Today I was speaking with a Fortune 100 company who was looking at their Inbound Validation processes and trying to decide whether automation would be required. My answer was a resounding yes, but more often than not – I see multinationals doing the inbound validation of supplier and business partner XML through manual processes. I think it is important to understand the risks as well as the consequences on your business operations by not automating. So here are the common issues when approaching Inbound Validations in Latin America:
First, it is important to understand that in many Latin America countries – Inbound Validation of the XML is not an option, it is required. The process is required in Brazil for both Goods and Transportation documents called CTe. As of December 2012, the same holds true for Mexico. And with Chile mandating the usage of electronic invoicing as of November 1, 2014 – inbound validations will be required as well.
So here are some considerations when looking at the inbound process.
- Staffing Cost – If you are processing over 500 inbound XML a month – you should consider automation, but don’t just look at the cost of the Accounts Payable team. You should consider:
- Inbound Receiving – in countries such as Brazil, you can utilized the PDF representation of the XML that must accompany the supplier trucks by law as a way to eliminate data entry. You can also fully automate the MIGO process off of these scans.
- Procurement – if you automate the match against the PO at the line item level before the truck arrives, and this is of course a best practice, you can ensure that what is arriving is an approved purchase. Your inbound receiving team doesn’t have to search or worse – call procurement to verify items.
- Accounts Payable – because there is a significant tax impact from invoices containing VAT, the three way automation focuses the AP team on invoices that are commercially wrong. In some cases, the XML can be disputed with the supplier before the truck arrives.
- Production Risk – Because of the tax impact, in many industries – companies will not allow a truck through their gates unless the XML is valid. It can be a common occurrence to turn the truck around. With automation – the PO match to the commercial terms could be done before the truck arrives – eliminating these potential issues because the team could have asked the supplier to cancel, correct and resend a new XML document or a CCe correction notice in Brazil as long as the tax values don’t change.
- Audit Costs - Controlling/Tax Teams – it is my experience that if there is an issue in the XML – that it is often not caught at the inbound receiving process. Instead, wrong information is pushed into the ERP system. This means that your financial teams are constantly reviewing data at closing to ensure everything is correct. In countries where they do a secondary check on the transactional data through the use of aggregated reporting (i.e. SPED in Brazil or Libros in Chile), you cannot afford to have discrepancies – this will more often than not trigger audits as well as significant fines. In Brazil, you can expect to see fines of ~500 Reais per incorrect or missing XML during an audit (it varies by state, but that is an approximate figure you can use) and 75 to 150% fine based on the value of the tax on the particular invoice/invoices in question.
- Incorrect Tax Obligations - In Chile for example, a buyer has 8 days to accept or refute a supplier invoice for accuracy – after 8 days, it is automatically assumed that the invoice is accepted. After this 8 day period, the only recourse to adjust the government systems is through the use of a Credit/Debit against the original, registered invoice.
- Cancellations – In Brazil, it is often stated that the invoice from a supplier can be canceled within 24 hours. The reality is that it can upwards of 7 days. So in your manual process are you doing secondary checks to ensure you are not deducting taxes from invoices that have been cancelled by suppliers. The Destinatario processes in Brazil actually freeze a supplier invoice, once the recipient acknowledgement is sent – the supplier can no longer cancel the invoice.
So as you look at the Account Payable process, remember it is more than just the cost of your AP staff – there are extensions and impacts into all parts of your business because of the Latin America process. So I always recommend automation – remember that the government imposed the legislation – you might as well get all the operational cost savings that the process allows. It doesn’t just have to be about what you have to do, it should be more about what you should do.