At Sigma-Aldrich Corp., the accounts receivable (AR) department has made big strides by getting back to the basics of reducing Days Sales-Outstanding (DSO) and write-offs from bad debt. The secret weapons employed by the $1.2 billion company, which supplies chemicals to research laboratories, were simple enough: Segment your customers and then focus on those that really make a difference to DSO and write-offs.
And, the results were impressive. By May, domestic DSO was down 34% to 38 days, from 58 days at the end of 2000, while write-offs fell to 0.29% of sales from 1.02% in 2000. In December 2000, 15% of receivables were more than 120 days old; as of May, only 1.15% were that tardy.
Besides this progress, what's also remarkable is how relatively easy and inexpensive the new system was to implement since it required more of a change in the thinking than in software. The attack plan was simple: The AR department divided its customers into categories based on how much business they do with Sigma-Aldrich, looked at the credit tendencies of the various groups and then dealt with them accordingly.
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Not every customer needed the attention of the department. In fact, smaller customers–those who spent $2,000 or less annually–tended to pay their bills within 60 days (94%) without any effort on Sigma-Aldrich's part. In 2000, those small buyers made up 61.4% of the company's accounts, but just 2% of its revenues, so improving the pace at which they paid would have little impact on the overall numbers, explains Jerry Amsler, the company's director of accounts receivable.
At the same time, the AR department focused on resolving quality problems, like incorrect billing addresses, and automated a lot of processes. Amsler says he's proud that the company actually reduced the number of AR employees at the same time it improved its credit statistics. In May, the AR department had 47 employees, down 32% from 69 in December 2000. The improvements also boosted liquidity and enhanced the company's profitability. "Basically what we did, we took a company that has been here for years and years and built the credit department from scratch," Amsler sums up.
One key attitudinal change that Amsler says was necessary: Accounts receivable had to regain some power in the perennial struggle between sales and AR over the credit approval process. Amsler's first step in improving the company's DSO and write-offs was to issue a document entitled Credit & Collection Policy. The policy statement was part of a reeducation process and was designed to reestablish AR's control over credit approval. To make sure the document was followed: Amsler went the extra mile to get senior management's endorsement.
CREDIT RISK MANAGEMENT – Silver
AstraZeneca
British drugmaker Zeneca's 1999 merger with Swedish pharmaceutical Astra AB presented the U.S. unit of the newly merged AstraZeneca Pharmaceuticals LLP with the challenge of amalgamating two accounts receivable departments while keeping control of credit losses and not dropping the ball on sales. "These are two good-sized companies with different systems that we had to pretty quickly integrate so that we had a single way of dealing with the customer," says treasurer Greg Davies.
The U.S. subsidiary, with some $9.3 billion in sales in 2002, started by merging the databases of the two companies, then worked on optimizing those databases and making other changes to improve customer service, Davies says. "The key was customer satisfaction," he adds.
To that end, AstraZeneca worked to improve its dispute resolution by using I-Many's software for managing customer charge-offs, Davies says. The company's adoption of imaging technology at its lockbox facilities was another plus for customer service, he says. The improvements benefited AstraZeneca as well as its customers. Its Day Sales Outstanding and past due numbers are now consistently in the top quartile of the statistics for pharmaceutical companies.
CREDIT RISK MANAGEMENT – Bronze
STERIS
Two years ago, STERIS' credit department was bogged down. Dealer commissions were manually processed. Credit applications were piled on a desk. And the old Oracle system was awash in 516 payment terms, many used only one time. Research on new customers was bare bones at best.
Then, STERIS decided to remake its credit structure. "Over the last two and one-half years, we've worked hard on improving payment terms," says Bill Aamoth, treasurer at STERIS. That meant upgrading to Oracle 11i. It narrowed payment terms to 10. Stored data was moved to the Oracle system, and credit ratings from D&B were filed in computer profile fields. Dealer commissions were now entered as credit memos. The benchmark for success: an Oracle best practices assessment by Deloitte Consulting.
The effect was dramatic. The cash collection cycle has been shortened, enhancing cash flow. Outstanding receivables with payment terms of 90 days or less increased to 97% from 88%.
Also, time was freed up in credit analysis, Aamoth says. Previously, it'd take 30 minutes to complete a standby letter of credit; now it takes ten minutes online. "We're not finished yet," says Aamoth. "We won't ever be done."
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