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Avoiding the Cash Drain from Contract Leakage – Part II

down the drain

Last week, I discussed the value of contract invoicing as a way to ensure compliance and improve control over non-PO invoices.  This week, we’ll look at how you can effectively apply this approach to the processing of these invoices.

At a high level, there are four contract types that provide different levels of control for invoicing against a contract. They are:

 

Supplier Level – covers all products or services

Commodity Level – covers all products or services for specific commodity codes

Catalog Level – covers all items from a specific catalog furnished by the supplier

Item Level – covers only specific items in a catalog, where these contract items can be made visible for users to add to requisitions or invoices (similar to a catalog)

Let’s take the case of an office furniture company where you sign a 12-month contract for outfitting new offices. The supplier offers a 10% discount off list price in its furniture catalog based on anticipated volume of business and minimum order amounts.  All purchases below order minimums are at list price.

With the agreement set, the supplier provides its standard furniture catalog with list prices, delivered as a punch-out catalog to ensure current pricing. From this, you can create either a catalog or item-level Release-Order contract—where the supplier will be invoicing against a purchase order—and incorporate the 10% discount into pricing terms. You set up minimum release amounts, and provide unrestricted release access. Requisitions entered for any catalog item covered by the contract will be automatically matched to the contract and the price adjusted to take the 10% discount if the order minimum is met.

Another option would be to use a Non Release-Order contract instead of the Release-Order contract. In this case, there is no purchase order and the supplier would invoice directly off the contract. This option can include additional pricing terms for fixed and recurring itemized fees, and for costs and expenses—useful for consulting and other services contracts. In most cases, these invoice options won’t require approvals, as the controls from invoicing from the contract serve that function. In addition, you could incorporate a goods receipt linked to the contract items or contract milestones, where three-way matching (invoice-contract-receipt) would occur.

In either case, you could automate the coding process by associating account codes to a project, account, cost element or some other parameter, and define them in the contract. That way, the supplier will be sure to include it on the invoice and eliminate a common non-PO invoice exception. In addition, with contract invoicing, you can add attachments such as a bill of lading, timesheet, or field ticket that can further expedite the processing of service invoices.

Another pricing component that you could incorporate in a contract invoicing agreement would be a tiered pricing structure, where you can specify different prices or discounts based on purchase volume (either dollar amount or quantity) against the contract. You can peg the pricing term to cumulative product usage, where the price change would apply once order volumes hit a certain thresholds (for example, once annual order volumes reach 1,000 units). Or it could be configured per order; for example, a $5.99 per unit price for orders of 19 or less, $5.49 for orders of 20-49, and $4.99 for orders of 50 or more.

With its flexibility, contract invoicing can also be extended to suppliers issuing invoices from back end systems like QuickBooks. Here, you could capture and import invoices as CSV files, then match all the invoices against the contract. For this and all the other contract invoicing scenarios, you will want to associate dollar limits with the contract—in the case of a blanket purchase order, a maximum dollar limit is required—and receive notifications when you are approaching those limits.

Contract invoicing is another by-product of a networked economy that is forging tighter links among trading partners. For organizations looking to improve compliance and better manage spend on invoices without purchase orders, it’s an invoicing option that’s worth considering.

About the author
Chris Rauen
Chris Rauen

Chris is responsible for marketing programs at Ariba that educate finance, procurement, supply chain, and other business professionals on the transformational potential of the Ariba Network and Ariba Financial solutions. Before joining Ariba, Chri... Read More >>>

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