Managing Credit, Receivables & Collections

March 2006

 

Using Six Sigma in AR: How Volt Reduced Bad-Debt Write-Offs by $750K Annually

Getting a "black belt" in accounts receivable management may sound like an extreme solution, but for some companies, it is defining best practices. It can also mean continued survival and a way to head off an outsourcing initiative.

 

At the conference of the National Association of Credit Mangers (NACM), a well-attended panel was devoted to a case study of how one company implemented Six Sigma procedures and collections automation to dramatically improve AR management. The company, Volt Information Sciences Inc., was able to deliver the following as a result of these initiatives:

 

• Tight control over DSO;
• Bad-debt write-offs reduced by $750,000 annually;
• Direct expense reduction of $150,000 annually;
• Full automation of AR management processes;
• Global AR visibility across all Volt business units; and
• Better communication with customer for disputes.

At the session "Using Six Sigma to Build a World-Class Accounts Receivable Process," Terry Jordan, senior credit manager at Volt, took attendees through the processes that achieved these impressive results. Jordan’s credit and collections department has 31 employees handling Volt’s 5,000 customers and approximately 10,000 invoices per month. This public staffing services company has over 300 company owned and operated locations-and 3,500 in-house and 40,000 contract employees.

 

Six Sigma + Emagia

As most credit pros know, Six Sigma is a metric, business philosophy, methodology, and team approach designed to drive maximum efficiency. "Two years ago," Jordan explains, "Volt decided to embrace the process, beginning with management." Top management wanted to improve customer satisfaction and operational performance. "We knew our manual processes wasted time and resources," Jordan explains, "and that we needed tighter internal control over our AR and dispute resolution processes." With other managers, Jordan participated in a 20-day training process to achieve "black belt" certification level ("green belt" certification training takes nine days). Key to the Six Sigma process is identifying metrics to ensure customer satisfaction.

 

As part of this intensive process, Jordan’s credit department at Volt chose the Emagia (www.emagia.com) cash flow management solution to implement its identified Six Sigma goals for receivables management. Emagia Cash Inflow Manager 4 software provides Volt with strategy-driven collections, AR portfolio management, deductions management, and cash flow analytics to accelerate cash inflow, reduce process costs, and improve customer service.

 

"Emagia," says Jordan, "met or exceeded our Six Sigma-identified needs for receivables management." The Six Sigma process develops a statistical metric to describe a process in a "state of near perfection" (only 3.4 defects per million opportunities, DPMO). Emagia met this test in terms of all identified Volt AR requirements, including the following:

 

• Number of collections strategies allowed;
• Flexibility in collections strategies;
• Flexibility in user customizable reporting;
• Number of AR analytical tools available;
• Ease of access to collector’s task list;
• Number of trackable performance metrics; and
• Ease of access to all account information.

 

Integrated Receivables Management

"Our twin goals," says Jordan, "were top-down strategic visibility and control of cash management and tactical execution by the collections and dispute resolution staff aligned with corporate strategy." The integrated receivables management supplied by Emagia currently provides Volt with:

 

• End-to-end portfolio management and reporting with roll-up/drill-down visibility across customer hierarchies;
• Real-time root-cause analysis of disputes and collections performance;
• Automated promises-to-pay upload with integration to auto-dispute creation and resolution;
• Workflow enabled and collaborative dispute resolution;
• Strategy-driven collection task lists (faxing, e-mailing of invoices, statements); and
• Full audit trail of notes, disputes, timecards, etc.
  

"What about the cost?" many credit pros might respond. "At Volt we leveraged our credit and collections automation to deliver bottom line savings that paid for the software in a very short time," answers Jordan. "We also established consistent policies around AR, collections, and dispute resolution as a result of the Six Sigma-Emagia processes," she adds. Another benefit has been improved communication between credit, collections, sales, service providers, and the customer.

 

What’s next for Jordan and Volt? "We plan to focus on continuous monitoring and improvement of Six Sigma-based AR processes," says Jordan. "One area we want to explore in particular is improved Credit Scoring through automation," she explains. "We’ll utilize the Six Sigma approach to define our credit scoring goals the same way we did for AR management," she says, "and evaluate and choose an automation provider as a potential solution."