Did you know there’s an SAP standard module for contract pricing and chargeback management? It provides the same functionality as the popular Vistex add-on but there are no license fees. It’s called SAP Compensation Management and it’s part of the standard Logistics / Global Trade modules. Take a look at this comparison:
|Extra license cost||Yes||Free|
If you didn’t know about Compensation Management, don’t feel bad – it’s one of SAP’s best-kept secrets. You won’t find it in SAP marketing materials or the training curriculum. Even the online documentation is limited to just two pages, and there’s a lot of confusion with the HR module of the same name. And yet it offers critical functionality for SAP wholesale distribution.
It’s time to drag this shy module into the spotlight and give it the attention it deserves. Take a look at the Key Features, then read on to learn more about the Compensation Management module in detail. And of course, contact me with your questions, suggestions and comments.
SAP Compensation Management is an ECC module that offers the following functionality:
- Contract pricing
- Contract membership management
- Chargeback processing (chargeback submission and tracking)
- Chargeback reconciliation
- Online processing and support for EDI (844/845/849)
Compensation Management is intended for wholesalers. For example, it provides outbound chargeback processing (chargeback submission). If you are a manufacturer you may want to consider SAP CRM instead, since it provides contract pricing and inbound chargeback processing (I’ll post a future series on that topic).
Even if you already have Vistex or another add-on package, SAP Compensation Management is worth a look. The provided functionality is superb and it’s even possible to combine the two: for example you can use contract pricing from Compensation Management module along with chargebacks from Vistex, or vice-versa.
SAP Compensation Management covers many different wholesale distribution scenarios. Any any business that uses sophisticated pricing contracts or chargebacks (or chargeback variants, such a price protection or bill-backs) needs a way to manage those processes.
For this series, I’ll present the business process for pharmaceutical wholesalers as an example, and show how Compensation Management can be used for contract pricing and chargeback management.
The diagram below shows the pharma wholesale business process from contract negotiation through chargeback reconciliation.
The contract pricing and chargeback process begins when a drug manufacturer negotiates a pricing contract with one or more customers. The contract defines discounted pricing for certain products. The Contract may be signed with an individual customer, but more often it is an agreement with a Group Purchasing Organization (GPO) that represents multiple customers.
The manufacturer sends the pricing contract information to wholesalers that carry its products. The contract is sent via EDI 845, email or fax. Contracted products are identified by NDC number. Eligible customers may be listed explicitly by DEA or HIN number, or the contract may just indicate that some customer group is eligible (for example, a GPO’s customer membership or a particular class of trade).
When an eligible end-customer purchases a contracted product, the wholesaler invoices the customer at the contract price. Contract prices are generally below the Wholesale Acquisition Cost, or "WAC" (the standard price that a wholesaler pays to purchase a product from the manufacturer). This means that the wholesaler is often in a position where it must sell product below at a price below its own acquisition cost.
To make the wholesaler "whole" again a chargeback request is submitted to the manufacturer. The chargeback request is a request for a credit of the difference between WAC and contract price. For example: if WAC for a product is $100 and the contract price is $90, the wholesaler will sell the product to an eligible end customer for $90 – but it will also submit a chargeback request to the manufacturer for the $10 difference between WAC and contract price. The wholesaler’s profit margin is derived from marking up the contract price, or other means (such as collecting a cash discount from the manufacturer).
The chargeback request is sent via EDI 844 or EDI 867, email, or fax. The request includes detailed information about one or more sales to end customers (called the "line items" of the chargeback). This information includes: the sale date, customer identifier such as DEA or HIN number, the product NDC code, and pricing information such as quantity, WAC price, contract price, and requested chargeback amount.
The manufacturer validates the chargeback request against its own contract pricing system. If the request is approved, the manufacturer issues a credit to the wholesaler, or, if the chargeback is determined to be invalid, it may be partially paid or not paid at all.
The manufacturer then sends the wholesaler a chargeback response via EDI 849, email or fax. The response lists the payment amount for each chargeback line item. If a line item was rejected or partially paid, the response also lists rejection reasons explaining why it was not accepted.
