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My mother is still alive because of a pacemaker manufactured by Medtronic. She is wearing a pacemaker since she was 14 years old. My great-grandfather has got one since the beginning of March 2012. All of this made me decide to send a letter of application to Medtronic. I was invited to a job interview, for which I was pretty nervous but when I look back at it all it seemed fine. A few days after the job interview I was informed that I was accepted as an intern at the ICIP team. I was looking forward to see how the theory learned at the HEAO was used in practice.
I would like to thank several persons who helped me during my internship and made this time a very pleasant experience.
Firstly, I would specially like to thank Rik van Ewijk for his help, advice and guidance as my company mentor. Secondly, I would like to thank Desiree Leunissen and Dennis Orbons for the support they gave me, even the small things. Thirdly, I would like to thank my internship tutor Astrid Frusch for her advice and feedback with regard to my internship report. And last but certainly not least I would like to thank my team members from ICIP and all other FSSC colleagues for this fine experience.
The story of Medtronic begins in the year 1949 in which Earl Bakken and his brother-in-law founded a medical equipment repair shop called Medtronic. Medtronic started out in a garage and slowly grew larger mostly because its successful pacemaker. Medtronic grew to an international company with different businesses in almost all parts of the world. The company statement was written by co-founder Earl Bakken. He was inspired by patients to create the Medtronic Mission, which is now an integral part of the company's culture and this mission has not changed since then.
Medtronic consists of six different business units which all focus on different markets: Cardiac Rhythm Disease Management (CRDM), Spinal and Biologics, CardioVascular, Neuromodulation, Diabetes, Surgical Technologies. The FSSC does not belong to one of these businesses in particular but is a service center for other entities. The FSSC consist of multiple departments including the ICIP team. The Intercompany Purchasing team or ICIP is responsible for a couple of different activities. The most important activities of the ICIP team are as follows: reconciliation intercompany AR/AP-balances, Goods in Transit (GIT)/ Credits in Process (CIP), Purchase Price Variances (PPV) and some remaining activities.
SAP is the administrative system used by Medtronic. Almost everything that has a financial value is recorded within this system. SAP is needed at most of the activities performed by the ICIP team and other financial team in the FSSC.
The main activity of the ICIP team is to reconcile the intercompany AP/AR (account payable/account receivable) Balances. Most of the transactions hitting those balances are booked automatically by the system on both the AP as well as the AR side of two Medtronic entities. For some manufacturing sites which are not on SAP however, this is not the case and need to be entered into the system manually.
PPV is caused by differences between the transfer price in SAP and the transfer price of the vendor and needs to be solved to prevent unwanted out of balances. PPV causes can be split into two main reasons: a difference in the labor, burden, and material price (LBM) or a difference in the mark-up percentage (MU%).
The scorecards showing all open items concerning Goods in Transit (GIT) and Credits in Process (CIP) have to be filled out to meet the Sarbanes-Oxley Act. When applying this act to the GIT/CIP balances, GIT/CIP transactions are not allowed to surpass the threshold of 180 days and the total amount above 90 days is not allowed to be more than 1% of the total balance.
Some of the remaining activities of ICIP are: Outgoing Sales Schedules, profit Elimination Analysis, integrations, transfer pricing, billing backup and working with Blackline.
Table of contents
Table of contents
1 Introductory 5
2 Medtronic 6 2.1 History 6 2.2 Company mission 7 2.3 Business overview 8
3 FSSC 11 3.1 The three divisions 11 3.1.1 Procure to Pay 12 3.1.2 Finance Solutions & Control and Close to Report 13 3.1.3 Order to Cash, Treasury and Intercompany (I/C) & Fixed Assets (FA) 13 3.2 A closer look at the Intercompany Inventory Purchasing Team (ICIP) 14 3.2.1 Reconciliation intercompany AR/AP-balances 15 3.2.2 Goods in Transit (GIT)/Credits in Process (CIP) 15 3.2.3 Purchase Price Variances (PPV) 15 3.2.4 Some remaining activities 15
4 Activities 16 4.1 A quick look at SAP 16 4.2 My activities 17 4.2.1 Reconciling accounts receivable with the accounts payable position 17 4.2.2 Purchase Price Variances 20 4.2.3 Goods in Transit/Credits in Process SOX-scorecards and Israel 23 4.2.4 Other monthly activities 25
5 Recommendations for improvements 27
Appendix 1 abbreviation list 31
Appendix 2 personal experience report 32
Medtronic is a large international company but is not so well know under students. Most students only recognize Medtronic once you describe the products they make. I was one of the few students who could directly link the name Medtronic to its products because of the pacemaker worn by my mother. The aspect of working for an international company really appealed to me and the FSSC of Medtronic was a perfect place to start.
The internship took place from September third till January 18th. It has been a really learn full experience and this report gives an impression about the company and the activities I had to perform.
The report begins with a general description of Medtronic containing the history, mission statement and business overview of Medtronic. After the general part a closer look at the Financial Shared Service Center is taken and all its teams are described including the ICIP team where I was an intern. Following the FSSC is the part where all my activities during my internship are described. The last chapter contains some recommendations about my activities.
The following paragraph contains information from (Our Story, 2010). Medtronic does not exist for that long in comparison to some other companies but has proven itself to the world and has become one of the leaders in its market. The short history of Medtronic had some important happenings and has molded the company to its current form.
The story of Medtronic begins in the year 1949 in which Earl Bakken and his brother-in-law founded a medical equipment repair shop called Medtronic. Medtronic started out in a garage but quickly expanded to a second garage and even an entire apartment. Medical professionals approached Medtronic with the request to not only repair equipment, but also to modify it, or design and produce new devices needed for research.
In the mid-1950s, Earl Bakken was approached by DR. C. Walton Lillehei who was a heart surgeon. Dr. Lillehei and his colleagues helped Medtronic to develop a better system for the current pacemaker which had to be plugged into a wall outlet. Together the teams came up with a pacemaker not larger than a paperback book that was powered by mercury batteries. Patients were able to move around and the pacemaker could easily and comfortably be worn by young patients.
