Evaluated receipt settlement definition
/What is Evaluated Receipt Settlement?
Evaluated receipt settlement (ERS) is an arrangement in which payments to suppliers are based on the quantities received, rather than a supplier invoice. The payment to the supplier is based on the number of units received and the price per unit stated in the authorizing purchase order. This approach is significantly more efficient than the traditional accounts payable process, but requires a high degree of coordination between the supplier and the purchasing entity.
How Does Evaluated Receipt Settlement Work?
The basic underpinnings of the evaluated receipt settlement process are as follows:
The supplier sends a listing of its products prices to the customer, which the customer includes in its ERS system. The list is usually sent electronically and in a format that the customer can use to drop into its in-house system.
The customer issues the supplier a purchase order that references the prices previously sent to it by the supplier.
The supplier issues an advance shipping notice to the customer, typically in an electronic format.
The supplier ships the ordered goods to the customer. The delivery includes a bill of lading that references the purchase order number.
The customer matches the bill of lading to the advance shipping notice.
The customer automatically calculates payment based on the supplier’s pricing schedule and the number of units received. The system also accounts for any sales taxes due, as well as volume discounts.
The customer automatically issues payment to the supplier, usually via an electronic payment.
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Example of Evaluated Receipt Settlement
Walmart, one of the largest retail corporations, uses evaluated receipt settlement (ERS) to manage payments to its suppliers efficiently. Here’s how the process works in a real-life scenario at Walmart:
Purchase order creation. Walmart issues a purchase order (PO) to a supplier for 1,000 units of a product, such as canned goods, at an agreed price of $2 per unit. The PO includes all relevant details like item descriptions, quantities, prices, and delivery terms.
Goods receipt. When the supplier delivers the products to a Walmart distribution center, the receiving department checks the shipment against the PO and confirms the delivery of 950 units instead of 1,000 due to a short shipment.
Payment calculation. Using ERS, Walmart automatically generates a payment based on the received quantity without requiring an invoice from the supplier. The payment amount is calculated as:
950 units × $2 per unit = $1,900.
Walmart’s system also creates a self-billing invoice for record-keeping, which is shared with the supplier.
Payment execution. Walmart processes the payment directly to the supplier for $1,900 according to the agreed-upon payment terms (e.g., net 30 days). This eliminates the need for the supplier to issue an invoice and speeds up the payment process.
Supplier acknowledgment. The supplier receives the payment along with the self-generated invoice detailing the quantities received and payment amount, making reconciliation straightforward and transparent.
This example demonstrates how ERS benefits both Walmart and its suppliers by reducing administrative workload, minimizing errors, and speeding up the payment cycle. It’s a common practice among large retailers and manufacturers that handle high volumes of transactions.
Advantages of Evaluated Receipt Settlement
Evaluated receipt settlement has several advantages, which are as follows:
Work reduction. It eliminates much of the non-value added activity associated with the payables function.
Variance elimination. There are no variances between the billed amount on the supplier invoice and the amount received, since there is no supplier invoice.
Electronic payments. Payments are usually electronic, so no checks are issued.
Automatic processing. The process can be largely automated, since there is no need for the manual reconciliation of documents, as occurs with three-way matching.
Payment consistency. Given the level of automation, suppliers can rely upon more consistent payments.