This Week in IDEA | January 03, 2007

New IRD CERICOMX® Customers

IDEA, a 1SYNC Data Pool On-Board Solution (OBS) partner, implements suppliers that subscribe to the 1SYNC data pool using IDEA's IRD CERICOMX application. IDEA was recently assigned the following suppliers:

- Anchor Hocking
- Torin Jacks, Inc.
- Garden Fresh Salsa
- Ferguson

These companies will be trained to use IRD CERICOMX®, an IDEA branded product for supporting and uploading supplier product information into the GS1 Registry® and GDSN via the 1SYNC Data Pool.

If you would like to learn more about the CERICOMX® product, please contact John Etrie, IDEA IRD Product Manager, here or at (703) 562-4624; or Tony Gaffney, IDEA CERICOMX® Implementation Manager, here or at (508) 386-0261.

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Spotlight on SAP

Protecting Profit Margins Through Automated Chargeback Management Solutions

Wholesale distributors rely on rebates, or chargebacks, from manufacturers to protect their profit margins. However, many distributors don’t claim all of the funds to which they are entitled because their manual procedures are prone to error. This narrows margins and negatively affects profits. Using an automated chargeback management solution, wholesale distributors can eliminate errors, ensure that they file claims for all rebates due to them, and improve the quality of information used for making business decisions.

PROTECTING PROFITS WITH EFFICIENT CHARGEBACK PROCESSING
Wholesale distributors compete based on their pricing strategies, and they rely on back-end rebates, also called chargebacks, to protect their profit margins. Let’s say a manufacturer offers a product to end customers at a price less than a distributor’s cost. The manufacturer reimburses the price difference to the distributor after the distributor files a chargeback claim.

It’s income to which a distributor is entitled, but many distributors give away this back-end money simply because they use manual, error-prone processes for chargeback accounting that allow valid chargebacks to fall through the cracks. Any administrator can keep track of one deal with one supplier. But when multiplied by thousands of suppliers and customers and hundreds of thousands of product agreement combinations, manual chargeback accounting is a liability. Inefficiency in the chargeback process has contributed to the steady decline in wholesale distributors’ pretax profit margins across all sectors.

Imagine how much you can improve your profit margins by accurately tracking how much is sold to which customer over a specific period of time. You could accurately file all your chargeback claims – and do so in a timely fashion. You could say goodbye to lengthy dispute cycles, collect cash promptly, and redeploy your staff in positions that add value to your company.

You can leverage information technology to turn this dream into a reality. By deploying an automated chargeback management solution, you can improve accounting and administrative productivity to facilitate the chargeback process. In turn, the increase in operational efficiency and profitability will drive responsiveness internally and across your supply chain.

CHARGEBACK MECHANICS
In this era of heightened competition, manufacturers frequently offer special pricing to distributors to cover the cost of providing goods and services to customers, making it especially important for distributors like you to track chargebacks. These pricing arrangements serve a number of purposes. One common scenario occurs when a distributor is asked to provide products to customers at prices below the actual purchase price paid by the distributor. The distributor recoups the difference between its acquisition cost and the customer sales price through a chargeback – also known as earned income, deviated billing or sheltered income in the food service industry, ship and debit in high-tech distribution, and special price agreements (SPAs) in the electrical distribution industry.

Essentially, the chargeback process results in a rebate payment from a manufacturer to a distributor. Because wholesale distribution is a slim gross margin business, chargebacks are a critical source of income to ensure overall profit margins are maintained.

Here’s how it works. A distributor sets up a proof-of-performance agreement with a manufacturer that entitles the distributor to a rebate once it has sold a certain number of units from that manufacturer. The rebate may be graduated, so the distributor receives one amount for 100 units sold and another amount for 1,000 units sold.

In addition, there are purchasing and selling chargebacks. With a purchasing chargeback, a distributor places an order with a supplier for 100 units of a product and receives a rebate for purchasing that quantity. But the distributor may earn another rebate when it sells the goods to the end user. Sometimes a portion of the rebate is passed along to end users for specific promotions.

The chargeback process may seem straightforward, but it can often be complicated and labor intensive to manage. Pricing agreements offer incentives at various levels of the supply chain. These incentives may be offered as warranty recoveries, marketing funds, and pricing-related credits. These arrangements are formalized in agreements that can span multiple customers, cover a vast array of products, and remain valid for several years. They can change frequently, and they can even be modified retroactively.