At first the external pacemaker was used by patients recovering from open heart surgery but soon physicians began to see an even larger value in these pacemakers. Pacemakers could be used to help people suffering from a chronic heart block. This presented several problems however: an external pacemaker worn 24 hours a day was inconvenient for the patient, the wires could become dislodged from the heart and the passage of wires through the skin to the heart introduced the possibility of infection. Drs. Chardack and Gage were experimenting with implantable pacemakers and published a paper about their work in 1960. Medtronic was very interested in this and immediately contacted the New York researchers. They signed a contract giving Medtronic exclusive rights to produce and market the Chardack-Greatbatch implantable pulse generator. The new pacemaker was a great success and Medtronic started to distribute outside the United States. Besides pacemakers Medtronic sold seven other products, including the Telecor, which visibly and audibly monitored heart activity; the Cardiac Sentinel, an automatic alarm that summoned aid when the patient's heart activity became critical and stimulated the heart with an electronically regulated pulse; and a Coagulation Generator, used to control bleeding during surgery without damaging nearby tissue.
Growth and globalization
The 1960s were very important years for Medtronic. The company moved to a 15,000-square-foot facility in St. Anthony Village in Minneapolis which kept expanding in the upcoming years. By 1962, the product line had expanded to 20 devices, and annual sales had reached a level of $500,000. Despite this Medtronic was still suffering from large expenses and had a net loss of $144,000. Medtronic almost went bankrupt and had to refocus its fiscal efforts. By 1963 the company was making profit again but had to make some changes to the company expenses and focusses. It was a painful lesson, but reinforced the reality that technological innovation must be balanced with fiscal responsibility to be successful long term. In 1966, Medtronic purchased the patents related to implantable pacemakers from Greatbatch and Chardack. During the mid-1960s Medtronic experienced a rapid technical growth and Medtronic transferred her expertise in electrical stimulation to treat other parts of the body. The annual sales also kept growing and in the year 1968 Medtronic reported a net income of $1 million.
During the 1960s Medtronic also expanded her global influence and for example opened a service center at Amsterdam's Schiphol. At this service center Medtronic provided physicians with technical information, repaired and tested equipment & devices and supplied sales representatives with marketing materials. Medtronic continued spreading in the late 1960s and early -70s, they opened a major manufacturing facility in Kerkrade, established an international division based in Paris, established a Latin American headquarters in Sao Paulo, Brazil; a European headquarters in Paris; a direct sales operation in Japan; and manufacturing facilities in Canada, France, and Puerto Rico. In the 1990s Medtronic stared to expand to Japan and opened a manufacturing facility and pacing research center there. During this time Medtronic also relocated her European headquarters from Paris to Brussels and eventually to Tolochenaz, Switzerland. Because of the continuing growth Medtronic needed a new world headquarters that could accommodate a growing employee base, increased demand for training, and consolidated research and development facilities which was built in Fridley, Minnesota in 2001.
Expanding into other markets
During the following years Medtronic managed to leverage her expertise to treat even more chronic conditions. Medtronic established a Neurological division and a Heart Valves division. Research spending doubled between 1985 and 1988, which caused Medtronic to expand into new area's and create new products. Medtronic also managed to expand to different markets by acquiring nearly a dozen medical technology companies who made equipment such as tissue heart valves, cardiopulmonary equipment, coronary angioplasty catheters, and centrifugal blood pumps. Art Collins joined the board as Medtronic's CEO in 2001; he saw a long-term opportunity in chronic diseases. He led efforts do further integrate information technology and biologics with Medtronic's devices to broaden their functionality. Biotechnology and biologics became another important part of the Medtronic product line in the year 2000. Substances that caused a biologic response when used with Medtronic's products could result in better outcomes and faster healing. In 2001, Medtronic acquired Minimed, a specialist on infusion pumps for patients with diabetes and became the market leader with this purchase.
2.2 Company mission
The following paragraph contains information from (Our Mission, 2010). A company mission shows the public what a company stands for and helps to guide the company in a specific direction.
The company statement of Medtronic was written by co-founder Earl Bakken. He was inspired by patients to create the Medtronic Mission, which is now an integral part of the company's culture. The products of Medtronic contribute to human health and therefore create a lot of emotional responses from their customers. Early in Medtronic's history, co-founder Earl Bakken was overcome by these emotional responses patients had to his products. They were overjoyed to regain mobility, feel better, and sometimes even to be alive as a result of Medtronic's work. That is why Earl wanted human benefit be the company's main purpose. He and the board of directors produced a formal statement of the company's objectives. This mission has not changed since then and continues to serve as an ethical framework and an inspirational goal for employees around the world. The objectives in the mission statement are as followed.
"To contribute to human welfare by application of biomedical engineering in the research, design, manufacture, and sale of instruments or appliances that alleviate pain, restore health, and extend life.
To direct our growth in the areas of biomedical engineering where we display maximum strength and ability; to gather people and facilities that tend to augment these areas; to continuously build on these areas through education and knowledge assimilation; to avoid participation in areas where we cannot make unique and worthy contributions.
To strive without reserve for the greatest possible reliability and quality in our products; to be the unsurpassed standard of comparison and to be recognized as a company of dedication, honesty, integrity, and service.
To make a fair profit on current operations to meet our obligations, sustain our growth, and reach our goals.
To recognize the personal worth of employees by providing an employment framework that allows personal satisfaction in work accomplished, security, advancement opportunity, and means to share in the company's success.
To maintain good citizenship as a company." (Our Mission, 2010)
2.3 Business overview
Medtronic consists of six different business units.
Cardiac Rhythm Disease Management (CRDM)
Spinal and Biologics
Each business unit specializes in a different medical technology and a short description will be given in the following paragraph which makes use of information from (Business overview, 2010).
