Executive Overview

In any business organization, regardless of size, inventory is a major cost concern. It is necessary for these organizations to better plan and project inventory consumptions in order to avoid large inventory cost hold-ups. When discussing inventory management, there are other elements, such as procure-to-pay (PTP strategies and available to purchase (!TP re"uirements, #hich play important controlling roles. $ne major element in the supply chain #hich is often overloo%ed is the &oods 'eceipt (&' versus Invoice 'eceipt (I' account. In many cases, this account carries a large balance - sometimes millions of dollars spanning purchases and receipts over multiple years - and ma%es it nearly impossible to reconcile differences bet#een good receipts and invoice receipt "uantities. !s part of a #ell-controlled process, it is beneficial for organizations to %eep trac% of their &'(I' balances and manage differences #ithin a manageable tolerance in order to control and match their receipts and payables. This technical #hite paper outlines some techni"ues #hich can be implemented to improve controls over the &'(I' account at a reasonable cost to the company.

Introduction
)uring the procurement process, the buyer issues a purchase order (P$ to the vendor, the vendor supplies the goods per the P$ details and the buyer then pays the vendor after matching #hat #as ordered to #hat #as supplied. This creates payment liabilities for buyers #hich are eliminated later by payments (disbursements made to the vendor. In *!P, if the aforementioned scenario is e+ecuted, then the process of tallying receipts and invoices is accomplished automatically by the system using the &'(I' (&oods 'eceipt(Invoice 'eceipt clearing account. This account is used in *!P to manage goods receipt amounts versus corresponding invoice amounts. Whenever a goods receipt ta%es place, the system credits the &'(I' account by a value e"ual to the P$ item value multiplied by the actual physical "uantity received (i.e. P$ Price , "ty received . When a corresponding invoice is received, the system debits the &'(I' account by P$ item value multiplied by the invoiced "uantity (i.e. P$ Price , "ty invoiced . If the invoice amount and corresponding &' value match, then the associated &'(I' amounts are eliminated, thereby leaving a zero balance for that particular transaction. -o#ever, in most procurement scenarios this process becomes more comple+ and the account re"uires additional monitoring. .ecause any mismatch bet#een invoice "uantities and goods receipt "uantities creates differences bet#een inventory and invoice values, this leads to balances #ithin the &'(I' account. The follo#ing are significant factors that impact &'(I' balances/ Purchasing processes/procedures - The manner in #hich purchasing documents are created and managed impacts the &'(I' account directly. *ome factors to be considered are &'- or P$-based Invoice 0erification, the use of contracts(scheduling agreements, and validity dates for open P$s. Goods Receipt processes/procedures - 1fficiency of goods receiving also has an impact on &'(I' procedures. These procedures may include a receipt trac%ing mechanism, returns, salvation procedures and &' processing time. Invoicing processes/procedures - Invoicing procedures also impact &'(I' procedures. 2actors that may be considered are invoicing patterns, invoicing fre"uency, and invoice details and accuracy. There #ill li%ely be differences in timing bet#een &' and I', creating balances in the &'I' account. Therefore, efficient management and monitoring of the factors above helps to ensure an improved system #hich can #or% #ithin acceptable tolerances. The leading practices related to &'(I' procedures detailed #ithin this #hite paper focus on the above mentioned factors (i.e. purchasing, goods receiving, and invoice receiving .

Leading Practices for Managing Purchasing Documents

Performance of the &'(I' clearing process depends upon the creation of purchasing documents, supplier terms, and organizational discipline. The follo#ing settings allo# a company to manage purchasing documents effectively in order to %eep &'(I' discrepancies #ithin a tolerable limit.

Unlimited over-delivery tolerance (set in the PO) - The unlimited over-delivery indictor should not be overloo%ed as it increases the ris% of receiving in e+cess of the original authorized P$ "uantities. It can be difficult to trace these goods receipts in a timely manner because there is not P$-to-invoice matching ta%ing place. !dditionally, if this indicator is selected for 1valuated 'eceipts *ettlement (1'* P$s, then invoices #ill continue to be paid for higher than authorized "uantities in automatic settlements. "Goods Receipt" and "Invoice Receipt" indicators (set in item categories and account assignment categories) - Turning these indicators on or off inside a P$ may result in a mismatch bet#een the &' and I' functions, therefore leading to &'(I' imbalances. It is recommended such indicators on the P$s be controlled via field status configuration. !s a result, these settings #ill be determined by the item category(account assignment combination and cannot be changed at the time of P$ creation. Purchasing document types - It is recommended management differentiate various procurement processes using different purchasing document types. )ocument types can help to differentiate &'(I' analysis according to types of purchasing transactions. This enables management to conduct a more precise analysis related to troublesome areas. Validity or purchasing documents - It is recommended the validity of longterm purchasing documents such as scheduling agreements or contracts be restricted for a reasonable period of time (e.g. - in most cases not longer than one year . !t the end of the validity period, the P$ "uantity balance should be closed and the item mar%ed for delivery completion. Indefinite validity dates %eep purchasing documents open and create difficulties in calculating accurate &'(I' balances. !ultiple active purchasing documents or vendor/material com"ination This sometimes results in matching problems at the time of receiving or invoice verification, #hen a reference is missing. Incorrect matching of receipts(invoices to P$s can lead to a mismatch bet#een &'(I' balances. #R$ indicator (set in the vendor master) - Turning this indicator on or off can create a conflict in the subse"uent functions. In the instance of 1'* (evaluated receipts settlement , automatic settlements are created and !ccounts Payable does not e+pect an invoice from the vendor. If the 1'* indicator is removed from the P$, these receipts can be left pending in the &'(I' accounts #ith a lac% of settlement(s . 2or a consistent process, changes to this configuration should be moved from the P$ to purchasing master data. #%pense procurements - In the instance of e+pense purchases, general materials codes or free te+ts are used. It is important to e+ercise caution in creating these P$s so later, these invoices may be traced to the correct receipts. 3se of free te+t in a P$ may lead to the incorrect receipt matching. Therefore it is recommended to standardize the purchase items in a recurring purchase. PO &pprovals - !ll purchasing documents should follo# controls #hereby the purchases must be approved according to management-defined guidelines. ! chec%list may be created to chec% #hether all controls relating to &'(I' are in