Keeping track of it all can be a real challenge. Wholesale distributors often wind up using a collection of inadequate tools, including spreadsheets, e-mail, faxes, and phone calls. The process is manually intensive and prone to error. As a result, distributors miss opportunities to file claims, or they become caught up in disputes and lengthy cycles of rejections and resubmissions that increase the days chargeback outstanding. Ultimately, this inefficient process drives up costs, impairs cash flow, and undermines profitability.

THE CONSEQUENCE OF CHARGEBACK INEFFICIENCY
From executives to accounting clerks, your staff has a vested interest in ensuring records are accurate and cash is collected in a timely fashion. Yet inefficiency in chargeback processing limits effectiveness, ultimately undermining your overall financial performance.

C-level executives, for instance, are responsible for implementing strategies that maximize margins and cash flow. Without accurate information and a clear picture of the margin earned on products, executives can’t plan effectively. And because unclaimed chargebacks could lead to cash crunches, executives may miss out on growth opportunities.

Sales vice presidents are responsible for increasing market share and operating margin, as well as optimizing incentive programs for sales representatives. Without accurate chargeback information, they can’t obtain accurate margin and revenue reports or secure critical deals. And inaccurate information on the revenues generated by sales representatives prevents them from optimizing their commissions.

Financial vice presidents must ensure all valid claims are created while minimizing both the claim threshold values and the time spent on handling disputes. Often, agreements are not available in time to create claims, it’s difficult to capture all the claim data, and manual processes require high claim thresholds. Disputes, when they arise, aren’t resolved in a timely manner.

Commissions are the lifeblood of sales representatives, and they want to be certain that they receive the compensation that is due to them. But because they may not have access to the most current chargeback agreements, their commission records are likely to be inaccurate. That means sales professionals have to spend extra time clarifying terms so they aren’t inadvertently shortchanged in their paychecks.

Chargeback clerks ideally would like to close a larger number of claims on the first settlement run, reduce the overall claim settlement time, and increase their personal productivity. Instead, they are trapped by extensive manual processes, which increase the likelihood of error. They must access multiple systems – including some that are paper-based – to answer most questions. These staff members bear the brunt of chargeback inefficiency every workday.

TAKING THE COMPLEXITY OUT OF CHARGEBACK PROCESSING
Chargeback data is reported to the manufacturer in several ways, although electronic transmission is the most common method. Data may be broken down by transaction or summarized. Both distributors and external agencies, such as group organizations or data providers, report chargeback data. Often, this data needs to be cleansed and validated before it is processed for payment.

For example, chargeback information needs to be validated against contract agreements to ensure authenticity. You need to verify whether the sale actually took place and if the price or quantity was modified. Accuracy is imperative, so that means checking to see if any line items were overlooked and all the pertinent information is complete. Clerks need to determine if duplicate claims were submitted or if a claim was resubmitted with the same information on another day. They also need to verify that the customer was eligible for the price, discount, or rebate; that claim amounts were consistent with the agreement; and that the customer did not return the product to the distributor or the manufacturer.

You can streamline these processes by deploying an integrated solution that supports electronic data interchange (EDI). The solution should contain all the functions needed to handle chargebacks systematically and efficiently. You should be able to create a variety of contract agreements with multiple manufacturers and end users, validate contract agreements, settle chargeback documents based on flexible parameters, reconcile and resolve disputes, produce reports, and establish a full audit trail for the entire chargeback life cycle.

Armed with an integrated solution, chargeback clerks can work more efficiently. Once they off-load manual processes, they have more time to focus on claims that require additional attention. Sales representatives no longer have to worry about applying the wrong pricing because they have access to the correct pricing information when and where they need it. In addition, sales vice presidents, financial vice presidents, and C-level executives have accurate information, so they can make better business decisions.

Technology helps to build trusted relationships with suppliers. Both parties understand disputes can occur, but when they do, you and your supplier have accurate data to resolve them on an exception basis. You can work together to optimize chargeback agreements for a particular customer, region, or product. You can also improve collaboration by making claim information available on a supplier portal.

Most important, greater efficiency leads to a positive impact on your bottom line and a quick return on investment. The reduction of unclaimed dollars directly affects your overall margin and improves your cash flow. Your dispute handling costs are lower, and you require fewer chargeback clerks.

THE POWER OF EFFICIENCY
Wholesalers that use an integrated chargeback management solution – and incorporate best industry practices – can boost efficiency and profits. For example, a large electrical distributor with branch offices in multiple states and several countries reduced by 63% the amount of time required to file and reconcile special price-authorization claims. Time saved processing chargeback claims translates into cost savings and greater efficiency for the distributor and the manufacturers whose products it sells.

