In a post earlier this week I outlined the reasons why suppliers should stop invoicing their customers in many circumstances. Instead, the buyer should self-generate the invoice based upon their view of the amounts due. The process, referred to as “self-billing” or “evaluated receipts settlement.” The following four industries provide examples of how self-billing is being used in practice today:
Automotive Manufacturing – Self-billing is often used in conjunction with Vendor Managed Inventory (VMI) programs in both North America and Europe. Automotive vehicle manufacturers also use VMI models with parts and subsystem suppliers. The Japanese OEMs use a system called “kanban.” European OEMs use a variety of models such as call-off, min/max and just-in-sequence. Regardless of the VMI model used, the self-billing process is similar. The quantity of parts or raw materials consumed in a manufacturing line is calculated at a regular interval. The consumption quantities are multiplied by unit prices to arrive at line item totals on a buyer-generated invoice.
Kanban Card (Image Source: thefabricator.com)
Consumer Products – Manufacturers of consumer packaged goods and food products also employ VMI programs with their upstream suppliers of packaging, ingredients or raw materials. Numerous permutations exist including schedule assignment, supplier managed inventory and consignment. However, in each of the models the vendor is responsible for determining replenishment quantities and owning the inventory until a point of consumption. Much like the automotive example, the quantity of parts or raw materials consumed in a manufacturing line is calculated then multiplied by unit prices to self-generate an invoice.
Grocery Retailing – Another form of self-billing model is called Scan-Based-Trading. Scan-Based-Trading is a form of VMI that has been adopted in selected merchandise categories of the grocery and automotive aftermarket sectors. In a Scan-Based-Trading model, the supplier retains ownership of the inventory until the consumer purchases the product. The scanning process at the Point-of-sale (POS) triggers a self-invoice generation process by the retailer. POS and pricing data housed in the retailer’s system is used to calculate the invoice amounts. Scan-Based-Trading is most popular in the US grocery industry with high-turnover products such as greeting cards, magazines, soft drinks and salty snacks. A study by the Grocery Manufacturers of America found that Scan-Based Trading projects achieved 100% Elimination of Invoice Deductions as well as 3-4% uplift in sales. Nonetheless, its adoption remains limited to only a few retail chains in North America.
Barcode Label – Key to Scan Based Trading
Media & Entertainment – The rapidly growing market for digital goods is another area making extensive use of self-billing. Consider online purchases of music, movies, e-books, apps (software) and video games for use on mobile devices, tablets and personal computers. Media and entertainment companies such as record labels, movie studios, book and video game publishers negotiate pricing and licensing arrangements with online retailers such as Apple’s iTunes and Amazon.com, which then sell directly to customers. Billing in these scenarios is complex as there is no regular replenishment or delivery of product. In fact, the supplier has no visibility to which types of products are being sold and in what quantity. Inventory in the form of an MP3 file or other media file is exchanged once upfront. The supplier is then dependent upon the online retailer to self-report the sales on a regular basis. The sales report is often in the form of a self-generated invoice from the retailer.