By Klara Boor

Credit Manager EMEA

Parker-Hannifin Sarl.

Switzerland

Is Collection all about Chasing the Customer

for Payment or Something Else Entirely?

ICTF’s International Credit Professionals

Symposium in Europe October 19-21, 2014 Prague

Parker Hannifin Corporation

• The global leader in motion and control

technologies, partnering with its

customers to increase their productivity

and profitability.

3

Uniquely Positioned to Address the

Challenges of Humankind

Food Water Infrastructure Transportation Life Sciences Environment Defense Energy

Food

Water

Infrastructure

Transportation

Life Sciences

Environment

Defense

Energy

5

What is Cash Collection about?

Is it about Chasing the Customer for

Payment or Something Else Entirely?

ICTF’s Symposium in Prague

Agenda

6

• Business background

• The Problem

• The Objective

• Team

• Milestones

• Issues ( examples)

• Results and Accomplishments

• Takeaways

Business Background

• The “Customer” is one of PH’s largest customers’ World Wide.

• Annual sales >$150 million

• Invoices issued >56.000 a year

• 16+ Parker invoicing locations

• 152 + “Customer” facilities”

• These facilities are located in 14 countries

• Sales Company Sweden is the largest selling location to the

“Customer”.

• Sales Company in Sweden is in charge of deals with the

Procurement Center of the Customer in Sweden

• Annual sales >$70 million

• Invoices issued > 30.000 a year

• 3.000+ part numbers are sold to 100+ “Customer” relationships

• Drop shipments from 16 different Parker locations into 50

different Customer locations

The Customer Group

Purchase by Region

0

20

40

60

80

100

120

140

160

FY 09 FY 10 FY11 FY 12

MU

SD

EMEA North America Latin America Asia Pacific

8

The “Customer” Group

Global Purchase by Technology

Filtration 36%

Hydraulics 35%

Fluid & Gas Handling

22%

Climate Control

4%

Pneumatics 3%

Sealing & Shielding

0%

Electro-mechanical

0%

9

Parker Footprint in EMEA - Sales model

Invoicing

from PSC

Sweden

X = Customer

facilities

Business Background

Your commitment:

100% delivery precision with

100% compliance to the delivery manual

Our commitment:

Manage the supplier relationship in a structured and professional way in

order to become the preferred customer

The Customer benchmarks both quality of products and

compliance in administrative matters to its “ delivery manual”:

- Electronic invoicing

- Labelling

- Packaging

- Delivery time

- Invoice and shipment note template and content; etc.

The “Customer” is EMEA’s largest sales opportunity.

Cost of non compliant administrative services are high

Non compliance= penalty, payment deduction, low supplier score

Agenda

12

• Business background

• The Problem

• The Objective

• Team

• Milestones

• Issues ( examples)

• Results and Accomplishments

• Takeaways

PH Invoicing entity Sum of Open Amount in $ Sum of Overdue in USD Sum of Past due %

00012_Sweden 25,720,583 3,253,004 13%

00005_PSC UK 9,273,910 2,846,089 31%

00063_Contamine PSC Sales Co 4,384,111 1,750,447 40%

00045_Kaarst PSC Sales Co 1,143,781 500,498 44%

00574_FORSSA 108,890 98,294 90%

00071_Geneva 97,475 97,475 100%

00004_Parker Dewsbury 93,955 80,502 86%

00055_Belgium 28,971 9,000 31%

00113_Grantham 5,223 5,223 100%

00069_Poland Sales Company 235,791 2,711 1%

00001_Derby 328 328 100%

00013_Norway 51 0 0%

00091_South Africa 113,637 -31 0%

Grand Total 41,206,708 8,643,540 21%

Source: GPS AR cubes

The Problem: Large overdue ! May 2012

Divisions and Sales Companies’ RONA is negatively affected by the

Customer claims. 180+ days overdue accrual reached $ 1million.

The workload due to Customer claims is very high.