The streamlined claims process has improved the company’s ability to track SPA claims from when it invoices end customers to when it receives credit from a manufacturer. The company receives credits faster, and better coordination of data has allowed the distributor to forge closer relationships with manufacturers. The distributor files 95% of its claims electronically over the new EDI-based system, with 80% of those items receiving electronic replies from the vendor. As those percentages approach 100%, the time spent on SPAs will decrease even further. Reducing costs for the supplier and distributor ultimately reduces cost to the end customers.

A CHARGEBACK MANAGEMENT SOLUTION FROM SAP
SAP has developed an integrated application that helps companies collect and track all the revenue to which they are entitled. The SAP® Paybacks and Chargebacks application by Vistex is comprehensive, integrated software designed for wholesale distributors. With SAP Paybacks and Chargebacks, you can capture chargeback data, manage claims, control varied and changing chargeback agreements, and ultimately transform chargeback management into a systematic and effective process. The software allows you to manage the entire chargeback life cycle – from initiation to settlement – and to minimize manual intervention to bring new levels of efficiency and accuracy to the process.

SAP Paybacks and Chargebacks enables you to perform the following activities:

• Create and manage a variety of agreements with multiple suppliers and customers
• Apply evolving agreements on an ongoing basis to maximize chargeback recovery
• Automatically submit claims using flexible settlement parameters and calendars
• Communicate with partners via EDI or Web portal technology
• Park documents to give suppliers a broader opportunity to review and approve claims
• Handle interim settlements to accept approved amounts quickly without waiting for final resolution
• Produce timely reports and establish a full audit trail for chargeback activity to support corporate accounting and compliance efforts
• Use multiple currencies and units of measure in the chargeback process
• Monitor and reconcile outstanding chargeback claims using flexible search criteria
• Support a multitier distribution model in which initial shipments are received in consolidation centers and subsequently shipped to branch locations, and onward to end customers
• Use the reported chargeback data to control various performance programs, such as administration fees, market share rebates, and so on
• Aggregate chargeback document data in logistics information structures and provide extract structures for use in a data warehouse
• Provide a holistic overview of chargeback agreements with complete visibility at customer and product level using a checkbook approach

SAP Paybacks and Chargebacks is fully integrated in the mySAP™ ERP application. That means you can include documents from other enterprise processes, such as sales and procurement, in the chargeback process. And you can easily use chargeback information in your finance, controlling, and compensation processes. For example, chargeback recovery may affect incentive payouts to employees.

The complete integration of Vistex and SAP software also means there are no interfaces and up-front integration costs to manage; ongoing maintenance and upgrades are seamless. And because mySAP ERP is powered by the SAP NetWeaver® platform, you are assured of easy integration and flexibility in virtually any IT environment – all of which help ensure a low total cost of ownership.

SUMMARY
You rely on chargebacks to protect your profit margin. But too often wholesale distributors give away this cushion simply because their manually intensive chargeback procedures are prone to error. You could simply hire more people to process chargebacks, but that would just increase your overhead.

Instead of struggling with manual processes, distributors should implement an automated chargeback management solution. This solution can streamline chargeback procedures and improve accuracy. Employees at all levels – from top executives down to chargeback clerks – can improve their job performance by having access to the right data at the right time.

For more information on how SAP Paybacks and Chargebacks can help you recover lost chargeback income, visit the SAP website.

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Initially published as the SAP white paper "Protecting Profit Margins Through Automated Charge-Back Management Solutions" November 2006. Copyright SAP AG. Used with permission.

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The e-Enabled Company

Creating Business Transformation Through eBusiness Technology

The use of eBusiness tools and strategies provide the opportunity for companies to sharpen their competitive edge in a myriad of ways — some very apparent, others less obvious and buried deep within an organization's infrastructure work processes. Early discussions of eBusiness focused on the eCommerce aspects of streamlined, levered procurement and the efficient use of web-based marketplaces — the buying and selling goods on-line. And while the technology advances both realized and forecasted will continue to directly impact a company's business model, they will also profoundly impact the management and effectiveness of supporting working processes. Technology driven shifts in how these work process are executed will further drive new business model options that can transform a company's competitive position.

Companies are comprehensively transforming how business is done through e-enablement — the concerted effort to uncover opportunities to lower internal costs, improve service levels and create new business models though the application of information technology in general and the internet/intranet specifically.

The Digital Economy. We have learned that the pendulum of the "digital economy" swings both ways as pundits became pariahs as fast as you could say "Sock Puppet". The bold predictions that revolutionary eCommerce upstarts would displace the incumbents and the promised flood of internet commerce did much to catalyze the bricks and mortar companies to action.