Cardiac Rhythm Disease Management (CRDM)
Figure CRDM accounted for $4.93 billion, or 31%, of Medtronic's $15.9 billion revenue in fiscal year 2011 (Business overview, 2010)CRDM is the first business unit founded by Medtronic and is also the largest. As already mentioned in the history of Medtronic, Earl Bakken developed the first wearable heart peacemaker in 1957. This business unit has expanded and specialized in these ways to threat cardiac rhythm diseases. Diagnostic and monitoring capabilities have been added to many of the devices and have thereby moved the business into more overall disease management. fy2010-pie-chart-crdm
Products of this business include: implantable pacemakers, implantable cardioverterdefibrillators, implantable cardiac resynchronization therapy devices, monitoring systems and catheter ablation.
Spinal and Biologics
This business unit Spinal and Biologics can be split into three parts; the Spine business, the Biologics business and the Kyphon business. fy2010-pie-chart-spinal
Figure 2 Spinal and Biologics accounted for $3.34 billion, or 21%, of Medtronic's $15.9 billion revenue in fiscal year 2011 (Business overview, 2010)The Spine business collaborates with world-renowned surgeons, researchers, and innovative partners to offer a broad range of state-of-the-art products and technologies. The therapies from this business treat a variety of neurological, orthopaedic, and spinal conditions.
The Biologics business focusses on biologic regeneration and pain therapies; this happens across a variety of musculoskeletal applications including spine, orthopaedic trauma and dental.
Kyphon focusses on medical devices that treat a variety of conditions of the aging spine including spine fractures caused by osteoporosis and cancer. Kyphon also develops devices to help restore and preserve spinal function and diagnose the source of low back pain.
Some example of therapies and technologies of this business are: minimal access spine technologies, balloon kyphoplasty, fusion systems, artificial cervical discs, interspinous spacer implant and biologics products.
Figure 3 CardioVascular accounted for $3.18 billion, or 20%, of Medtronic's $15.9 billion revenue in fiscal year 2011 (Business overview, 2010)CardioVascular is Medtronic's third-largest business. CardioVascular is specialized in therapies about interventional cardiology, cardiac surgery, and vascular surgery. CardioVascular develops their products in collaboration with leading physicians and are used to reduce the potential debilitating effects of coronary, aortic, and structural heart disease.
CardioVascular's products include: angioplasty technologies, stent grafts, heart valves, open-heart and coronary bypass graft products.
Figure 4 Neuromodulation accounted for $1.59 billion, or 10%, of Medtronic's $15.9 billion revenue in fiscal year 2011 (Business overview, 2010)Neuromodulation is the second-oldest and fourth-largest of Medtronic's business units. Neuromodulation was founded when Medtronic shifted expertise from heart electrical stimulation to treat diseases and conditions involving the nervous system. Neuromodulation focusses on neurostimulation systems and implantable drug delivery systems for chronic pain, common movement disorders, and urologic and gastrointestinal disorders.fy2010-pie-chart-neuro
Theories developed by Neuromodulation include: Medtronic deep brain stimulation therapy, Medtronic pain therapies, enterra therapy, interstim therapy for urinary control and intrathecal baclofen therapy (ITB Therapy).
Figure 5 Diabetes accounted for $1.27 billion, or 8%, of Medtronic's $15.9 billion revenue in fiscal year 2011 (Business overview, 2010)Diabetes is Medtronic's fifth-largest business. This business exists for more than 25 years and helps people with diabetes manage their glucose levels and live longer, healthier lives. Diabetes offers the only FDA-approved integrated diabetes management system consisting of an insulin pump, continuous glucose monitoring (CGM) and therapy management software.fy2010-pie-chart-diabetes
Diabetes develops: advanced insulin delivery systems, continuous glucose monitoring and therapy management software.
Surgical Technologies is Medtronic's sixth-largest business. Surgical Technologies develops innovative technologies and techniques that improve patients lives with aspects to the ear, nose, and throat (ENT) diseases and cranial, spinal, and neurologic conditions. Surgical Technologies can be split into three different businesses: Neurologic Technologies, Navigation and Imaging and Ear, Nose, and Throat (ENT). fy2010-pie-chart-surg
Figure 6 Surgical Technologies accounted for $1.1 billion, or 7%, of Medtronic's $15.9 billion revenue in fiscal year 2011 (Business overview, 2010)Some of Surgical Technologies key products are: surgical navigation systems for cranial, neurologic, spinal, and ENT procedures, powered pneumatic and electric drill systems, hydrocephalus valves and shunts and intraoperative nerve monitoring systems.
FSSC stands for Financial Shared Service Center. As the name already suggests, the FSSC is a service center for other entities. Entities are different parts of the company. Medtronic has two other FSSC's; one is in located in the United States and the other in China. The FSSC has its own mission: As a team, provide financial services, deliver efficiency, quality and compliance, and exceed customer expectations. The FSSC consists of multiple departments and these will be discussed below. The following chapter contains information from (FSSC, 2012)
3.1 The three divisions
Figure 7 shows the different divisions as they were at the beginning of my internship.
Figure 7 FSSC divisions before December
In the beginning of December the manager leading Finance Solutions & Control and CtR left Medtronic and a solution to this change had to be found. The supervisor from the former Close to Report was promoted to Close to Report Manager. A new supervisor of Close to Report was elected and the company structure was changed. A big change was that the entire team of I/C & FA was shifted to the Close to Report department. This happened because these departments had more connections to each other than I/C & FA had to Treasury and Order to Cash. The Finance Director of the FSSC made the announcement that he was going to leave the FSSC in a short period. He was not replaced and the FSSC now directly falls under the supervision of the international Vice President Finance. This had little impact on the ICIP team but caused some differences especially when looking at supervision.
Further changes will be visible in Figure 8.
Figure 8 FSSC divisions since December
The FSSC is divided into three main departments, and then further divided into sub departments. Below are all departments described like they were at the beginning of my internship. This situation is chosen because the new situation was not fully implemented yet and the major period of my internship fell under the old situation
3.1.1 Procure to Pay (PtP)
Accounts Payable (AP)
The Accounts Payable team processes all invoices to creditors from the region International West. AP processes these invoices through manual processes for 20+ countries. There are more than 40,000 active suppliers and the Accounts Payable team processes more than 700 invoices per day for these suppliers. In fiscal year 2010 AP processed over 175,000 invoices and 125,000 payments.
