A Discussion on Processing Debit Memos

8/6/2019 A Discussion on Processing Debit Memos

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Copyright 2008. Power Transmission Distributors Association, Chicago, Illinois, USA. All rights reserved.

A Discussion onProcessing

Debit Memos

Developed by the

PTDA IndustryRelations Committee

Pow er Transmission Distributors Association230 W est Monroe Street, Suite 1410Chicago, Ill inois USA 60606 -4703www.ptda.org

Phone: +1.312.516.2100Fax: [email protected]


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A Discussion on Processing Debit Memos 1

A Discussion on Processing Debit Memos

In the world of power transmission/motion control distribution, itwould seem that the process of issuing debit memos and grantingcredits to reconcile those memos would seem straightforward.

Distributors issue debit memos to manufacturers to seek a credit.The manufacturer reviews the debit memo and grants a credit on anoutstanding invoice. All is good.

A task force of the Industry Relations Committee of the PowerTransmission Distributors Association (PTDA) discovered that, inpractice, the process is much more complex. Distributors may ormay not issue debit memos, instead opting to take a credit whenmaking payment on an invoice. Manufacturers may be slow toprocess the debit memo, leaving the distributor with an unreconciledcredit. In the Associations efforts to reduce the causes of friction

between channel partners, the debit memo process was investigated.The following outlines the findings of the research and offerssuggestions for improving the process.

Why is a Debit Memo Needed?

Although there are dozens of reasons why distributors issue debitmemos, there are two general scenarios under which debit memos areissued: price or invoicing discrepancies and product returns.

Price or I nvoicing Discrepancies

Pricing errors, incorrect delivery charges, discounts incorrectlyapplied, duplicate billing, incorrect service or late chargesall ofthese are reasons why a distributor may issue a debit memo. Its thedistributors way of notifying the manufacturer that there is adisagreement that needs a financial resolution.

In the case of issuing a debit memo due to a pricing discrepancy, theprocess should be more efficient because no product is involved.Distributors with a high volume of sales generally have a three-waymatch system in place (purchase order, order acknowledgement andadvanced ship notice) that will flag any discrepancy in pricingthroughout the system. For those distributors without this type ofinternal system, the discrepancy might not be noticed immediatelyin some cases, the discrepancy is found by chance.

Returned GoodsIncorrect product shipped, annual returns, defective or damagedproductissuance of a debit memo is one step in the returned goodsprocess. This process usually begins when a return goods request ismade from a distributor to a supplier. The supplier issues an RGA


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(returned goods authorization) number that allows the manufacturerto track the return and triggers the debit memo process.

Understanding the Issues

The task force discovered that, while there are times when the debitmemo process works smoothly, more often than not, there are issuesthat prevent a seamless process.

Delay in Resolving a Debit MemoFor a manufacturer, one of the advantages of selling throughdistribution is that the distributor takes on the credit risk.Distributors work with lower volume purchasers who may take fulladvantage (and then some) of credit terms offered by the distributor.Distributors maintain a delicate financial balance between what theyowe their suppliers and what their customers owe them.

One of the frequent complaints from distributors is that the debitmemo process delays their ability to receive credit for pricingdiscrepancies or for returned product. In some cases, it can take upto 150 days for a debit memo to be resolved. Many distributorssimply take the credit off the invoice because its in themanufacturers best financial interest to delay issuing a credit.

Taking Unauthorized CreditsFor manufacturers, distributors who take credits against the invoiceare jumping the gun. The manufacturer wants to be able to review adiscrepancy or a return before authorizing the credit. For a pricing or

invoicing discrepancy, it may take some time to track down where thediscrepancy originated. Was the distributor quoted the wrong priceby the salesperson? Was there a price increase that didnt getcommunicated to the distributor? Was the error a keying error by theaccounting department when the transaction was entered in thedatabase? If a distributor simply takes the credit, it becomes moredifficult for a manufacturer to reconcile the problem once the invoicehas been paid.

In the case of returned goods, the debit memo allows themanufacturer to analyze the request before granting the authority to

return the merchandise. The manufacturer can ensure the productbeing returned is marketable. Once materials are returned, a creditmemo is issued to the distributor and the manufacturer closes thetransaction.

In addition to debit memos for pricing discrepancies and inventoryreturns, there may be times when distributors take credits againsttheir expected annual rebates. In general, manufacturers wont


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accept debits for rebates due. Manufacturers reserve the right toverify the amount of the rebate payment instead of distributorscalculating the rebate amount based on their records and taking thecredit against a product invoice.