The popular refrain is to discount this episode as just another chapter in a series innovations adopted by industry from the advent of the steam engine to the use of the mini-computer. If in fact, "internet speed" only served to justify the venture capitalist's haphazard decision making and the real benefits of these new capabilities would be slow to accrue, why bother? At least, why rush?

Simply put, the potential benefits of e-enablement are real and powerful. eBusiness tools, concepts and strategies are and will affect every business strategy, drive the next generation of work processes for every function and monetize core competencies and intellectual know how within your entire organization. The results of more loyal customers, lower operating costs and value growth will yield a more competitive, focused and truly transformed company.

The e-enabled company will apply the new e-business capabilities to internal business processes with the same strategic intent, commitment and rigor that would be applied to customer interfaces and e-procurement processes. Company e-enablement is concerned with both 'making it happen': ensuring that the overall e-business strategy can be implemented in a timely and effective manner while uncovering new formats in which to compete. This means establishing the right change management program at all organizational levels, and developing appropriate policies, systems and processes that support the e-business strategy.

Information Technology Driven Change. Information technology has become as potent of a business strategy lever as are product innovation, globalization and mergers and acquisitions. In the 1990s, information technologies fought hard to cost effectively deliver the capabilities demanded by the business requirements. IT departments were challenged to satisfy the innovation required by MRO and ERP solutions as well as provide basic desktop hardware and software tools. In today's environment, information technology has moved from one of simply supporting the business model to one that can enable business performance and create strategic options unavailable in the past.

Beyond the overwhelming and obvious role of the internet as a delivery channel and interactive platform, two additional factors have contributed to this changing role of information technology.
First, companies can now manage data electronically more cheaply and faster than ever before. Speed and capability continues to accelerate even as the cost to perform these operations continues to fall.
The second factor results as lower transaction costs and greater ease to store, communicate and transact electronically creates new services to capitalize on the technology's scalability. Application Service Providers (ASPs) and Business Service Providers (BSPs) have taken the outsourcing service partner model of non-valued added work processes to a new level. Transaction costs can be defined as the costs of finding information about available goods and services, negotiating and contracting for those services, and the ongoing management of the relationship. Transaction costs are a major determinant of the scope of company operations, i.e. companies will bring an activity 'in-house' because of the lower transaction costs that result when compared to those incurred when the service is obtained from an external market. These costs are considerable: in 1998, Douglass North and J. Wallis, estimated transaction costs to be 45% of the total economy.

Most companies understand the benefits of Business Process Outsourcing as a means to lower the cost of a specific corporate function or work process. These providers lower the external transaction costs to their clients and the need for companies to keep the service "in-house", while taking over the management of not only the IT infrastructure, but also the workflow, best practices, labor and management of that particular service. These services can provide unit cost efficiencies because of their ability to electronically optimize the work process and spread the cost of maintaining its quality over many more users than that of a single company.

The Role of the Company Intranet. The company intranet should serve as the corporate central nervous system by linking modular work process components together. Corporations will require an increasingly flexible IT infrastructure linking employees via intranet portals. As knowledge management and decision making become the essence of the e-enabled corporation, cross functionally generated data will be aggregated from all sources — both internal and external / BSP and eMarketplace alike — and delivered to workers in an actionable format.

Many industrial companies have already implemented their knowledge management efforts from e-mail centric and intranet "brochureware", to collaborative workspaces integrating voice, video and net meeting tools.

Work Process Opportunities. Opportunity areas for eBusiness to impact work processes will vary from firm to firm. IT infrastructure, company size and competency set all play a role in identifying the fertile areas for transformation. Clues to finding these opportunities are below:

Opportunity Clues

• Coordinate
• Collaborate
• Distribute
• Report
• Research
• Consolidate
• Re-key
• Reconcile
• Route
• Approve
• Core competency
• Brand
• Industry Leadership

eBusiness Enablers

• ASP
• BSP
• Collaborative Tools
• Portals
• Commerce Tools
• Buying Group
• Auctions
• Marketplaces
• "bots"
• Internet
• Intranet
• Value-networks

The Future?

• Customer-Driven Production
• Unbundled Services
• Paperless Company
• Expert Systems
• Enhanced Decision Making

The acid test, however, is to determine if the work being done is of value in the eyes of the customer. If it is not a factor in the customer's decision to become your client, then clearly it becomes a candidate to outsource.