The Expense Reporting team processes all expense claims for employees in International West Community. These expense claims are processed through expense express or through other manual processes. Expense Reporting does this for 40 entities in 22 different countries. There are about 3,000 expense claims per month and this equals to a total of $3 million.
Financial Service & Support Team (FSST)
The Financial Service & Support Team or FFST consists of a few smaller teams: Helpdesk, System Administration, Business Intelligence and Training and Communication.
Helpdesk - The helpdesk processes all first line questions for Accounts Payable in the International West region. They also look at SAP master data requests like general ledger account maintenance and cost center setup. The helpdesk also handles all the requests involving the creation and maintenance of the vendors from International West and India.
System Administration - The System administration provides functional support to systems in use in the PtP area and the financial part of eCats, Medtronic's compliance tracking application. They also have support knowledge about SAP Business Warehouse, used for the quick gathering of information, and other SAP related programs.
Business Intelligence - The FSST has a broad knowledge of applications and systems. This knowledge is used by the Business Intelligence team to provide a range of reporting solutions for both the FSSC and the other Medtronic entities.
Training and Communication - The training and communication team coordinates training and communication efforts to spread knowledge across the International West region.
3.1.2 Finance Solutions & Control and Close to Report
Close to Report (CtR)
The Close to Report department together with the three supporting teams within this department is responsible for managing an effective and efficient closure process. The close process also includes related analysis and reporting. CtR supports the regional and business finance community as well as corporate.
Finance Solutions & Control (FS&C)
The FS&C has to make sure the balance sheet is complete and accurate. FS&C also provides year reports for the region and is in charge of integrating newly bought companies.
Value Added Tax (VAT)
The VAT team is responsible for submitting VAT return. VAT ensures that the taxes for 15 different countries are correct and minimalized. This is mostly done by making sure most of the capital is within Switzerland because of the positive tax climate there.
3.1.3 Order to Cash (OtC), Treasury, Intercompany (I/C) & Fixed Assets (FA)
I/C Debit Credit Memo (IDCM)
The IDCM team is responsible for the accurate and timely processing of all intercompany non-inventory transactions. IDCM processes Intercompany Request Forms (IRFs), prepares and processes intercompany payments and processes the global intercompany netting in SAP. Per year IDCM processes more than 1000 internal transactions with a total worth of $5 billion.
Intercompany Inventory Purchasing (ICIP)
The ICIP team processes all inventory items like the IDCM processes all non-inventory transactions. ICIP processes incoming sales schedules and prepares and processes revaluations for inventory changes. The ICIP team is also responsible for the Credits in Process, Goods in Transit and PPV reconciliations. ICIP books more than 5,800 invoices manually with a total worth of $1.1 million.
Fixed Assets (FA)
The Fixed Assets team processes all fixed asset items. Another responsibility of Fixed Assets is to make sure all inventory items are processed to be capitalized and the recording of all additions and disposals of fixed assets. FA processes around 12,000 new assets a year.
The Cash Application team is responsible for customer receipt processes. For these receipt processes, frequent interaction with OtC partners is needed.
Treasury manages cash & liquidity, global multilateral netting, trade finance, customer finance and collection & payments solutions; thereby interaction with Corporate Treasury, Tax, Medtronic's banking partners, businesses, customers and suppliers is necessary.
The Bank Reconciliation team is responsible for monitoring & reconciling incoming and outgoing bank transaction, interacting with Medtronic's partner bank, local finance, Cash Application and the Purchase to Pay team. Bank Reconciliation uses 228 bank accounts and gets around 25,000 incoming and 8,500 outgoing bank transactions per month.
Regional Credit Management
Regional Credit Management monitors and manages the risks embedded in the ECA region's receivables and ensures Medtronic fulfills global policies, procedures and processes. Regional Credit Management also tries to align activities with Global and Regional functions to achieve best efficiency and effectiveness in credit management processes.
3.2 A closer look at the Intercompany Inventory Purchasing Team (ICIP)
During my internship I was part of the ICIP team. The Intercompany Purchasing team or ICIP is responsible for a couple of different activities. The most important activities of the ICIP team are as follows.
Reconciliation intercompany AR/AP-balances
Goods in Transit (GIT)/ Credits in Process (CIP)
Purchase Price Variances (PPV)
Some remaining activities
Some of these activities will be fully described under the My Activities section of this report because these are activities partially performed by interns of the ICIP team.
3.2.1 Reconciliation intercompany AR/AP-balances
The main activity of the ICIP team is to reconcile the intercompany AP/AR (account payable/account receivable) Balances. Most of the transactions hitting those balances are booked automatically by the system on both the AP as well as the AR side of two Medtronic entities. For some manufacturing sites which are not on SAP however, this is not the case and need to be entered into the system manually. The ICIP-team books the AP side of this transaction. All differences between the invoice price and the price set up in SAP are booked to the intercompany PPV (Purchase Price Variances) account.
All invoices, for which a purchase order (PO) cannot be found in the system, will be booked to the disputed items at month end. These disputed items are reconciled on a monthly basis. At month end all transactions booked automatically, manually and booked into disputed at AP side should match the AR side of the trading partner. The remaining difference is named Out of Balance and will be investigated in the next month.
3.2.2 Goods in Transit (GIT)/ Credits in Process (CIP)
At the beginning of each fiscal month the ICIP team retrieves all open items concerning Goods in Transit and Credits in Process from SAP. Those items are then categorized on aging, trading partner and bucketed in the following categories: Goods receipt without invoice receipt, invoice receipt without goods receipt, undershipment; for which the goods receipt is smaller than the invoice receipt or when vice versa classified as overshipment. The remaining items should be items of the current month and are classified as timing issues because they should be solved at month end.
The total dollar amount of outstanding over 90 days should not exceed 1% of the overall balance. Items over 180 days need to be solved immediately because these are not allowed to remain on the Sox-scorecards.
