Chad Ghosn joins the online furniture retailer from Expedia.
New web-based trade settlement programs streamline orders and payments and smooth relationships between retailers and suppliers.
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.
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.”