DETROIT / BROCKVILLE, ONT — As automotive parts suppliers close their books on 2005 – a tough year that saw a number of leading companies having to restate earnings and come under the review of the Securities and Exchange Commission for accounting and pricing irregularities – it’s becoming increasingly apparent that many of them need stronger oversight and processes related to parts and pricing management, says Terence J. O’Reilly, president and CEO of Pricedex Software, Inc.
“It’s no wonder they’re having difficulties,” says Mr. O’Reilly. “Sarbanes-Oxley (SOX) has forced greater accountability and transparency into financial management, and many corporations are ill-equipped to comply, so questionable practices and IT process deficiencies continue, and are simply coming to the surface.”
SOX also requires greater internal financial controls and processes that can generate financial reports that are readily verifiable with traceable source data. And it requires that changes to financial reports be fully documented as to what was changed, why, by whom and when; in other words, an audit trail. The same is true with a number of other key business processes such as pricing and special pricing.
“Most corporations’ pricing practices today, whether relating to negotiated contracts, rebates, input costs, or channel-related pricing are still performed on spreadsheets which form the basis for input to business systems. There’s simply no reliable audit trail available,” says Mr. O’Reilly.
The issue of SOX compliance, while important to all manufacturing sectors, is compounded in the automotive aftermarket simply by the number of parts that aftermarket suppliers in particular have to price, track and manage, says Mr. O’Reilly.
“Over the past year, we’ve met with numerous aftermarket companies that have dozens of brands and product lines to keep track of with vehicle application coverage that goes back 10-20 years or more. This, combined with the dramatic increase in the number of vehicle models sold in North America, makes the job of managing millions of parts and their corresponding prices and product information nearly impossible without a top-notch PIM (product information management) solution that provides for proper documentation and is fully auditable.”
That’s one reason why aftermarket companies in particular are looking in increasing numbers to product information management software that incorporates robust pricing management functionality to help with SOX compliance and to simply run product and pricing processes more efficiently.
“The more meetings we have with parts suppliers, the more receptivity we see to the whole area of product information and pricing management,” he says, “and this movement is being driven by a combination of issues coming together.
“Certainly SOX is a primary driver and has everyone’s attention, but so do the areas of parts proliferation and related cost, and escalating materials and fuel prices and their effect on margins. A related problem is that when companies are working on very thin margins, there’s a temptation to get creative in pricing and billing practices. As we’ve seen this past year, companies simply can’t afford to continue doing ‘business as usual.’ It’s not worth the risk.”
According to Mr. O’Reilly, a comprehensive PIM solution can help aftermarket companies profitably manage these challenges and more easily comply with SOX standards by providing the process discipline, built-in documentation provisions, audit trail, visibility and accountability that SOX requires.
To begin understanding how PIM could impact your company and SOX compliance, Mr. O’Reilly suggests asking these questions:
- Do you have management visibility into your pricing practices and processes?
- Can you properly account for your rebate liabilities and practices?
- Do you have a system in place to track and properly document pricing changes?
- Can you easily determine who changed a price and for what reason?
- Do you have a test methodology to validate controls for pricing, approval and sales authorizations, as well as revenue recognition?
- Can you measure and monitor price performance?
- Can you properly forecast Net Sales Revenue?
- Does your company have the ability to report on all of the above – especially those activities that have a ‘material’ effect on your company’s financial performance and reporting?
- Do you have an automated system that can provide insight into the above requirements?
A good product information management system – with a solid pricing component – will help aftermarket companies answer these questions in the affirmative, says Mr. O’Reilly, which in turn can go a long way not only to complying with SOX, but ferreting out improper, or even fraudulent practices in a company.
These might include customer side agreements; backdated agreements; overly liberal return, exchange or refund policies; and overly aggressive discounts, “round tripping” or untracked rebate obligations in order to record questionable revenue.
“While SOX may be one of those initiatives CFOs ‘love to hate’, by and large the surveys I’ve seen suggest that financial executives agree that SOX is forcing some much needed change in financial management,” says Mr. O’Reilly. “This will also force change in certain other areas of business process management such as product information and pricing. And these changes will, in turn, produce other new efficiencies, cost reductions and improved margins.”