3.2.3 Purchase Price Variances (PPV)
Another reconciliation done by the ICIP-team concerns the following PPV accounts: I/C Raw Material PPV, (Semi-) Finished goods, Intercompany PPV and I/C PPV Quantity differences. As mentioned earlier all differences between invoice prices and those prices set up in SAP will be booked to the PPV accounts. The task of the ICIP team is to investigate the cause of this PPV and make the correction by reclassing the amounts.
3.2.4 Some remaining activities
Some of the remaining activities of ICIP are: Outgoing Sales Schedules, profit Elimination Analysis, integrations, transfer pricing, billing backup and working in a program used for reconciliations called Blackline.
The activities performed by me matched the main activities of the ICIP team. I had a real good opportunity to really feel what it was like to work in this team and preform the same activities as they usually preformed. All these activities involved SAP in some manner, so this system will first be shortly explained before my activities get a closer look.
4.1 A quick look at SAP
SAP is the administrative system used by Medtronic. Almost everything that has a financial value is recorded within this system. SAP is a form of an ERP-system. ERP-system stands for Enterprise Resource Planning system. ERP-systems are systems used for collecting and processing daily transactions and support processes on an operational level (Vaasen, Bollen, Hartmann, Meuwissen, & Vluggen, 2005). SAP is needed for most of the activities performed by the ICIP team and other financial teams in the FSSC. Here is a list of transactions in SAP used for my activities:
MIRO: Used for invoicing on the accounts payable position by using purchase orders.
FBL1N: Shows an overview of the accounts payable position.
FBL3N: Shows an overview of different general ledger accounts like Goods in Transit and Credits in Process.
FBL5N: Shows an overview of the accounts receivable position.
F-44: Used for clearing an invoice.
MR8M: Used for reversing an invoice.
ME23N: Used to look up a purchase order.
ME2N: Shows an overview of open purchase orders per manufacturer.
MR11: Used for goods received/invoice received maintenance.
MB5S: Used to look up open materials.
MM03: Used for showing basic data about a material.
VK13: Shows the markup-percentage for materials.
2KEE: Shows an overview of Purchase Price Variances per manufacturer.
Most FSSC departments depend on SAP and cannot perform their activities when the system goes down.
4.2 My Activities
My activities during my stay at Medtronic can be divided into four categories;
Reconciling sales schedules with the accounts payable.
Purchase Price Variances.
Goods in Transit/Credits in Process SOX scorecards and Israel.
Other monthly activities.
These activities take place during each month, some at a weekly basis and some at a monthly basis. My first task consisted of reconciling sales schedules with the accounts payable. After I got a feeling for the process and SAP my activities were expanded. We made an activity schedule in which all activities were explained and when they were supposed to be added to my current activities. Purchase Price Variances, GIT/CIP scorecards, GIT/CIP SMO, disputed items and some more entities to reconcile were added that moment.
4.2.1 Reconciling accounts receivable with the accounts payable position
Reconciling sales schedules with the accounts payable position was my first intern activity. Medtronic has a lot of different entities which can be divided into two groups when looking from a SAP perspective. There are the non-SAP entities which of course do not use SAP and the SAP entities that use SAP.
The invoices from the SAP entities are booked with an automatic batch. There should be no problem with these entities because the SAP data from one of the entities can be matched against the SAP data from the other entity. This does not give a fail proof guarantee but mistakes are at a minimum. Another team member of the ICIP team who also is responsible for billing tries to solve these few errors made in the automatic process. My responsibility for the SAP to SAP entities is reconciling the automatic booked items and reporting errors to this team member so she can take a look at them and try to solve the issues.
This process is fairly easy; first two data outputs need to be compared with each other. The data required can be found in SAP. The two data required are data from the vendor perspective also called accounts payable and data from the customer perspective also called accounts receivable, these two should match but this is not always the case.
The comparing of AP and AR happens by exporting the data from these two out of SAP and then by checking the two totals. Medtronic uses dollars as their general currency so this is the currency in which these two transactions are compared.
If the two transactions do not match, both files have to be exported into an excel file where all lines are compared using pivot-tables. The for example -7,523.95$ in the accounts payable position has to be matched against 7,523.95$ in accounts receivable position. Lines which do not match are gathered and put in a file which will be send to the other ICIP member so she can look into these mismatches. This is done on a biweekly basis because this is a time consuming process and there are not enough problems to make it worth to check them every day.
The invoices from the non-SAP entities need some more work. These entities, as the name already suggest, do not work with SAP. Medtronic is trying to implement SAP in every entity but some entities are added by taking over smaller companies. Medtronic cannot force these companies to immediately switch to SAP. The long term vision is to have all Medtronic entities on SAP but this will never completely happen if Medtronic continues to take over companies. The problem between the SAP entities and non-SAP entities is created when they are communicating data with each other. There are different batches for every non-SAP entity which try to book as many invoices possible automatically. This has to be done for each non-SAP entity because all the data is provided in different manners. Unfortunately not all invoices are booked by these batches and this is where my work begins.
The non-SAP companies send the ICIP team a sales schedule on a weekly or daily basis. These schedules contain all the invoices for that month up till that date. These schedules are provided in an excel file but again the problem jumps up that all the data is provided in a different way. The data is extracted from the system the non-SAP company is using and is pasted in the excel file which leads to different layouts per entity. There is a reconsolidation file per entity to check if all the invoices have been correctly booked by the batch. The sales schedules are pasted into these reconciliation files and are matched against accounts payable to see if all invoices match.
The process of reconciling sales schedules with the accounts payable position for the non-SAP entities can be described as follows.
Figure 9 Reconciliation file
Three sorts of data are needed: the sales schedule, the accounts payable which contains the invoices booked in SAP and all open purchase orders. This data is combined and all three have a different pivot-table.