The Customer is EMEA largest DSO

opportunity

Parker Company Sum of Open

Amount in $

Average of

Days Sales

Outstanding

(JDE)

Average of

Average

Days Late

00012_Sweden 25,720,583.2 121 18

00005_PSC UK 9,273,910.3 180 3

00063_Contamine PSC Sales Co 4,384,111.4 219 10

00045_Kaarst PSC Sales Co 1,143,781.4 210 25

00069_Poland Sales Company 235,790.8 148 0

Grand Total 40,758,177.0 156 15

Reducing DSO will generate additional cash for PH

1 day DSO reduction = $ 260,000 CASH

The Problem May 2012

15

Overdue

$ 8 million overdue in $ 40 million AR

Customer satisfaction

Issues to meet the customers

administrative requirements

Costs

$2.6 million less Cash

$ 131k interest cost

> $ 1 million debits

Workload

Rework of paperwork and claim handling

Waste

Agenda

16

• Business background

• The Problem

• The Objective

• Team

• Milestones

• Issues ( examples)

• Results and Accomplishments

• Takeaways

The Objective May 12

Sales Company Sweden had the largest sales volume with the Customer =>

selected as Kaizen location

PSCO has large overdue: $1.4 million in $ 25.7 million in AR

Charges received from the Customer : $712k

Credit notes issued due to administrative claims: $ 601k

Customer is challenging PH to improve the administrative quality.

The team is to implement improvements within the order to payment

process that will allow the Customer to pay Parker on time.

We need to have simple, automated, lean processes that comply with

both PH’s and the Customer’s systems.

Aim is to reduce cost and improve customer satisfaction

17

The objective

The team is to implement improvements

within the order to payment process that

will allow the Customer to pay Parker on

time – Kaizen “Charter”

18

Agenda

19

• Business background

• The Problem

• The Objective

• Team

• Milestones

• Issues ( examples)

• Results and Accomplishments

• Takeaways

20

Global Account

Manager: the customers

business model doesn’t

fit PH model; they want

to buy from the

manufacturing entities…

SC Inside

Sales:

Workload is

high due

manual order

entries

SC Lean:

Same errors

in 10 different

sales

companies?

Corporate

Credit: the

Customer is

the largest

overdue

customer of

EMEA

EDCN: the customer

wants one PO= one

delivery note= one

invoice? We need to

reduce DSI

SC IT: we need full

EDI, but divisions

are slow with

implementation

Cross-functional team

SC Finance: We cannot

collect efficiently – our

invoices are rejected

Corporate IT: EDI

implementation can

take from 2 weeks to

12 months depending

on the response time

of partners

SC Claim: Difficult to

trace the prove of

delivery in 4 months

after delivery

Agenda

21

• Business background

• The Problem

• The Objective

• Team

• Milestones

• Issues ( examples)

• Results and Accomplishments

• Takeaways

22

Milestones June 2012, Kaizen kick-off

• Mapped current state from order entry to cash receipt

• Listed the 70+ issues

• Listed actions to solve them

•Identified main overdue root causes

•80 % of issues are due to admin and system errors at various Parker

shipping locations preventing the Customer to process automatically

invoices

October 2012 Designing future state

• Mapped future state: OTC including relationship set up

• Communicating with the Customer’s business stakeholders is complex

April 2013, Implementing and focusing on EDI

• EDI and system requirements discussed in details

• Additional 10+ gaps identified

October 2013

• Closing meeting to evaluate Kaizen outcomes and next steps

Lean principles – process map

What is the problem for the

customer – time, cost, quality?

1. Clarify the problem

4. Eliminate waste

Plan and execute actions to

eliminate the waste steps

Study the process

where the problem

occurs

2. Map the Process

Steps

3. Analyse the process steps

Decide what is value adding,

value enabling and waste in

the process

5. Reduce Value Enabling

Once waste is eliminated,

look to reduce the value

enabling content where

possible

5. Formalise new process

Confirm new process, measure

and monitor, and create new

process map, SOP’s etc

(1) Customer’s procurement sends purchase order to the Sales company

(3) Interco.

order to

the

Division

(5) Division invoices

the Sales Company

(4) Division completes the shipment, delivers it to the customer’s

production plant with the shipment note

Customer’s

Shared Services

Customer’s

procurement

Customer’s

production

plant

PH

division

24

(2) Sales company confirms the order to the Customer

(6 ) Sales Company sends the invoice to

the Customer’s Shared Services via EDI

(7 ) the Customer’s Shared Service matches the EDI invoice

with the purchase order and the shipment note

PH Sales

Company

PH Shared

Services

Purchase order

Shipment approval

Invoice approval

(8 ) matched invoices are paid – deduction if any discrepancy

PH

division PH

divisions

Customer’s

production

plant

Customer’s

production

plants

(9 ) deductions sorted out

Sales model

Current process – future state map: • Customer relationship set up

• Order entry and confirmation process

• Price update

• Division/ EDCN ship order process

• Invoicing via EDI

• Payments including deductions

• Claim handling (quality, pricing and administrative claims)

