Six Sigma Case Study: Credit Invoice Reduction

Improvements resulted in an annualized hard savings of $537,921

The project was to reduce the number of credit invoices by 50%. To keep the metric consistent, the ratio of credit invoices to total invoices was determined to be the metric. The objective was to reduce the ratio from 8% to 4%.

The project analyzed the 43 defect codes that were assigned to credits. The major contributors were: (1) Customer Ordered Wrong Product, (2) Rebate Discounts to Distributors, (3) Accounting Write Offs, (4) Defective Product Returns, and (5) Wrong Price.

The project focused on customer’s ordering wrong product and the returns associated with the issue. When a flow diagram was made of the returns process, it was obvious the process did not support the returns policy. The process map indicated loopholes for product to be returned at a great disadvantage to the Company. Product was returned for up to two years after the purchase. By this time, the product was obsolete, and often damaged. Regardless, the return was accepted, and a credit was issued even though the product was discarded upon receipt.

Therefore, the returns policy was strengthened. Essential to the strengthening of the policy was the creation of a Returns Department in Customer Service, and a specific returns phone number. All returns were funnelled through this number. Not only did this streamline the process, it separated the Customer Service personnel from the returns decision-making. This allowed the Customer Service team to maintain a positive relationship with their customers. The warehouses were the checks and balance of the policy. An electronic communication system was implemented so the warehouses could confirm the terms of the return were followed.
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At the beginning of the project, it was assumed the largest cost benefit would be a reduction in labor. Freight spent returning product far exceeded any labor estimates. It was discovered the customer was sending product back collect, when they should have been responsible for freight. Product was also being shipped on a multitude of different carriers. This significantly raised the cost of freight. To prevent future occurrences, the return authorization states whether the return should be collect or prepaid. It also states which of the Company’s preferred carriers should be used. Once again, the checks and balances occur at the warehouses. If the shipment did not arrive on the correct carrier, with the terms assigned, the return was refused at the warehouse. The refusal forced the customer to abide by the terms on the return authorization.

Customer returns were not the only cause of credits. Improvements were also made to affect the quoting errors and defective product. Action Teams were created to respond to customer feedback concerning defects.

The submission for volume discounts by the distribution centres was also improved. The submission for credit was automated through the Company’s extranet. The contracts were entered, so the information could be submitted electronically. A claim on an invalid or expired contract could not be processed. This forced an annual review of contracts. It also removed the manual processing that would take several weeks to administer.

The sum of all the improvements created a 41% decrease in credit invoices. The improvements resulted in an annualized hard savings of $537,921.