The purpose of this file is to compare the invoices booked within SAP to the invoices that should have been booked. This is done by comparing the data from the accounts payable with the data from the sales schedule and can give us three different outcomes. In the reconciliation file, seen in figure 9, the invoice number in the right pivot is given a specific color. This is done by a formula comparing the data from the accounts payable with the data from the sales schedules. If the invoice number is marked green, the invoice from the sales schedule and the invoice in AP match. This means that the batch did its job and no further actions are needed. If the invoice number is marked red, the invoice from the sales schedule has been booked but not in the correct way and needs to be manually corrected. If the invoice is still white after updating the pivot-tables, the invoice has not been booked within SAP and needs to be booked manually.
There can be multiple issues causing the invoice not to be booked or not to be booked correctly. These causes need to be solved during the month and after month close an IDD-file needs to be filled out explaining what went wrong with the automatic batch bookings. The IDD-file will be explained later.
The theory about incorrect journal entries states that "Had - Is = Correction". What has been booked? And what had to be booked? The difference should be the correction journal entry (Fuch & Vlimmeren, 2009). Medtronic does not necessary choose for this approach. When the invoice is booked incorrectly there are two choices, reverse the entire invoice and book the invoice again or try to locate the problem and make an extra booking to correct it. Depending on the situation one of these solutions is chosen. The choice mostly depends on the amount of goods already booked and the traceability of the missing amounts. In some cases a material or purchase order cannot be found and the material gets disputed. The disputed items will also be explained further on. Most entities have the same problems over and over again so solving them is not that hard. For example a material has not been booked. In order to find the right material number the matching quantity, price and material description need to be found in the open purchase orders extracted from SAP. When in another case the purchase order is known but the material is not known, an extraction of outstanding materials is needed. The matching quantity, price and material description need to be found within these outstanding materials to locate the right purchase order. In some cases the tax code is not entered correctly and this causes changes between prices. In these cases the invoice needs to be reversed. The lines created by the invoice and the lines created by the reversal need to be cleared against each other.
The remaining invoices which were not booked by the batch need to be booked manually. In most cases the invoice can be booked without trouble. In the other cases the same methods as mentioned above can be used to locate the correct data.
At month end all invoices need to be invoiced correctly and the pivot-table should be completely green. If for some reason these invoices cannot be booked entirely the remaining materials will be included in the disputed items file. These disputed items create a difference at month end. This difference is booked at month end and reversed in the next month.
Sometimes not all invoices can be booked completely during a month. This is because a material or multiple cannot be found on a PO or the PO cannot be found in the system. These items cannot just remain open because this will lead to Out of Balances and are therefore booked under disputed items. At month end these disputed items, all transactions booked automatically and manually at AP side should match the AR side of the trading partner. The items which end up as disputed should be copied from the sales schedule and collected in disputed file per manufacturer. This activity had been neglected the past few months and it was my responsibility to try and match the amount booked on disputed items against items from the sales schedule.
The IDD-file is used for creating an overview of correctly, incorrectly and not booked invoices by the automatic booking process for the Non-SAP entities. After each month this file is filled out and incorrect and not booked invoices are analyzed. There are multiple causes for failures during the automatic booking and these should be identified in the IDD file.
Once all causes have been found, or the file at least has been updated for as far possible, the file is reviewed by the ICIP team member responsible for the automatic booking batch. She looks for recurring issues and if needed she adapts the batch to these issues.
4.2.2 Purchase Price Variances
Figure 10 PPV overview in SAPSolving PPV (Purchase Price Variances) requires a bit more work than the activity mentioned on the last page. PPV is caused by differences between the transfer price in SAP and the transfer price of the vendor. PPV can have multiple causes and need to be checked during the month. At month end PPV should be at an acceptable level, which differs per manufacturer, or there should be a special reason causing the PPV. During my internship I was responsible for the PPV of the entity Minimed. On the right in figure 10 the current state of PPV is shown. The amount of PPV will almost never be zero because of rounding differences; solving these would be time consuming and will not make a large difference. That is why a threshold of $1000 has been set up. Everything below this threshold is ineffective and is written off at the end of the month.
The Purchase Price Variances of Medtronic are comparable to the Purchase Price Variances theory from (Fuchs & Vlimmeren, 2009). The theory shows that PPV is normally caused by differences between the fixed transfer price and the price actually billed. Transfer prices are fixed for a year in most companies and this also is the case at Medtronic. A positive PPV is created when a lower price than the fixed transfer price is billed. A negative PPV is will be created when a higher price is billed than the fixed transfer price. The theory about PPV also says that the fixed transfer price is created by estimating the average price used during the upcoming year.
Medtronic has some differences to the theory. The fixed prices used by Medtronic are not an estimation of the average prices but are communicated with the manufacturer at the beginning of the year. These prices set by the manufacturer are used in SAP and should match the prices of the goods that are billed. The creation of PPV is in theory quite normal because the fixed price and actual price do not need to match. In Medtronic's case they do have to match because these are the prices agreed on. PPV created at Medtronic is the cause of a mistake and not the cause of a price that does not match to the average price.
The data with the outstanding PPV from SAP needs to be imported into excel. The excel file with all the PPV differences looks like figure 11. Using the program Business Explorer Analyzer, the data from SAP can be imported directly into the excel file. This is quite useful for updating the file and showing the newly caused PPV differences. This file contains a lot of information but the most important data is: the purchase document, the material number, the PPV amount and the material group for finding further information.
Figure 11 PPV overview in excel-file
The amount of PPV is filtered using a range of greater than $1000 or less than -$1000. PPV causes can be split into two main reasons: a difference in the labor, burden, and material price (LBM) or a difference in the mark-up percentage (MU%). We use the following journal entries during the PPV process.
Figure 12 The different journal entries
The easiest to solve PPV differences are caused by an incorrect booking at the invoice receipt account. In most cases this is a manual booking and an incorrect quantity or price is causing the PPV. Reversing the invoice and rebooking it should clear the PPV. In other cases an analysis of the LBM and MU% is needed. When goods are receipt LBM will be booked on the inventory account. The inventory profit account represents the MU% according to SAP. The Goods in Transit account should be the multiplication of the LBM and the MU%.