Size MattersThe amount of business a distributor does with a manufacturer canplay a role in how the distributor goes about requesting a credit.Those distributors that do large volumes of business may bypass thetraditional process of debit memo reviewapprovalcredit.Instead, the debit memo is issued with the payment of the invoiceand the amount of the debit memo is deducted from the amountpaid. Because of the volume of business a manufacturer gets fromthese distributors, the manufacturer will accept the revised paymentamount. The manufacturer would rather accept the payment made(usually a significant amount) and negotiate the debit memo or issue acorrected invoice later to avoid a delay in receiving the paymentaltogether. Distributors with a low volume of sales dont have thesame financial leverage as high volume distributors and must gothrough the traditional process and wait for a credit to be issued.

Manufacturers of products that are in high demand also have anadvantage in determining how a debit memo is resolved.Distributors want to receive product from these manufacturers.Having unresolved or short-paid invoices could cause a distributor tobe placed on credit hold with manufacturers of popular productsand delay delivery of the product.

Improving the Process

Because processing of debit memos involves the finances of bothdistributors and manufacturers, it is in the best interests of thechannel partners to find ways to reduce or eliminate the costs ofresolving these transactions. Based on interviews with several powertransmission/motion control distributors and manufacturers, thefollowing are offered as suggestions for improving the debit memoprocess:

Commun icate All Information to the Right PersonWhile this may seem obvious, keeping open lines of communicationin each step of a transaction is essential for a smooth process. In thecase of debit memos, there are several stages where communicationscould break down.

The distributor issuing the debit memo should communicate clearlyto the manufacturer that a debit memo is being issued and the reason


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for the debit memo. The distributor also needs to be sure tocommunicate this information to the right person. While themanufacturers sales rep may be the primary point of contact for thedistributor, this may not be the right person to notify of a debitmemo. As the manufacturer generally wants their sales person out in

the market selling and not resolving accounting issues, it wouldbenefit both the manufacturer and the distributor to appointsomeone at the manufacturer to be the point person for resolvingdebit memo requests. Manufacturers may have a policy in place forreturned goods. A well-constructed policy will indicate the pointperson for resolving issuesincluding a request for credit forreturned items. PTDA has produced a template for creating aninventory returns policy that is available by download on theAssociations Web site at www.ptda.org/InventoryReturns.

Process Debit Memos in a Timely MannerTime and again, distributors mentioned that the delay in receiving

credit was a major source of friction and the main reason why theytake a credit against an invoice instead of following the traditionalprocess. By establishing and communicating a timeline in whichdebit memos will be processed, manufacturers may be able to preventdistributors from circumventing the system. In particular, thetimeline should include: Number of days after a debit memo is transmitted before the

distributor receives paperwork approving a credit or returnedgoods authorization.

Number of days in which paperwork from the manufacturer mustbe completed by the distributor and submitted back to the

manufacturer. Number of days in which credit/payment is made after paperwork

has been submitted.

Submit Debit M emos Using Electronic StandardsWhile a few of the companies interviewed noted that they use EDItransaction set 812 to communicate and resolve debit memos, mostlarge distributors noted that they only use EDI with their largestsuppliers and most manufacturers noted that small or mid-sizeddistributors dont use EDI at all. And, electronic resolution of debitmemos is more likely to occur with returned goods than with price or

invoice discrepancies as a returned goods credit may be more direct.Resolving a price or invoice discrepancy may involve more researchinto how the discrepancy occurred and there may be many ways toresolve the issue. The uniqueness of this type of transaction doesntlend itself well to electronic formats.


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About the P ower Transmission Distributors Association (PTDA)Founded in 1960, the Power Transmission Distributors Association (PTDA) is the leadingassociation for the industrial power transmission/motion control (PT/MC) distributionchannel. A U.S.-based trade association, PTDA represents 205 power transmission/motioncontrol distribution firms that generate more than $10 billion in sales and span 3,500

locations in North America and 12 other countries. PTDA members also include 194manufacturers that supply the PT/MC industry.

PTDA is dedicated to providing exceptional networking, targeted education, relevantinformation and leading-edge business tools to help distributors and manufacturers meetmarketplace demands competitively and profitably. For more information, visitwww.ptda.org.

2008 P TDA Debit Memo Task Force Members

Task Force ChairLee CritchfieldBearing Service Inc.

Douglas HamptonOrthman Conveying Systems

Dane McElroyCanadian Bearings Ltd.

Mike PowerLovejoy Inc.

George WhittierGarlock Klozure

Pow er Transmission Distributors Association230 W est Monroe Street, Suite 1410Chicago, Il l inois USA 60606-470 3www.ptda.org

Phone: +1.312.516.2100Fax: [email protected]

Documents

A Discussion on Processing Debit Memos