Gap analysis -> Action plan

Executing and implementing changes

25

Kaizen milestones

26

Division ship order process – current state

27

Division ship order process – future state

Agenda

28

• Business background

• The Problem

• The Objective

• Team

• Milestones

• Issues ( examples)

• Results and Accomplishments

• Takeaways

Issues (examples) • EDI invoices did not arrive at the Shared Services of the Customer. Action:

• technology and provider change

• invoice receipt confirmation

• invoices which no receipt confirmation are resent electronically the same day

• We couldn't pursue “proactive calls” as the Customer communicates with

his suppliers via his web Portal. Action:

• technology change: invoice tracking robot implemented

• status of invoice is downloaded into our internal tracking tool – if problem: ticket opened

at the customer web portal

• Booking payments at PH Shared Services is difficult, because the

Customer sent payment details to the delivery location and the sales

company. Action:

• path defined and reinforced 29

Important because the customer calculates terms from the invoice

approval date!!

Important because it is us who needs to chase the customer if it is

about an invoice deviation!!

Issues (examples)

• The Customer’s Debit invoices got lost. Action:

• Mailbox for payment communication implemented

• Clearing of payment deductions was not immediate. Action:

• Process between the sales company and division with clear deadlines defined,

visibility in AR created

30

Fast claim handling is important because the customer allows

suppliers only 21 days to sort out claims – if claim is not resolved

within 21 days debit note is issued and deducted from the next

payment run!!

Issues (examples)

• Customer address book details (about 142 parameters) were

collected on an ad-hoc, non-standard way. Action:

• Customer Master Data template, including EDI test template was designed and

implemented

• Divisions maintain their own customer data in templates which are

different to the sales company. Action:

• Introducing the same template at all sales companies and divisions

31

Relationship set up and entering the correct and same customer

address details into our systems is a critical process – condition

produce all documents at the requested quality – an enabler of the

automated 3 ways matching at the Customer!!!

Issues (examples) • Ownership of EDI implementation within divisions was not clear. Action:

• Defined Sales Company as ultimate owner

• EDI implementation process was not well coordinated; various teams are

involved such as Sales Company inside sales, supplying divisions,

Corporate IT, JDE implementation team in Hamel, Business intelligence

team, the Customer’s IT team, EDI service provider (IBM). Action:

• Implemented a standard project tool to get commitment from parties and track progress

• EDI messages were not always aligned to the customer’s requirements.

Action:

• Designed seamless and controlled relationship/ EDI set up

• The implemented EDI connections didn’t work properly – labels, ASN,

invoice records did not match at all divisions. Action:

• Copy paste the working solutions into divisions.

32

Perfect EDI process is critical for the customer as it enables it to

process shipment documents and automatically match them to

invoices – conditions of due time payment!!!

Issues (examples)

• The Customer needs to have shipping information one day before

the shipment; in order to meet this requirement we started picking,

packing and invoicing one days earlier – which caused double work

in sales administration, EDC operations. Action:

• Workaround implemented at EDC.

• In order to lower inventory our distribution center split order lines –

ship products in more parcels – create more delivery notes –

instead of one. Action:

• Workaround implemented, partial shipments not allowed any more.

33

One order- one invoice – one delivery – one delivery note is a

critical process for the customer – we cannot split deliveries if

we want to be paid on time!!

Issues (examples)

• Sundry invoices and Inspection reports got lost because the Customer

sent them to various Parker locations, instead of sending it to the Sales

Company. Action:

• Communication path/ mailbox reinforced;

• Processing claims within the sales company took long. Action:

• Sales Company’s inside sales manager’s performance objective linked directly to the

improvement of claim process, speed, transparency and communication.

• Processing claim at the divisions took long.

• We charge back administrative claims to divisions on a consistent way.

• There was no transparency about how long items were open. Action:

• Implemented a new claim management system to track each single item and track root

causes of claims and disputed DSO.

34

Fast claim handling is important because the customer allows

suppliers only 21 days to sort out claims – then a debit note is

issued and automatically deducted from the next payment run!!

Issues (examples)

• Not all Customer locations comply with the mutually agreed claim

handling rules and deadlines ( 7 days, 21 days, no payment hold,

no payment deductions)

• Claim procedures were reinforced with the Customer.

• The Customer takes the charge back amount by deducting it from

the next payment run even if PH rejected the claim.

• Claim procedures were reinforced with the Customer’s procurement manager.

• Price discrepancies between the price on the invoices and the price

in the Customer’s procurement system. Action:

• We get now price update confirmation with the validity date from the Customer’s

procurement.