The amounts on the inventory and inventory profit accounts should be checked and matched with the amounts of the correct LBM and MU%. I have made the following schedule where the amount that should have been booked is compared with the amount that has been booked.
to be goods receipt
has been goods receipt
has been invoiced
to be invoiced
Medtronic USA Inc
IC credits in prog
Figure 13 PPV comparing schedule
In the example in figure 13 the MU% is causing most of the PPV difference and should be corrected. When a difference on the inventory account is causing the PPV, the vendor is using a different LBM. This happens a lot at the beginning of the fiscal years because prices change at these moments. The changes at the beginning of a fiscal year can also have an impact on the MU% for the same reason.
After all the items are analyzed and the causes have been identified, it is time to book the items so the PPV amount drops. MU% differences will be booked to account 5018900 (Other Product Cost - I/C Profit) and LBM differences will be booked to account 5299900 (Revaluation Variance-manual). The journal entries for these bookings need to be inspected by the manager and after they are approved or corrected the journal entries can be booked.
4.2.3 Goods in Transit/Credits in Process SOX-scorecards and Israel
At the beginning of each month the ICIP team has to fill out SOX-scorecards for some of the entities. These scorecards show all open items concerning Goods in Transit (GIT) and Credits in Process (CIP).
These scorecards have to be filled out to meet the Sarbanes-Oxley Act. This act is an United States federal law that sets enhanced standards for all U.S. public company boards, management and public accounting firms. When applying this act to the GIT/CIP balances, a standard is set and needs to be controlled. GIT/CIP transactions are not allowed to surpass the threshold of 180 days and the total amount above 90 days is not allowed to be more than 1% of the total balance. These GIT/CIP balances are checked every month and transactions which are going to reach the 90 days are solved or investigated.
The SOX-scorecard can be compared to a part of the balanced scorecard. The theory of the balanced scorecard can be found in (Horngren, Sundem, Stratton, Burgstahler, & Schatzberg, 2011). A balanced scorecard is used to view the organization from four perspectives, to develop metrics, to collect data and to analyze it. These perspectives are: the learning & growth perspective, the internal business process perspective, the customer perspective, and the financial perspective. The SOX-scorecard can be compared to the internal business perspective in a balanced scorecard. This perspective shows managers how good their department is preforming and which kind of things are causing issues. This increase in measurement of the performance is an important issue in the SOX-Act. The performance is only measurable if there are specific critical success factors. These factors are elements which managers must achieve in order to achieve the company's mission. Critical success factors need another measurement tool to tell if they fulfill to their expectances, these are called key performance indicators.
The rules of the balanced scorecard applied to the SOX-scorecard give four questions that need to be answered. What perspective is Medtronic looking at? What is the critical success factor? What is the key performance indictor? What target does Medtronic want to reach?
Perspective = How are the Goods in Transit and Credits in Process accounts composed.
Critical success factor = Goods in Transit/Credits in Process accounts.
Key performance indicator = The SOX-scorecard shows the aging of the items on both accounts.
Target = Items are not allowed to surpass the threshold of 180 days and the total amount above 90 days is not allowed to be more than 1% of the total balance.
Following these four questions will lead to a better overview of the GIT/CIP-balances and increases measurement of these balances. The GIT/CIP-balances are implemented in the SOX-scorecards using the following steps.
At the end of each fiscal month a review of the GIT/CIP balances per manufacturer is looked up in SAP. These balances are exported from SAP and are divided into two categories; manual post accounts and automatic post accounts. Manual post accounts consist of corrections and etc. while the automatic post accounts consist of the actual goods receipts and invoiced receipts. These automatic post accounts are the transactions which are being investigated each month and have the thresholds as mentioned above.
Once the balances have been exported from SAP and divided into the different categories in the excel-file the actual process starts. The transactions are separated per fiscal month and this shows the transactions in reach of the 90 days threshold and If there are any transactions above this threshold. All open purchase orders for the manufacturer are exported from SAP and are placed in a special excel-file which shows why the purchase orders are still open by using different formulas. There are five different possibilities why the PO remains open: an overshipment, an undershipment, goods receipt without invoice receipt, invoice receipt without goods receipt and a timing issue. The last reason is not shown by the excel-file and need to be filled out manually. These timing issues are caused by the time it requires to ship or transport a product or the time it takes to make the invoice. Because the date on which the invoice is receipt and the date on which the goods are receipt are not the same the transactions are included in the GIT/CIP balances. The timing issues should solve themselves the next month or in some cases the month after but cannot remain open any longer. After that period a reason why the transaction still stands open should be visible. The data with the reasons why a transaction still stands open is copied to the excel-file containing the GIT/CIP balances and via formulas is matched with the correct transaction. This shows the reasons why the transactions above 90 days or near 90 days are still open and gives the opportunity to solve them.
Before the issues can be looked in however a summary has to be made showing the balances from the previous month. This summary is the actual scorecard.
Figure 14 SOX-scorecard GIT
As shown in figure 14, the automatic transactions are divided into 4 time categories: transactions under 30 days, between 30 and 60 days, between 60 and 90 days and larger than 90 days. In some files a fifth time category is added which is larger than 180 days but these transactions should not exist anymore. The manual post accounts are divided between profit elementary entries and other entries. The totals per time category for automatic post accounts are easily traced by using a pivot table and copying these totals to the scorecard. After filling out the scorecard a final check is done by comparing the totals with SAP. When everything matches the data in SAP, the file is saved and checked afterwards by the ICIP supervisor.
Solving the issues above 90 days for Israel
The transactions above 90 days need to be solved and require individual investigation. There were four reasons why these transactions could still be open: overshipment, undershipment, goods receipt without invoice receipt and invoice receipt without goods receipt. In some cases GIT and CIP can be matched against each other and the difference can be cleared. But this is not the case in most cases. Each material is looked up and sometimes the problem can be found in the open PO. A material has been wrongly booked causing one material to have an overshipment and the other an undershipment or the invoice has been booked twice. The items remaining need some more effort. These items are divided into 3 categories; one which is communicated to the manufacturer and two which are communicated to the contact of the concerning manufacturer.
