Configure and Customize SAP Automatic Credit Management

2007 Wellesley Information Services. All rights reserved.

Configure and Customize SAP Automatic Credit Management to Work for You, Not Against You

Stef Cornelissen Sperry Associates BV

1What Well Cover

Introduction Why use credit management? How SAP automatic credit management works How to customize SAP automatic credit management How to work with SAP automatic credit management Wrap-up

2Who Should Attend This Session ...

Managers What are the possibilities of SAP credit management?

SAP consultants How do I design a credit management solution? What customization do I need? What is the impact on logistic processes?

3In This Session

Walk through SAP automatic credit management functionality and examine the settings available in SAP R/3 and mySAP ERP sales processes to support it

Get tips and tricks for using these settings to control system behavior

Gain an understanding of how credit management interferes with the supply chain

Get best practices for mitigating the risk of overcontrol during the design phase

4What Well Cover


5Cost Reduction

Source: Killen Associates, Inc., 2001

Credit controls = reduction of Days Sales Outstanding (DSO) = cost reduction

Credit controls can lower the supply chain

efficiency

Issue

Key challenge: Reducing credit risk without hampering the supply chain!

6Dealing with Bad Debt

Before getting involved, ask yourself:

How do I react to a bad debt? Do I block orders from important customers, or do I

grab a phone? What is the volume of blocked orders my F&A

department can handle? Can I afford to block customers (small customer base)? How important is the issue in the first place? What do I save (apart from my personal bonus)? What is the cost in terms of damage to a world-

class SCM?

7Why Use Credit Management?

You can reduce the risk of bad debt You can prevent losing time to bad customers, focusing

instead on the profitable ones It enables you to realize one way of working, preventing

individual slips It saves time; the system does the checking Credit management reporting provides detailed analysis

of customer payments

8When Not to Use Credit Management

Do not block documents just in case Do not introduce overcontrol to ensure a low Days Sales

Outstanding (DSO) at all costs (bonus issue) Do not introduce massive automated controls if you do

not have the resource power to check and release all the blocked documents within a couple of hours (supply chain)

Use reporting, analysis, and active dunning to monitor payment behavior Do not forget that a blocked order does not get you any money

9The Basic Design

Strict control makes sense when you have: Large numbers of small, anonymous customers (low margin) Controlling customers that are known to have credit problems

(risk reduction up front) Monitoring or dunning should suffice for: Key customers Long-term customers When a long-time relationship exists, credit control should aim

at changing payment behaviorf Threatening to stop delivering is a last ditch reaction rather

than an automated process In general, use automated blocks when control

up front is essential. Otherwise, aim at changing payment behavior with other measures!

10

Solving Key Problems with Credit Management

Prevent sales or deliveries to customers with bad credit or bad paying behavior

Keep track of your customers paying behavior and credit use through reporting and analysis

Automate credit management in high-volume business with anonymous customers

Solution

11

Who Should Do It?

You need financial consultants to explore what can be done with reporting and analysis

You need SD consultants to explain what speed is required when a document is blocked and what the impact is on the supply chain

Never have credit management designed by just one of the two!

Its a finance issue!

Its a logistic issue!

12

What Well Cover


13

Integration between F&A and Sales!

How SAP Automatic Credit Management Works

Orderentry

Credit check

Creditmaster

Customertransactions

Customizingsettings

Sales orderprocessing

Sales orderblocked

Sales process

F&A credit management

Sales orderrefused

Reportanalysis

Issue

14

Functional Principles of Credit Management

In Customizing, you define when a credit risk occurs For example, more than 30% of bills not paid over credit limit

During the sales process, the system checks the credit exposure of your customer For example, when you create or change an order or a delivery

Depending on your design, the user creating the document is informed by a warning (still possible to save the document), or an error message (document will be blocked for credit)

15

Functional Principles of Credit Management (cont.)

Once a document is blocked for credit, it has to be released manually by someone from the credit control department

Prior to release, the clerk uses credit management reporting, such as payment history or outstanding open items, to assess the risk involved

16

How SAP Automatic Credit Management Works

Example of a credit warning

17

What Well Cover


18

Structure Your Thinking Design a Process

Set yourself a target to measure performance Current percentage of bad debt Days Sales Outstanding (DSO) compared to competitors

Volume issues: High-volume, low-value requires automation and efficient

handling through grouping, with as little personal handling as possible (refuse orders as much as possible) Low-volume, high-value requires individualization with

emphasis on reporting and blocked orders or deliveries that can be checked and unblockedf Low-volume means analysis on the individual levelf Long-term customers means that blocking is not required

in all cases Its a last resort reaction

19

Analysis:Bad debtand DSO

Check results!

