Credit Management Part 3: Order Blocking

In Part 1 and 2 of this series, I demonstrated how to automatically assign a credit limit using the new credit management feature, how to adjust it and how to recognise credit guarantees and insurance within a customer’s credit limit. In this post, I will cover the creation of blocking rules and how to dynamically put and release order holds.

Besides the credit limit automation, the credit management feature has a functionality related to customer sales orders. With the order blocking functionality, the order-to-cash process is more controlled, easy to manage and it is possible to identify the processes that need more attention. The system will stop the process based on several triggers including the credit limit previously defined. 

Customer Information

The account status (Credit and Collections > Setup > Credit management setup > Account statuses) is a new field in the customer master that represents the credit standing for a customer. The status affects the invoicing and delivery process and can be used to determine blocking rules for the customer.

For example, you can use “Open” to indicate that the customer is in good standing, which means that it will not be on hold, and use “Hold” status to represent a customer that should have to invoice and delivering on hold.

Credit management parameters – Credit management checkpoint

The order block is a useful functionally to prevent the company to take unnecessary risks regarding customer orders. The credit management feature offers 5 triggers out of the box in which is possible to block the customer sales order. The user can select which ones are more efficient to each business context in Credit and Collections > Setup > Credit management parameters > Credit tab > Credit management checkpoint fast tab.

In each one of the 5 moments of the order-to-cash process, it is possible to check the blocking rules and if is the case put an order on hold. An order can be automatically blocked in these moments:

• Confirmation: When the sales order is confirmed it can be put on hold and only after the release the confirmation is succeeded
• Picking list: At the moment of the generation of the picking list. After the released a list of the required items is sent to the warehouse and the order fulfilment process can begin.
• Released to warehouse: When the order is released to the warehouse. The shipment is only created after the order release.
• Packing slip: When the packing slip is sent. After the order release, the customer will receive a document that describes the content of the shipment.
• Invoice: When the order is invoiced. The invoice will be created after the order release.

It is possible to stop the order if necessary, by selecting the checkbox for posting or even to a proforma.

The column called “grace days” is used to determine the number of days for which the sale order hold that was previously released will not be applied to the blocking rules again. For example, if the order has blocked in the confirmation stage and has been already released by the user or the system automatically, during ten days after the released date, the system will not apply the rules to that order, even if the next steps on the order to cash process are defined as mandatory to check the blocking rules.

Blocking Rules

To automatically place a sales order on credit hold the system use blocking rules, by matching several customer information to the conditions defined in the blocking rules. This can be used to give more automation to the process as well to improve the efficiency and coordination of the credit and sales teams.

There are nine blocking rules, two of them based on rankings (rules 1 and 2) and 7 regarding specific customer or order information that is defined in the form Credit and Collections > Setup > Credit management setup > Blocking rules. There are two rule types in each one of the rules. The Blocking type will block an order if it matches the criteria, and the Exclusion type will exclude the order from being blocked, given specific conditions.

Rule 1: Rank payment terms

This blocking rule is based on the ranking of terms of payment. Every customer has a term of payment associated with, so when a sales order has created that term of payment is also associated with the SO. In Credit and Collection > Setup > Credit management setup > Rank payment terms form it is possible to rank the payment terms and assign them a ranking value. Regarding this, when a SO is created and if the user changes the default term of payment to one with a different ranking, the order will be sent to credit management and required approval for release.

Rule 2: Rank settlement discounts

Such as the terms of payment, this blocking rule is based on a ranking of the settlement discount associated with each customer and to the sales order. In the Credit and Collection > Setup > Credit management setup > Rank settlement discounts form you can rank the different settlement discount. If in the sales order, the settlement discount is changed to one with a different rank of the original, the sales order will be sent to the credit management for approval.

Rule 3: Days Overdue

This rule will place an order on hold regarding the customer with at least one invoice overdue for a certain number of days. It is possible to configure by table (for a specific customer), group (Credit management group, and/or risk group) or for all customers. The number defined in the form represents an additional number of days to the payment due date of the invoice.

Rule 4: Account Status

This rule is based on the account status of the customer. The sales order is sent to credit management automatically if the account status of the related customer matches with the defined in the rule. For example, any order for a customer with an account status “Hold” will be blocked and sent to the credit management for approval.

