers don’t even attempt to reconcile all documents, relying instead on statistical sampling to determine payment terms they will seek with suppliers, Rosenblum says. For example, a retailer might review 50 invoices from a supplier to see how they matched up with purchase orders. If they average an overpayment of 2%, the retailer might tell the supplier that it will apply a 2% deduction on all invoices.

“Bad data leads to trade friction,” Connolly says. “Trading partners spend half their meetings going over who has the right data, but all that goes away if they have a common view of data.”

Web-based trade settlement can change all that, advocates say. “Retailers and suppliers look at the same documents, electronically, and at the same data to arrive at the same version of the truth,” says Connolly.

Cultural challenges

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The biggest challenge in moving to a trade-settlement system, Rosenblum says, is dealing with the cultural change required in getting retailers to try a new way of doing things. But because they use increasingly common web-based tools like automated e-mail alerts and browser-accessed web pages, trade settlement systems can be expected to quickly become common tools of retailers and suppliers, she adds.

Notiva, founded by CEO Tom Furphy, former vice president of finance for supermarket chain Wegmans Food Markets Inc., focuses on collaborative match and reconciliation services. Retailers have the option of deploying Notiva’s Retail Trade Edge software on their own web servers behind a firewall, with a link to a Notiva-hosted application for collaborating with suppliers, or using a completely hosted system to which both retailer and supplier subscribe.

Notiva uses IBM Corp.’s Websphere platform to integrate with a retailer’s back-end software, enabling it to pull data from purchase orders, invoices and delivery receipts from general ledger, accounts/payable and other applications into the Notiva Retail Trade Edge application. Integrating that data at the start of system implementation takes 4-6 weeks, Connolly says. Algorithms in the Notiva system look for discrepancies in pricing, ordered quantities and product descriptions, according to tolerances and thresholds set by the retailer.

A retailer can configure the Notiva system, for example, to alert managers when invoice prices are more than 1% above purchase order figures. Any invoices that come within the 1% would be automatically forwarded to the retailer’s accounts-payable system for payment. Invoices with discrepancies remain on a web page for the retailer’s review.

The alerts regarding discrepancies, which can be programmed as e-mail to computers or other messages to cell phones or PDAs, tell a retailer to check the details in the web application on unmatched invoices. A retail manager or clerk can then check particular line items from an invoice to call up the related purchase order to see if there was a reason for the discrepancy—for example, because half the lot of an item was ordered in extra-large containers, requiring a higher price than was reflected in the purchase order—or whether the retailer should challenge the invoice and seek a deduction. Because the application can be accessed by multiple managers simultaneously through a web browser, the overall review process time can be sharply reduced, experts say.

When a retail manager receives an e-mail alert from a trade-settlement application that information on invoices and delivery receipts don’t match details on purchase orders, he logs onto the web application to collaborate with the supplier on reaching acceptable terms. “The importance of the web to collaboration can’t be underestimated,” Rosenblum says. “Without the web, there are too many things managers can’t do. Collaboration is totally enabled by the web-based application.”

From hours to minutes

Parts of these review processes that once took several hours can be cut to a matter of minutes, Connolly says. To realize the benefits from the Notiva system, retailers will pay within a broad range, from $500,000 to $5 million for a software license to install Trade Edge on their own web servers. The price goes up along with the retailer’s volume of transactions, Connolly says. In addition, suppliers pay an annual subscription fee ranging from $10,000 to $50,000, depending on the number of retailers to which they connect.

Lawson and TradeCard offer similar functionality, though with different integration options. Lawson is different from Notiva and TradeCard in that its trade settlement software operates as the Payables Management module within its Lawson Financials software suite, which integrates with its full suite of enterprise resource planning software for overall retail operations.

Lawson, whose enterprise applications also include accounting and accounts-payable software, provides an immediate integration between its Payables Management module and these back-end applications for its enterprise suite customers. “Once an invoice is reconciled, its information automatically updates the retailer’s general ledger accounting software and goes to the accounts-payable module,” says Rob Wilson, product marketing manager. Lawson’s licensing fee for its invoice match and reconciliation tool starts at $50,000 for customers already using Lawson enterprise software.

With TradeCard, which unlike its competitors offers trade settlement software only as a hosted application, retailers can extend the purchase order and invoice match and reconciliation services to integrated supply chain financing. If the TradeCard system finds no discrepancies among business documents, the system can automatically remit the invoices to a third-party financing partner.

In addition to alerting retail managers of discrepancies in purchase orders, invoices and delivery receipts, the TradeCard system will also alert retail managers when invoices are good to pay, letting retail finance managers keep their funds in high-interest-bearing savings accounts as long as possible before transferring funds to payment accounts, Bruu says. In addition, TradeCard provides online management of financing imports, allowing retailers and suppliers to avoid paying the fees related to bank letters of credit typically used to assure payment in import transactions.

Fast training

Using the web-based TradeCard system in lieu of a letter of credit, Bruu says, each supply chain buyer pays only once for each transaction with its seller regardless of how many changes they make to invoices. By comparison, she adds, bank letters of credit would impose fees each time a change is made to a business document. Combined with the savings in using TradeCard as a tool for matching and reconciling purchase orders and invoices, “We estimate $3-$6 million in savings per $1 billion of procurement,” Bruu says.

The trade settlement vendors say their web-based systems are easy to learn within a training period that, in TradeCard’s case, according to Kolber, is about a half day. Although TradeCard usually sends a product manager to a customer’s site to train users, it also provides training through webcasts. In addition, the systems can take 4-6 weeks to implement, depending on the amount of integration a client wants with partners and its own back-end software applications.

TradeCard charges users on the buying side of transactions an annual subscription fee based on volume; users on the selling side pay per-transaction fees equal to less than 1% of transaction value. In addition, a retailer can expect to pay TradeCard or a third-party systems integrator tens of thousands of dollars to integrate the TradeCard platform with its back-end software that stores data on purchase orders and other documents.

Analysis ahead

As retailers and suppliers perfect their use of trade settlement software, they’ll move on to the next step of analyzing in a collaborative way how and why invoice discrepancies occurred, experts predict. “They have to learn what triggered an invoice deduction in the first place,” Connolly says, noting that Notiva released its first trade settlement analytics software in April. “They’ll use analytics to leverage the data in their trade settlement software to see what business process problems they need to fix to preclude more invoice deductions going forward.”

“We believe analytics long-term will provide the biggest return for both retailers and manufacturers,” he adds, “because it will give them a common view on how to do business.”