Executive Overview

In any business organization, regardless of size, inventory is a major cost concern. It is necessary for these organizations to better plan and project inventory consumptions in order to avoid large inventory cost hold-ups. When discussing inventory management, there are other elements, such as procure-to-pay (PTP) strategies and available to purchase (ATP) requirements, which play important controlling roles. One major element in the supply chain which is often overlooked is the Goods Receipt (GR) versus Invoice Receipt (IR) account. In many cases, this account carries a large balance - sometimes millions of dollars spanning purchases and receipts over multiple years - and makes it nearly impossible to reconcile differences between good receipts and invoice receipt quantities. As part of a well-controlled process, it is beneficial for organizations to keep track of their GR/IR balances and manage differences within a manageable tolerance in order to control and match their receipts and payables. This technical white paper outlines some techniques which can be implemented to improve controls over the GR/IR account at a reasonable cost to the company.

Introduction
During the procurement process, the buyer issues a purchase order (PO) to the vendor, the vendor supplies the goods per the PO details and the buyer then pays the vendor after matching what was ordered to what was supplied. This creates payment liabilities for buyers which are eliminated later by payments (disbursements) made to the vendor. In SAP, if the aforementioned scenario is executed, then the process of tallying receipts and invoices is accomplished automatically by the system using the GR/IR (Goods Receipt/Invoice Receipt) clearing account. This account is used in SAP to manage goods receipt amounts versus corresponding invoice amounts. Whenever a goods receipt takes place, the system credits the GR/IR account by a value equal to the PO item value multiplied by the actual physical quantity received (i.e. PO Price * qty received). When a corresponding invoice is received, the system debits the GR/IR account by PO item value multiplied by the invoiced quantity (i.e. PO Price * qty invoiced). If the invoice amount and corresponding GR value match, then the associated GR/IR amounts are eliminated, thereby leaving a zero balance for that particular transaction. However, in most procurement scenarios this process becomes more complex and the account requires additional monitoring. Because any mismatch between invoice quantities and goods receipt quantities creates differences between inventory and invoice values, this leads to balances within the GR/IR account. The following are significant factors that impact GR/IR balances: Purchasing processes/procedures - The manner in which purchasing documents are created and managed impacts the GR/IR account directly. Some factors to be considered are GR- or PO-based Invoice Verification, the use of contracts/scheduling agreements, and validity dates for open POs. Goods Receipt processes/procedures - Efficiency of goods receiving also has an impact on GR/IR procedures. These procedures may include a receipt tracking mechanism, returns, salvation procedures and GR processing time. Invoicing processes/procedures - Invoicing procedures also impact GR/IR procedures. Factors that may be considered are invoicing patterns, invoicing frequency, and invoice details and accuracy. There will likely be differences in timing between GR and IR, creating balances in the GRIR account. Therefore, efficient management and monitoring of the factors above helps to ensure an improved system which can work within acceptable tolerances. The leading practices related to GR/IR procedures detailed within this white paper focus on the above mentioned factors (i.e. purchasing, goods receiving, and invoice receiving).

Leading Practices for Managing Purchasing Documents

Performance of the GR/IR clearing process depends upon the creation of purchasing documents, supplier terms, and organizational discipline. The following settings allow a company to manage purchasing documents effectively in order to keep GR/IR discrepancies within a tolerable limit.

Unlimited over-delivery tolerance (set in the PO) - The unlimited over-delivery indictor should not be overlooked as it increases the risk of receiving in excess of the original authorized PO quantities. It can be difficult to trace these goods receipts in a timely manner because there is not PO-to-invoice matching taking place. Additionally, if this indicator is selected for Evaluated Receipts Settlement (ERS) POs, then invoices will continue to be paid for higher than authorized quantities in automatic settlements. "Goods Receipt" and "Invoice Receipt" indicators (set in item categories and account assignment categories) - Turning these indicators on or off inside a PO may result in a mismatch between the GR and IR functions, therefore leading to GR/IR imbalances. It is recommended such indicators on the POs be controlled via field status configuration. As a result, these settings will be determined by the item category/account assignment combination and cannot be changed at the time of PO creation. Purchasing document types - It is recommended management differentiate various procurement processes using different purchasing document types. Document types can help to differentiate GR/IR analysis according to types of purchasing transactions. This enables management to conduct a more precise analysis related to troublesome areas. Validity for purchasing documents - It is recommended the validity of longterm purchasing documents such as scheduling agreements or contracts be restricted for a reasonable period of time (e.g. - in most cases not longer than one year). At the end of the validity period, the PO quantity balance should be closed and the item marked for delivery completion. Indefinite validity dates keep purchasing documents open and create difficulties in calculating accurate GR/IR balances. Multiple active purchasing documents for vendor/material combination This sometimes results in matching problems at the time of receiving or invoice verification, when a reference is missing. Incorrect matching of receipts/invoices to POs can lead to a mismatch between GR/IR balances. ERS indicator (set in the vendor master) - Turning this indicator on or off can create a conflict in the subsequent functions. In the instance of ERS (evaluated receipts settlement), automatic settlements are created and Accounts Payable does not expect an invoice from the vendor. If the ERS indicator is removed from the PO, these receipts can be left pending in the GR/IR accounts with a lack of settlement(s). For a consistent process, changes to this configuration should be moved from the PO to purchasing master data. Expense procurements - In the instance of expense purchases, general materials codes or free texts are used. It is important to exercise caution in creating these POs so later, these invoices may be traced to the correct receipts. Use of free text in a PO may lead to the incorrect receipt matching. Therefore it is recommended to standardize the purchase items in a recurring purchase. PO Approvals - All purchasing documents should follow controls whereby the purchases must be approved according to management-defined guidelines. A checklist may be created to check whether all controls relating to GR/IR are in place when the PO is created/approved. Because purchasing documents initiate