Rule 5: Terms of payment

This rule is an addition to the rank payment terms rule (rule 2). However, this one will check for specific terms of payment and place the order on credit hold if the term of payment defined matched with the term of payments of the order. For example, if the sales order terms of payment is cash the order will be automatically assigned to the credit management.

Rule 6: Credit limit expired

With this rule, the order will be blocked when the credit limit has expired for a certain number of days. It can be applied to a range of customers divided per group (credit management group), to a specific customer or to all. The number of days defined in this rule is an interval in which it is possible to update the credit information of the customer, after that, all orders will be on hold. So, if the credit limit was expired for 30 days or more, the customer will have his orders blocked.

Rule 7: Overdue amount

Overdue amount rule is a combination of two factors: the overdue amount and the credit limit threshold. After defining the range of customers for which this rule is applied (specific, credit management groups, or all) you can define the limit amount that will block the order. This rule also investigates the percentage of credit limit that has been used. So, an order will be put on hold if it exceeds the overdue amount and if the customer is over 80% of their credit limit.

Rule 8: Sales order

The rule is based on the total value of the sales order. That means that the order will be blocked if the total amount is greater or less of a specific value. This rule has an additional parameter that overwrites all the other blocking rules. This sales order rule can have an exclusion line that will release the order over other rules. By selecting the exclusion type and then selecting the “release sales order” checkbox, all orders that have an amount smaller than 1,000 will be automatically released even if it should be blocked by other rules.

Rule 9: Credit limit used

The credit limit used rule applies to the customer credit limit amount already used. By defining a threshold remaining it will define a percentage of credit limit that blocks the order. This means that if the value of the order exceeds the value of the credit limit (considering the percentage defined) the order will be blocked.

The credit limit used rule is controlled by the credit and collections parameters. This rule will only be run if the “Check credit limit for sales order” parameter (under credit tab > Credit limit fast tab) is set to YES. If the Message when exceeding credit limit is set to warning, the rule will run, and the user will have a notice when the credit is exceeded. If the Message when exceeding credit limit is set to error, the rule will run and put the order on hold, but the user will not receive an error message.

Hierarchy

Credit limit check-up hierarchy

Credit management brings a new hierarchy to check the credit limit to put an order on hold. So, first, the system will check the credit limit for the customer credit groups, if the customer belongs to a group. After that will check the induvial credit limit, looking first at the temporary credit limit, including the insurance and guarantee, and finally the customer credit limit including the insurance and guarantee.

Blocking Rules hierarchy

The Exclusion rule in sales order rule can overwrite all the others if the exclusion is true. Any other exclusion rule run after the blocking rules. That exclusion rules only affect the rule in which are defined. However, exclusion rules do not override the blocking rule if they are at the same level. Blocking and exclusion rules run first in Table, then Group, then All orders.

Blocking Order Process and Example

Credit management functionality stops the order-to-cash process to give special attention to risk business factors. Let us look to an example on how to deal with the order blocking and release. In this scenario, I had created a sales order and changed the terms of payment and set the expiration date of the credit limit as overdue, so the order should be sent to the credit management team once it is confirmed.

After the order is sent to the credit management, in the sales order form, under credit management tab on top there is a link to the credit management hold list (or go to Credit and Collections > Credit management hold list > All credit holds) to see all sales order that has been put on hold.

Every line has information about the sales order and the credit hold reasons. If more than one blocking rule has been broken, it will indicate that are multiple hold reasons. So, on top of the form, it is possible to see all the blocking reasons for which the order has been blocked. For this example, has mentioned before, the reasons are credit limit expired and terms of payment changed.

Release order

It is possible to manually release a hold order using the button release on top, which will give a released reason to the order and set the order status to open. This release option has two actions that can take after the release. It can release the order with posting, that will automatically open the form where the order was blocked, this case the order confirmation form, or without positing, that will just change the order status to open.

Reject order

The reject option, accessed by the button rejects on top, will remove the order form the hold list, and the sales order header will be changed to show that the order has been rejected. It also will request a reason for that.

Automatically released order

With the button Evaluate for release, it is possible to automatically release an order. This function tells the system to run the blocking rules again and check if the orders are still valid to be held. This process can be run in a batch job and if the rule is no longer applied to the order, the system will automatically set the order status to open and allow the order-to-cash process to be continued. 

Stay tuned for Part 4 where I will cover customer payment predictions and cashflow forecasts. Both use finance insights AI.

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