Business goals

High-volume/

low-value

Low-volume/

high-value

Grouping

Customers

Employees

Transactions

Automated response/

group reporting

Customer history

and personal

action

Grouping

Customers

Employees

Transactions

Risk

Role

Response

Risk

Role

Response

How to Customize Credit Management

Bad Debt = Loss; DSO = Behavior

20

1. Determine the credit control area On what level do I control credit?

2. Customize the credit master record First-time customers Risk categories Customer grouping

3. Customize the automated system response Decide on the type of system response Decide on the type of document that will trigger the response f Sales orderf Delivery

Define automatic credit control

Important Steps in Customizing Credit Management

21

Credit control on national level

Credit control on company levelCompany Code

Credit Control

Area

Credit Control

Area

Company Code

Company Code The data flow from SD and the

default setting for first-time customers are defined in the

credit control area

Don't Forget

Step 1: Determine the Credit Control Area

OR

22

Alternatives to Determining Credit Control Area

A company code must always be assigned (default financial values)

The credit control area can be: Assigned to the Sales Organization

f Enterprise Structure > Assignment > Sales and Distribution > Assign Sales Organization to Credit Control Area

Derived from the customer masterf Payers Sales Area Billing Documents tab

User exit SAPFV45K_001 Sequence: User exit, customer (payer) master record,

sales organization, company code The company code always supplies a default value

23

Customize the Credit Control Area

Define how the credit exposure is calculated in the credit control area

Building Block

24

Understand Update Groups in the Credit Control Area

Update group 000012 Sales order

f Increases open order value from delivery-relevant schedule lines

Deliveryf Reduces open order value from delivery-relevant

schedule linesf Increases open delivery value

Billing documentf Reduces open delivery valuef Increases open billing document value

Financial accounting documentf Reduces open billing document valuef Increases open items

These definitions are available via

F1 on the Update field

25

Understand Update Groups in the Credit Control Area (cont.)

Update group 000015 Delivery

f Increases open delivery valuef Increases open billing document value




26

Understand Update Groups in the Credit Control Area (cont.)

Update group 000018 Sales order

f Increases open delivery value Billing document

f Reduces open delivery valuef Increases open billing document value




27

Step 2: Customize the Credit Master: First-Time Customers

Default settings for first-time customers are defined in the credit control area

Building Block

28

Step 2: Customize the Credit Master: Risk Categories

The risk category defines the system response

Building Block

29

Risk Categories in SAP Credit Management

You can freely define risk categories in Customizing Use risk categories To define automatic system responses, such as blocking a

sales order As a selection in reporting

Building Block

30

Step 2: Customize the Credit Master: Customer Grouping

SAP supports grouping for: General grouping field in master data (selection in reporting

and transactions) Customer groups defined in Customizing assigned in

master record (system response, selection in reporting, and transactions) Credit representatives (authorization, selection in reporting,

and transactions)

Building Block

31

Defining Customer Credit Groups

Define customer credit groups in Customizing Assign customer groups in the customer credit master

Building Block

32

Defining Customer Groups

Customer group is a freely-definable field in the credit master used for reporting tools

It does not require Customizing and allows for flexible reporting

However, each customer belongs to only one group! Think about the use of this field (region, size, number of years

as a customer, and so on)

33

Where Did All This Happen in Customizing?

34

Summary of Steps 1 and 2 to Customize Credit Management

So far, we have customized the customer credit master record:1. Credit control area2. First-time customers3. Risk categories4. Customer grouping

C

U

S

T

O

M

E

R

M

A

S

T

E

R

R

E

C

O

R

D

35

Customer Credit Master Record ExampleC

U

S

T

O

M

E

R

M

A

S

T

E

R

R

E

C

O

R

D

Values selected from customized

possibilities

Transactiondata

Free value

Credit limit

36

Setting Payment History Record for Reporting

To have access to reporting on payment behavior, one setting needs to be made in the customer master record:

Don't Forget

37

ReportingCustomer

credit master

Customermaster

First-time customer:

Default values

Payment history!

Customer group

Credit rep.

Step 3: Customize the Automated System Response

Systemresponse

Customer credit group

Risk category

Credit limit

Next:

Customized in Steps 1 and 2

38

Systemresponse

Customer credit group

Risk category

Credit limit

Goods issueDeliverySales order

Detailed warning

Warning + block

Block

Warning + error

Error

Warning

Credit group Credit group

Step 3: Customize the Automated System Response (cont.)

=

Credit group

39


Automatic response is defined for combinations of: Credit control area Risk category Credit group

Goods issueDeliverySales order

Detailed warning

Warning + block

Block

Warning + error

Error

Warning

Credit group Credit group Credit group

40


High-value, low-volume: Standard settings Entering this type of sales order in the system can trigger

valuable production orders f It is often wise to trigger an automatic block on the sales

order, which is removed manually by the F&A department after final acceptance of the risk The credit department should realize that it needs to

react speedily (JIT issue!) Repeat the same procedure at the moment of the goods issue

f This is the final system control

But for high-value customers, most orders will be released anyways, so discuss whether it would be better to use reporting plus credit warnings and a collaboration between sales and accounts receivable!