35

Consistent follow up of Claim procedures at both the

Customer and PH plants allows to have “clean” AP- AR

ledgers!!

Agenda

36

• Business background

• The Problem

• The Objective

• Team

• Milestones

• Issues ( examples)

• Results and Accomplishments

• Takeaways

Results: Overdue reduced! Sept 2013

Source: GPS AR cubes

Sum of Open Amount (USD)

Parker Company Grand Total Past due USD Past due %

00012_Sweden 19,871,306 1,089,699 5.5%

00005_PSC UK 6,577,315 247,967 3.8%

00063_C PSC Sales Co 1,962,339 351,274 17.9%

00045_K PSC Sales Co 1,456,365 252,026 17.3%

00069_Poland Sales Company 222,580 31,449 14.1%

00004_P Dewsbury 135,817 134,809 99.3%

00071_Geneva 101,713 101,713 100.0%

00574_F 49,845 49,845 100.0%

00091_South Africa 43,986 6,609 15.0%

05004_P R 37,826 37,407 98.9%

00055_Belgium 16,505 216 1.3%

00113_Grantham 4,946 4,946 100.0%

00010_Denmark 3,753 0 0.0%

Grand Total 30,484,297 2,307,960 7.6%

The Customer’s past due with Parker dropped from 21% to 7.6%

180+ overdue accrual reduced by $283k.

Results: DSO reduced Sept 2013

Process improvements led to a DSO reduction of 9 days.

Cash impact: $ 2.6 million.

Largest Customer Name Open Amount

(USD)

Days Sales

Outstanding

Average

Days

Late

Volvo CE Arvika 905 1629 SEK 113697 SE 3,594,831 96 3

Volvo CE ESK CS 956 1629 SEK 113697 SE 2,316,631 96 3

Volvo CE Braås 903 1629 SEK 113697 SE 1,485,490 96 1

Volvo CE ESK CS 924 1629 SEK 113697 SE 1,470,538 98 3

Volvo CE Brasil 966 1629 SEK 2701 BR 879,311 106 1

Volvo CE Hallsb 907 1629 SEK 113697 SE 725,586 97 4

Volvo CE ESK CS 924 3074 EUR 113697 SE 473,628 65 10

Volvo CE Shippe 894 1629 SEK 014024 US 469,496 103 10

Mack Trucks GRE XXX XXXXX EUR 4295 US 439,123 100 33

Renault Tru SAI GXX XXXXX EUR 3595 FR 422,652 133 31

TOTAL /AVERAGE 19,863,641 112 12

- 9 days - 6 days

Customer plant 1

Customer plant 2

Customer plant 3

Results and Accomplishments

39

• 1. Less Credit Notes due to administrative claims ( - $317k)

2. Less Charge Backs ( -$524k)

3. Designed and implemented Order to Payment Future Processes (Lean)

4. Learned the importance and possible implications of the EDI communication; Highlighted EDI

implementation gaps and provided inputs to IT Management to establish Best Practices;

Agreed that EDI Pull (ultimate ownership) shall come from the SCO

5. Introduced a software enabling us to see and prove invoice receipts at the Customer

6. Created a “standard” Customer Master Entry/ Maintenance Template

7. Developed a Invoice tracking/ Investigation tool to solve outstanding invoice problems and to

enhance communication within the sales company’s teams; the tool provides full visibility of

ownership, root causes and impact;

8. EDCN Ship order process was changed to meet the customer’s requirements

9. Designed and implemented a PSC claim handling system and lean procedure

10. Worked in a dedicated Cross Functional team – excellent collaboration across the PSC,

Corporate IT, Sales Company’s IT, Corporate Credit, EDCN, Divisions

Kaizen’s mission completed?

40

New Dashboards include late payment, EDI and

Administrative claims.

The Kaizen’s objective

41

Improvements were implemented within the order to

cash process that allows the Customer to pay

Parker on time, in most cases.

It was a Teamwork!

Takeaway

42

• By streamlining the Order to Cash process

we can generate important savings to the

company:

• Improve cash flow

• Lessen AR assets and +180 days accruals

• Reduce workload and resources

• Improve customer satisfaction and generate

more sales

Takeaway

43

• We have an opportunity to

• leverage the Customer Kaizen’s learning

and best practices

• to apply lean tools and principles in the

entire order to cash value stream

• work as a team across the divisions, sales

companies and support teams

44

What is Cash Collection about?

To ensure that we, as a supplier, meet all

the administrative requirements of the

customer…

then

if it is still necessary chase the customer

for payment …

Takeaway