In the last post in this series I covered the general business process for contract pricing and chargeback processing using SAP Compensation Management instead of Vistex. This time I’ll explain how the contract pricing and chargeback process is handled within Compensation Management.
- The process begins with the creation of a pricing contract in the Compensation Management module. The contract is sent from the manufacturer to the wholesaler by EDI 845, email or fax, and a Compensation Management contract is created in SAP. The contract lists all of the customers and products that are eligible for contract pricing. Each contract is assigned to a manufacturer. The manufacturer is represented as a vendor in SAP. If a GPO was involved in the contract negotiation then it is also assigned to the contract. The GPO may be stored just for reference, or to drive special pricing or special contract prioritization.
- When a sales order is created in the SD module the system determines for each product whether the customer is eligible for a pricing contract. If so, the contract is assigned to that order line and it is given a contract price. The determination logic may be simple, such as assigning the lowest contract price from a group of contracts, or it can be more complex, such as prioritizing certain contract types or GPOs over others.
- Normal SD processing then continues and the order is delivered.
- Normal SD processing continues and the customer billing document is created. For contracted products the customer is invoiced at the contract price. The billing document also includes several other pricing conditions that are necessary for chargeback processing, including WAC price and expected chargeback revenue. When the billing document is saved and released to the FI module, the expected chargeback revenue is posted as an accrual.
- A chargeback request document is created. This chargeback is linked to the billing document and to the pricing contract. It contains all of the data needed to submit a chargeback to the manufacturer.
- Individual chargeback request documents can be combined into a "collective chargeback request" to reduce chargeback volume with the manufacturer. The individual or collective requests are submitted via EDI 844, email, or fax.
- The manufacturer reviews the submitted chargebacks and responds with a chargeback reconciliation document via EDI 849, email, or fax. The reconciliation includes the paid amount and any rejection reasons for each chargeback line item.
- Once the chargeback document has been reconciled, it is released to FI. The accrual for the chargeback amount is reversed and the actual chargeback amount is posted as a vendor credit.
This time I’ll cover the process in more detail and work through an example in an SAP system. I’ll reference the diagram below and provide some screenshots for each step (note that you can click on the thumbnails to see a full-size image).
One thing you may notice immediately from the diagram is that all contract pricing and chargeback data is available in SAP BW. SAP provides standard BW extractors and key figures for detailed contract and chargeback reporting.
Step 1. Condition Contract
The first step in the process is to create a pricing contract. Figure 1 shows the SAP Compensation Management contract entry screen. In this example the contract was received from vendor 3818 and it represents an agreement to sell material "MS" to customer CMS0000031 for $90.00 per piece.
I’ll also enter a comment about how this contract was received and attach a spreadsheet received from the manufacturer. The texts are fully customizable and a separate "attachment" button allows source documents such as spreadsheets, emails, and so on to be attached directly to the contract.
Step 2. Sales Order
Now I’ll switch over to the SD module and enter a sales order for the contracted customers and material. For contract-priced items, the order line item can be double-clicked to see the "Compensation Management" tab, which shows the contracts that were considered for pricing. The user can view the details for a contract by clicking on it.
Switching to the pricing conditions for the line item, we can see that SAP determined the WAC (condition ZWAC), contract price (condition PCHB) and expected chargeback amount (condition CHBK). The conditions are configurable, so it’s easy to create additional condition types such as discounts, surcharges or rebates.
In this example, the normal price for the item is $110.00 but the contract price is $90.00 so the sale is made at $90.00. WAC is $100.00, so the expected chargeback amount is the difference between WAC and contract price, or $10.00.
Step 3. Billing Document
Once the order is delivered, the wholesaler’s end customer is invoiced. The billing document has the same pricing conditions as the sales order. When it’s released to accounting the expected chargeback amount is posted as an accrual.