The manufacturer receives a list of open items which are concerned to be scrap material which have very low prices and for example consist of spare or replacement parts. These materials remain open because there is no invoice for them and after the manufacturer approves, these materials are written off.
The contact for the manufacturer receives two lists; one containing items which are expected to never be received again and another list with items which need to be checked by supply chain. The items communicated back to supply chain mostly concern items with an undershipment or goods receipt without invoice receipt. This is for example caused when supply chain receipts 39 goods while 40 have been ordered. Supply chain closes the PO because they expect this last good to never be received again but they do not think of the financial problems this causes. The good remains open and turns up on the scorecard. Sometimes a good has been booked twice and causes an overshipment. The other list contains items which are probably going to be written off after the contact approves.
Solving the items is not an easy process because there is no standard way of solving them. Each month brings different problems and a lot of communication with local finance is needed.
4.2.4 Other monthly activities
During the internship there were many different activities that did not reoccur every week or month but did show up once or twice. Most of these activities concern solving problems which are provided via e-mail.
One of issues was a problem with booking goods receipt. They were not able to book goods receipt while invoice receipt was already booked. The solution to this problem was temporarily reversing the invoice receipt so goods receipt could be booked. After goods receipt was booked a signal was given and the reversal could be undone.
Another example was when goods receipt could not be booked because a warning about creating PPV was given. This was the first time they received this warning and reversing the invoice did not solve the problem. It turned out that the PO had been manually changed and the price for the material had been changed to a very low price. Booking the goods receipt for the correct price would cause a very large PPV due to the difference between these prices and the large quantity. The PO was corrected and the PPV issue was solved.
Medtronic sold Physiocontrol and during my internship the administration for this company was slowly being passed on to Physiocontrol herself. This caused a lot of problems and constant communication with Physiocontrol. Physiocontrol was writing off PO which would not be paid anymore and therefore communication with ICIP was needed. Open PO's needed to be communicated to Physiocontrol and some items needed to be reversed because of an wrong delivery.
5. Recommendations for improvements
In this part of the internship report a closer look will be taken at some recommendations for improvements or issues that caught my attention while preforming my activities. During my internship I gave a presentation about some ideas and challenges (Debije, 2013) in which some of these ideas already were discussed with my fellow colleagues. The chapter first names the problem or issue encountered per activity and gives a recommendation or idea for every one of these problems/issues.
Recommendations for reconciling accounts receivable with the accounts payable position
There were some issues which caught the attention:
Sales schedules are provided in different manners.
Automatic bookings often have the same failures.
The same manufacturer often encounters the same issues.
Manufacturers provide the schedules relatively late.
Sales schedules are provided in different manners
Every non-SAP manufacturer provides their sales schedule in a different manner depending on the output their system gives. This causes some extra actions for the ICIP team to perform. Some of the sales schedules need to be adapted so that the schedule can be processed. The ideal situation would be when all manufacturers would fill out a standard sales schedule. This remains an impossible goal as long as these manufacturers keep using different systems. Once the manufacturers switch to SAP the sales schedules are no longer required and this activity completely disappears. This however will never happen as long as Medtronic continues to buy new companies with different systems. The standard sales schedule will therefore remain impossible until Medtronic stops growing.
Automatic bookings often have the same failures
The IDD-file helps to find problems with the automatic bookings. This file already is looking at the problems with the automatic bookings and does not require any improvement. The file just needs to be kept up-to-date and failures should be solved.
The same manufacturer often encounters the same issues
There are multiple issues which can cause a failure from the automatic batch. Some of these failures keep coming back at a certain manufacturer. Minimed is one of these manufacturers. The issue with Minimed is that the same materials keep missing a material number or PO number. This causes the batch to fail and the numbers have to be found manually before the invoice can be booked. A solution to this problem is creating lists of materials which always cause problems while booking invoices. These lists should be communicated back to the manufacturers.
Manufacturers provide the schedules relatively late
At month end Medtronic always has its month close. During these days all remaining invoices need to be booked and AP and AR should match or the difference should be equal to disputed items. The sooner the sales schedules are received, the sooner the close can end. Some manufacturers were quite late with providing their schedule and this delayed the close process. During a ICIP meeting the decision was made to implement deadlines for providing the sales schedules. The deadlines were: closing day minus two for the preliminary schedules and closing day plus one for the final schedules while looking at the different time zones.
Ideas for Purchase Price variances
Purchase Price Variances do not really have any issues; this process has been taken under the loop in the period before my internship. Some issues still encountered were:
Price changes at the new fiscal year.
Minimed had an extremely large amount of PPV in October.
Price changes at the new fiscal year
This is a one time problem per year and is already prevented as much as possible. Each fiscal year end the manufacturers provide their prices and these are imported into SAP. Sometimes old prices are used by mistake and cause a PPV difference. During the fiscal year there is nothing more to do than pro-actively check and control the PPV balances at the end of each fiscal month.
Minimed had an extremely large amount of PPV in October
The Minimed PPV was caused by a quantity difference between the sales schedule and pivot. The quantity did not match the correct quantity when there were two materials for the same price and quantity on the same invoice. The pivot would take the quantity of one of the materials and the price for both causing PPV while booking this invoice. The reconciliation file has been updated to solve this problem. Data from the sales schedules and pivots is now automatically being checked for differences.
Ideas for Goods in Transit/ Credits in Progress SOX scorecards and Israel
The GIT/CIP balances have seen much attention during my internship at Medtronic but there still remain some issues.
A lot of scrap items are causing balances.
Some items partially or completely clear each other but remain in the GIT-CIP file.
Manual bookings from years ago remain on the scorecard.
A lot of scrap items are causing balances
The scrap items on the GIT/CIP balances do not form a very large amount due to their low prices but together they can form quite an amount. These scrap materials almost never get invoiced and remain on the balance until they reach the 90 days threshold. Writing off scrap items once they enter the 60 - 90 days period could be an option to solve this problem. They could be written off in an earlier