the start of a GR/IR procedure, it is recommended to maintain strict control over them. Supplier collaborations - Supplier collaboration can be defined as the backbone of procurement as it can effectively mitigate the external factors affecting the GR/IR process. Suppliers may be motivated to provide on-time supplies by the purchasing company offering an incentive for such performance. Note: this is not dependent on the system.

Leading Practices for Inventory Management

Inventory management forms a bridge between procurement and the accounts payable functions. Strong inventory practices ensure appropriate tracking of goods receipts, shortages, as well as escalation procedures. Use of efficient inventory procedures can assist in providing accountability over inventory and fewer GR/IR discrepancies. The following are some techniques that may be used to assist in the GR/IR process: Movement types which allow GR with/without PO reference - In some cases, goods may be received with reference to a PO. In these instances, there may be a mismatch between Invoice and PO quantities. Any such goods receipts do not create corresponding goods receipt entries in the GR/IR account (because GR/IR entries are made at PO prices), thereby causing a subsequent invoice match, further resulting in a balance within the GR/IR account. It is recommended the usage of such movement types be discontinued. Materials with different purchasing unit of measure (UOM) - For materials with different purchasing UOM, receipt quantities should be entered in the purchasing UOM. Any manual error caused at this point may lead to further discrepancies in subsequent GR/IR procedures. It is recommended to allow the system to do the conversion based upon the "Base UOM" so any invoice quantity matching problems can be avoided. Goods reversal when invoice verification is completed (configured in movement types) - This results in excess invoicing of the goods as the vendor receives payment although the goods have been returned. It is recommended once invoicing is completed, these movement types be disallowed. Rather, return POs with a separate document type should be used for returning items to a vendor. Bounded GR area - The GR area should not be accessible to personnel outside of the receiving function. In the instances of emergencies, often there is a tendency to have materials lifted from the GR area. These goods may not have been accounted for properly at the time of goods movement. In some cases, goods are delivered directly to their respective departments, thereby bypassing normal receiving procedures. This may lead to a mismatch between actual receipt quantity and invoice quantity. As a result, a GR/IR imbalance may exist. Receipt of any goods should be done centrally by authorized personnel only. Shortages - Shortages/damaged goods should be captured appropriately within the system. If they are not captured correctly, then a quantity mismatch may exist within the GR/IR account.

Communication - Because goods and invoice receiving spans several different functional departments, strong cross-departmental communication is essential across the Purchasing, Receiving, and Accounts Payable departments. This can lead to an effective consolidation of purchasing activities and avoid long outstanding GR/IR mismatches.

Leading Practices for Managing the Invoicing Process

Along with purchasing and receiving, it is also important to have effective invoice verification and analysis processes in place. As this process forms one piece of the GR/IR process, effective management over this function can help to create downstream efficiencies. The areas mentioned below, if managed diligently, may lead to a more efficient and more accurate way to manage the GR/IR account. GR/IR Account Maintenance - It is important to monitor the GR/IR account activities, which assist in triggering an action to clear pending goods receipts or invoices. A delay in this activity may require additional efforts in verification and validation. Furthermore, there should be a fixed frequency (based on the number of entries) and expected follow-up time required for performing GR/IR account maintenance. Typically, the minimum frequency of maintaining the GR/IR account is no less than every 90 days. Three-way match - Organizations for which invoicing is done first and goods receipt takes place later are more prone to balances within the GR/IR account. As a result, it is recommended to follow three-way matching procedures for invoice processing. GR-based invoice processing which allows for a three-way match check between PO, GR, and invoice is recommended. In addition, management needs to consider configuration at the following levels to help ensure an effective automated 3 way match: item category, account assignment category, purchasing value keys, invoice tolerances, movement types, and PO field statuses. Invoice details - It is recommended to have a clear reference to PO and delivery details on the vendor invoices. This helps trace invoices to a PO and a receipt. It also assists in determining the appropriate corrective action to take in order to clear GR/IR account balances. It is also recommended to require a packing slip in order to match vendor invoices so as to avoid GR/IR mismatches. Controlling mechanisms - In order to efficiently manage and resolve GR/IR related issues, it is important to implement controlling functions to review and suggest corrective actions such as periodic evaluation of the GR/IR account. It is recommended to develop a cross-functional report with which invoices and receipts can be matched as part of the GR/IR clearing process.