41


High-volume, low-value In the case of an everyday customer in a high-volume business,

you do not want to bother F&A with every customer over the limitf It is better to make it impossible to accept new sales orders

from suspect customers (error message) Blocking orders will clog the supply chain

f The need for action at the point of goods issue is prevented by making it impossible to accept new orders

42

SAPs Triggers for the Automated Response

1. Static credit check2. Dynamic credit check3. Document value4. Changes in critical fields5. Maximum percent of open items6. Number of days since last review7. Number of days open items8. Oldest open item9. Days oldest open item10. Highest dunning level 11. User

Detailed warning

Warning + block

Block

Warning + error

Error

Warning

43

Static and Dynamic Checks

Static checks involve all open items Open orders and open deliveries can be included in the check,

in which case all orders are included, regardless of the future date

Dynamic checks limit the time window of open orders to a certain period, such as three months in the future Dynamic checks make sense to exclude orders for future

maintenance, and so on, from credit analysis They have comparatively little relevance for current

credit status

44

Setting Document Value

You can set an absolute maximum for document value This is an easy control in high-volume business Only high-value orders go through to the F&A department

Even if users are authorized to process high-value transactions, this setting triggers a system response in the selected combination of risk category and credit group

45

Critical Field Controls

The check on critical field controls the payment terms in the sales order together with the value date

Values are defaulted from the customer master If values are changed manually in the sales order, a response is

triggered, typically an order block The block will have to be removed by F&A, allowing a check on

possible abuse of payment term or value date

Warning

Be careful! If changes trigger new blocks, documents need to go through Finance again.

46

Checking Open Items: Behavioral Check!

You can check open items in a number of ways: The total amount: Already discussed in the static credit check The ratio between open items past the due date and the

customer balance (%) f A method to allow more leeway for customers that

represent larger business volumes, while controlling those with little turnover or doubtful behavior

Check against the dunning level f During a dispute with a customer, it is prudent to

block new orders for consideration by the F&A department

These settings allow you to focus on behavior. By far, the preferred method from an SCM point of view!

47

Building Block

User exits if you are still not satisfied!

LVKMPTZZLVKMPFZ1: USER_CREDIT_CHECK1 LVKMPFZ2: USER_CREDIT_CHECK2LVKMPFZ3: USER_CREDIT_CHECK3

Customizing the Automated Response OVA8

48

Customizing the Automated Response OVA8 (cont.)

OVA8 contains possibilities to exclude spurious double checks

49

Customizingthe system response

Where to Customize Credit Management

50

Early Warning Report

What if you do not want the sales desk to tell major customers, You are over your credit limit?

Use the early warning report (RFDKLI42)!

Tip

51

What Well Cover


52

How to Work with SAP Automatic Credit Management

SD interface in credit

management

53

Credit reporting

How to Work with SAP Automatic Credit Management (cont.)

54

One-screen managementwith VKM1

F&A dealing with

blocked documents

Detailed warning

Warning + block

Block

Warning + error

Error

Warning

Individual/massmanagement

Individual credit reportand document details

How to Work with SAP Automatic Credit Management (cont.)

55

What If a Customer Pays?

SAP does not remove the block from a sales order once the customer credit is okay again!

Use VKM1 CHECK or run a logistic transaction or program that recalculates the sales order For example, the availability check or pricing (in general, too

time consuming)

Tip

56

Updating SD Document Status (cont.)

VKM1 CHECK only checks documents that are already blocked!

Select all documents and press CHECK to refresh credit checkSelect all documents and press CHECK to refresh credit check

57

Detailing Report Structures

Detail report structures in Customizing: Number of buckets in reporting (days in arrears) Point of reference for days in arrears

f Either the cash discount due date or the net due date

Building Block

58

Selecting the Defined Bucket Structure

Select the defined bucket structure in the Credit Master Sheet:

59

Information on the Credit Master Sheet

Address and communication data from customer master All important fields from the credit management master Total of the open deliveries, orders, and billing documents

The currently-defined credit limit, upper and lower credit limits, currency, and the date of last check on the customers credit limit

Payment history on control-area level Balance in every company code belonging to the

control area Days in arrears of the open items in all company codes

belonging to the control area

60

The Credit Overview F.31

61

Selections for the Credit Overview

62

What Well Cover


63

Resources

SAP Credit Management Business Scenario Map www8.sap.com/businessmaps/BE7741D52E4541D0919217B910

5587DA.htm All online SAP help PDFs! www.easymarketplace.de/online-pdfs.php

FI/SD Credit Management/Risk Management, SAP R/3 4.6C Included on your CD

64

7 Key Points to Take Home

Before designing credit control, think carefully about the preferred system response and the workload for F&A

Behavior change is always preferable to blocking business Use behavioral checks combined with a credit limit warning

Credit management requires integration between the Sales and F&A departments

If the number of blocked transactions is important, run VKM1 CHECK before dealing with blocked documents

To keep track of important orders for doubtful customers, use a 0.01 credit limit to block orders automatically and release only after F&A check

65

7 Key Points to Take Home (cont.)

Do not forget to check the payment history in the customer master!

Define measurable business goals beforehand, and check the effect of your credit management

66

Your Turn!

How to contact me:Stef Cornelissen

[email protected]@bowstring.nlwww.bowstring.nl