The Transformed Company. Our e-enabled and transformed company will change the definition of what we today define as a company. The knowledge capital of these firms will be levered through a variety of business models. Customers will transact seamlessly through their preferred communication link(s) and choose the service level to match their needs. One can envision this knowledge-based company focused on its core competencies using a modular, scalable IT infrastructure and outsourcing to best in class business service providers its non-value creating activities.

Real time information about the company's markets, customers, partners and internal positions will utilize smart systems and analytical tools to convert this data into actionable decision options to drive optimum delivery of the company's value.

Instead of asset based organizational structures, companies will serve customers from a needs based orientation. And functional silos will disappear into integrated core work processes with process-centering organizations taking hold.
How far are we from making these forecasts a reality? Looking to companies like ENRON, Dell and Cisco, not very. While empirical performance data tying all aspects of the e-enablement tool kit together is difficult to find, Slywotzky and Morrison have summarized in their book, How Digital is Your Business?, the superior financial performance of digitized leaders in various industries have over their nearest competitors. Clearly, capitalizing on the transformation tools available can handsomely reward those willing to take the leap.

IDEA’s Industry Data Exchange (IDX2, Industry Data Warehouse (IDW2), Industry Retail Database (IRD CERICOMX) and IDEA eCredit (IeC) are some of the eBusiness tools that can transform your company. For more information contact Pat McCartin at (978) 454-7819) or Isabel DuPont at (847) 720-4106.

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What's on CIO Agendas in 2007

According to a recent survey conducted by McKinsey & Company, CIOs are focusing their plans on more flexible architectures and more efficient data centers.

Two trends in information technology will become increasingly important to CIOs in 2007: a migration to service-oriented architectures and the introduction of lean-manufacturing principles to data center operations. These are among the results of McKinsey’s most recent survey of senior IT executives. The survey asked CIOs and other senior executives in North American companies about their plans for the coming year.

New technologies and trends constantly compete for a share of the enterprise IT budget, and during each cycle, one or two rise above the others to become a major focus for CIOs. In 2006 two areas of critical focus have been software as a service and server consolidation and virtualization—two trends that CIOs, a year earlier, had cited as important.

As those technologies gain traction, executives are also signaling interest in two further trends to improve efficiency and effectiveness. Sixty-four percent of the respondents to the 2006 survey told us they plan to implement service-oriented architectures in the coming year. This strong response suggests that the thinking about IT architectures is shifting to embrace global standards for interaction, both internally and with external partners and suppliers.

Advocates of service-oriented architectures expect them to make IT more flexible, open, and efficient by facilitating communication and interaction between systems. Under this design, common IT tasks, called services, can work smoothly together, regardless of an organization’s underlying technology platform. The concept has been around for years, but as more organizations adopt Web services standards, interest in these architectures has grown. That interest persists even though many executives have been unclear about the precise meaning of the term—a confusion made worse by some vendors’ propensity to label every product as “service oriented.” Despite this confusion, the compelling benefits of service-oriented architectures—easier communication and interaction among applications—and the increasingly mature offerings from vendors are enticing more IT executives to give it a close look.

Just as interesting, 48 percent of the CIOs that were surveyed in 2006 said that they plan to implement service-oriented architectures for integration with external trading partners in 2007. Traditionally, companies pilot any new integration technology within the firewall, and broader adoption for integration with trading partners follows a few years later. The fact that so many IT departments are already moving beyond the internal pilot stage means that enthusiasm for this trend is high. What’s more, the wide-spread adoption of software as a service promises to encourage the spread of service-oriented architectures, because they make it easier to integrate enterprise systems with applications from third-party vendors.

The second trend poised to strengthen in 2007 is the application of lean-manufacturing principles to data centers. In our recent survey, 28 percent of the respondents said that they had already applied or decided to apply lean principles to improve their data center operations. Lean, of course, isn’t a technology but rather a methodology applied to processes—originally in manufacturing operations but increasingly within services, including IT.

Data centers have grown tremendously over the past 10 to 15 years as IT spending has increased and cost-conscious CIOs have consolidated smaller centers into fewer and larger ones. A data center for a typical large enterprise has hundreds of millions of dollars in capital equipment (server farms, mainframes, networking gear, and storage devices), consumes large amounts of electricity, and requires hundreds of highly skilled engineers and technicians to operate. In particular, the labor costs have grown significantly with the commitment of resources to processes such as incident response, problem management, and change management. Applying lean principles can help reduce waste and improve labor productivity by as much as 40 percent in some processes. Nearly one-third of our survey respondents aim to apply lean principles in these centers—a significant share, suggesting that the initial positive results from early adopters are encouraging a wider field of IT organizations to explore this methodology.

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