place #hen the P$ is created(approved. .ecause purchasing documents initiate the start of a &'(I' procedure, it is recommended to maintain strict control over them. $upplier colla"orations - *upplier collaboration can be defined as the bac%bone of procurement as it can effectively mitigate the e+ternal factors affecting the &'(I' process. *uppliers may be motivated to provide on-time supplies by the purchasing company offering an incentive for such performance. 4ote/ this is not dependent on the system.

Leading Practices for Inventory Management

Inventory management forms a bridge bet#een procurement and the accounts payable functions. *trong inventory practices ensure appropriate trac%ing of goods receipts, shortages, as #ell as escalation procedures. 3se of efficient inventory procedures can assist in providing accountability over inventory and fe#er &'(I' discrepancies. The follo#ing are some techni"ues that may be used to assist in the &'(I' process/ !ovement types 'hich allo' GR 'ith/'ithout PO re erence - In some cases, goods may be received #ith reference to a P$. In these instances, there may be a mismatch bet#een Invoice and P$ "uantities. !ny such goods receipts do not create corresponding goods receipt entries in the &'(I' account (because &'(I' entries are made at P$ prices , thereby causing a subse"uent invoice match, further resulting in a balance #ithin the &'(I' account. It is recommended the usage of such movement types be discontinued. !aterials 'ith di erent purchasing unit o measure (UO!) - 2or materials #ith different purchasing 3$5, receipt "uantities should be entered in the purchasing 3$5. !ny manual error caused at this point may lead to further discrepancies in subse"uent &'(I' procedures. It is recommended to allo# the system to do the conversion based upon the 6.ase 3$56 so any invoice "uantity matching problems can be avoided. Goods reversal 'hen invoice veri ication is completed (con igured in movement types) - This results in e+cess invoicing of the goods as the vendor receives payment although the goods have been returned. It is recommended once invoicing is completed, these movement types be disallo#ed. 'ather, return P$s #ith a separate document type should be used for returning items to a vendor. (ounded GR area - The &' area should not be accessible to personnel outside of the receiving function. In the instances of emergencies, often there is a tendency to have materials lifted from the &' area. These goods may not have been accounted for properly at the time of goods movement. In some cases, goods are delivered directly to their respective departments, thereby bypassing normal receiving procedures. This may lead to a mismatch bet#een actual receipt "uantity and invoice "uantity. !s a result, a &'(I' imbalance may e+ist. 'eceipt of any goods should be done centrally by authorized personnel only.

$hortages - *hortages(damaged goods should be captured appropriately #ithin the system. If they are not captured correctly, then a "uantity mismatch may e+ist #ithin the &'(I' account. )ommunication - .ecause goods and invoice receiving spans several different functional departments, strong cross-departmental communication is essential across the Purchasing, 'eceiving, and !ccounts Payable departments. This can lead to an effective consolidation of purchasing activities and avoid long outstanding &'(I' mismatches.

Leading Practices for Managing the Invoicing Process

!long #ith purchasing and receiving, it is also important to have effective invoice verification and analysis processes in place. !s this process forms one piece of the &'(I' process, effective management over this function can help to create do#nstream efficiencies. The areas mentioned belo#, if managed diligently, may lead to a more efficient and more accurate #ay to manage the &'(I' account. GR/IR &ccount !aintenance - It is important to monitor the &'(I' account activities, #hich assist in triggering an action to clear pending goods receipts or invoices. ! delay in this activity may re"uire additional efforts in verification and validation. 2urthermore, there should be a fi+ed fre"uency (based on the number of entries and e+pected follo#-up time re"uired for performing &'(I' account maintenance. Typically, the minimum fre"uency of maintaining the &'(I' account is no less than every 78 days. *hree-'ay match - $rganizations for #hich invoicing is done first and goods receipt ta%es place later are more prone to balances #ithin the &'(I' account. !s a result, it is recommended to follo# three-#ay matching procedures for invoice processing. &'-based invoice processing #hich allo#s for a three-#ay match chec% bet#een P$, &', and invoice is recommended. In addition, management needs to consider configuration at the follo#ing levels to help ensure an effective automated 9 #ay match/ item category, account assignment category, purchasing value %eys, invoice tolerances, movement types, and P$ field statuses. Invoice details - It is recommended to have a clear reference to P$ and delivery details on the vendor invoices. This helps trace invoices to a P$ and a receipt. It also assists in determining the appropriate corrective action to ta%e in order to clear &'(I' account balances. It is also recommended to re"uire a pac%ing slip in order to match vendor invoices so as to avoid &'(I' mismatches. )ontrolling mechanisms - In order to efficiently manage and resolve &'(I' related issues, it is important to implement controlling functions to revie# and suggest corrective actions such as periodic evaluation of the &'(I' account. It is recommended to develop a cross-functional report #ith #hich invoices and receipts can be matched as part of the &'(I' clearing process.