Like the sales order, the billing document has a Compensation Management tab at the line level for contracted items, but it also has a Compensation Management tab at the header level. This tab provides an overview of all chargeback "PPF actions" (outputs) generated for the billing document. Here we can see that the system automatically created a chargeback request when the billing document was saved.
The second sub-tab "chargeback overview" shows information about all chargeback documents related to this billing document. It’s possible to "drill-in" to any chargeback document directly from this screen.
Step 4. Post A/R and Accrue Chargeback
When the billing document is released to FI, the expected chargeback amount is posted as an accrual.
Step 5. Chargeback Request
Chargeback processing begins as soon as a chargeback-relevant SD billing document is saved. A chargeback request is automatically created from the billing document (it’s also possible to group requests into a "collective request").
SAP calls a chargeback request a "remuneration request". It’s represented in the system as an Agency Business document of type "CHBK".
The "chargeback workbench" transaction is used to monitor and control chargebacks at any point in the process. The standard workbench settings allow users to perform all document processing without ever leaving the workbench.
In Figure 8 I’ve listed some chargeback documents and selected the header and item data for the chargeback I created previously.
The chargeback request looks a lot like an SD billing document: it has header data, item data, texts, outputs, pricing conditions, and so on. Figure 9 shows a chargeback request.
The "invoicing party" is the vendor to whom we’re submitting the chargeback (3818) and the "payment reference" field is used to store the chargeback reference number received from the vendor in the chargeback response document (see below). Since I haven’t submitted the chargeback to the vendor yet, this field is blank.
The chargeback document has its own pricing procedure along with configurable rules for copying pricing conditions from the source billing document. This is a very powerful feature because it allows all kinds of new pricing in the chargeback. For example, the chargeback pricing procedure can be used to adjust chargeback amounts by vendor or product, to automatically post payment differences to a write-off account, or to post additional conditions such as rebate accruals.
Step 6. Send Chargeback to Vendor
The chargeback can now be submitted to the vendor. SAP provides a configurable output procedure for chargeback requests, and outputs can be triggered based on business logic or generated manually. Messages are entered on the chargeback document "output" tab. Figure 10 shows an EDI 844 message sent to the vendor.
Step 7. Record Vendor Response and Reconcile
The vendor reviews the submitted chargeback and provides a chargeback response (via EDI 849, email, or fax). A reference number is also included in the response and stored on the SAP chargeback document for future resubmissions.
For each line item the vendor will approve it and pay it, or specify a partial payment amount along with one or more rejection reasons.
For this example, we’ll assume the item was partially paid with a rejection reason code "WAC incorrect". The vendor expected WAC to be $99.95, but the WAC on the chargeback request was $100.00. Based on a $90.00 contract price, the vendor expected a chargeback request for $9.95 rather than the $10.00 that was submitted.
The system behavior for each type of rejection is fully configurable. In this example, the system has been set to automatically post the chargeback difference to a write-off account.
Rejections are recorded on the chargeback document as a "complaint", which links the chargeback to a "complaint document". Complaint processing is completely configurable: for each reason code additional fields, validations, triggers, and workflows can be defined.
Step 8. Release Chargeback to FI
The chargeback is now complete and can be released to FI. Based on the chargeback pricing procedure, the original chargeback accrual (for $10.00) is reversed and the actual amount paid ($9.95) is posted to chargeback revenue and as a credit on the vendor account. The difference of $0.05 is posted to a write-off account.
The chargeback release can be performed through various transactions. I’ll use the chargeback workbench – just clicking on the "execute" button will release all selected chargebacks to FI (see Figure 12).
I hope you’ve enjoyed this brief introduction to wholesaler contract pricing and chargeback processing using SAP Compensation Management instead of Vistex.
I’ve barely scratched the surface about topics like chargeback reconciliation, pricing, and rebates. And there are other areas like credit-and-re-bill processing and the chargeback web portal that I didn’t cover at all.
If you’d like to know more, I encourage you to check out the key features post to get an idea about what other functionality is available (at a high level). Then let me know what you’d like to see in future posts.
And of course: if you would like consulting or training help, please contact me.