Reducing errors and discrepancies in the supply chain

by | Dec 18, 2016

Businesses take a variety of paths towards gaining greater profits. Increasing sales, reducing costs, streamlining processes – all of them can contribute. However, increasing sales depends on customer purchases; and reducing costs depends on vendor agreements and negotiations.

Streamlining processes, on the other hand, is mostly under your full control. And it dovetails with one other aspect of costliness that is within your control – how you deal with errors and discrepancies within the supply chain.

Discrepancies and errors are costly

When it comes to shipments to distribution centers and to retail stores, it is estimated that it costs an average of $120 to $150 per purchase order to manage inventory errors, track down missing paperwork, inadequate visibility, incorrect pricing, paying incorrect invoices (or worse – fraudulent invoices), inventory delivery delays through manual receiving processes, and more. For drop shipping, the figures are smaller because the purchases are smaller and the reasons for errors are different: Wrong item shipped, item didn’t arrive, item was damaged in shipping, wrong size, etc.

If your organisation processes 10,000 purchase orders per year to distribution centers and retail stores, that’s $1.2 million to $1.5 million lost due to errors as a cost of business. If your business handles 100,000 POs yearly, that’s $12 million to $15 million – poof, just gone. Again, when it comes to drop shipping (which is starting to gain traction in Australia), the costs are smaller but even small errors add up to eaten profits. Clearly there is plenty of room for savings here, and all that needs to happen is more accurate processing paperwork that you are already handling on a daily basis.  Imagine how much you could add to your bottom line if you could even cut your errors in half.

Three chances for errors on every purchase order

There are three places where errors and discrepancies can result in inaccurate transactions. First, there is the buyer’s purchase order, usually a retailer making a request from a supplier. Then there’s the supplier’s invoice, asking for payment for the product. Finally, there’s the inventory that was actually delivered to the warehouse.  The retailer could ask for 100 widgets, but the supplier sends an invoice for 110 and only 90 were delivered to the warehouse – nobody in this situation is getting what they need.

It’s not that it’s deliberate, no one is trying to fleece each other – obviously suppliers and retailers need to work together for both businesses to grow. But there are a lot of opportunities for error in this situation. To reduce the risk for errors and discrepancies, these documents shared between warehouse, retailer and supplier needs to be automated as much as it can.  Though automation can’t eliminate all costs and errors associated with processing POs, it can greatly diminish them both.

Three-way match with automated EDI

Three-way match is an accounting method that compares the buyer’s PO to the supplier’s invoice to the inventory receiving sheets from the buyer’s warehouse. This process of comparing the three documents verifies invoices for immediate payment, while also preventing loss through incorrect payments for flawed or fraudulent invoices. Referring back to the example I gave above, the difference between the retailer’s 100 widget request, 90 widgets received at the warehouse and the supplier’s 110 widget bill would have been identified before payment was sent, and that’s the best time to straighten these situations out.

Automating the three-way match is even better. With manual comparison, there is still plenty of room for error if someone with tired eyes after a long day is reviewing your invoices. Additionally, making this three-way comparison takes time and good communication. With automation, technology can process the three-way match in an instant and it will be more accurate than having a person review every transaction.

Saving time is also saving money

Say that 70% of all invoices pass the three-way match without any problem. With automated EDI, all of those accurate transactions would be processed and approved without a human ever having to look at them, saving you man-hours and opening up more opportunities for innovation because only the 30% of invoices that are incorrect would need to be processed manually.

For example, if employees in Accounts Payable process 100 invoices a day and it takes six minutes to process each one, that’s 10 hours, which could be reduced to three hours with automation. You could reduce staff, or you could also see what your current employees could do if they had an extra seven hours a day to direct towards other responsibilities .

Most common errors in the supply chain

Furthermore, if you know where most of the errors occur, you can save even more time (and money) by addressing the issues with automation. Based on our own research, the most common discrepancies are the incorrect item was shipped or the price varied from what was agreed upon.

Using EDI Purchase Order Acknowledgements (POAs) and EDI Advanced Ship Notifications (ASNs) can bring even greater efficiency. With POAs, suppliers can confirm products, quantities, and prices before the first case is shipped. With ASNs, retailers know when the orders are shipped, the quantities includes and when to expect them to arrive, allowing for more accurate forecasting. With the accuracy and speed of automation, POAs and ASNs can help with closing out purchase orders more quickly, making the supply chain more efficient and nimble.

Suppliers can also gain value of more accurate inventory and order fulfillment accuracy through the process of the creation of an ASN. We’ve learned from suppliers that the process of building the ASN has resulted in identifying miss-picks of items as the orders were being fulfilled. Obviously the fewer errors that go out the door, the better.

Retailers and suppliers alike have the same goals in mind: accurate transactions, efficiency and fewer costly mistakes.  With automation of three-way match, POAs and ASNs, retailers and suppliers can have more accurate transactions, gain efficiency and importantly, reduce the costs associated with errors and discrepancies.

More than 65,000 companies in over 60 countries have reduced costs and gained opportunities with supply chain automation from SPS Commerce. Want to learn more? Contact SPS Commerce today.

Amelia Edwards

Marketing Manager, APAC at SPS Commerce
Amelia Edwards draws on more than 10 years experience in B2B and B2C communications and management, to write about market dynamics in Australia and the Asia-Pacific region.Amelia is responsible for SPS Commerce’s market strategy in APAC, in support of the company’s dynamic growth.

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