GPI 323 – Analyze customer debit memos to see what has perturbed your customers enough to bill you for it.

Ask your accounts receivable department to gather all of the debit memos they received during the month from all customers.  They might not be formal debit memos but simple emails explaining why customers paid less than that on the invoice. You need to see how you failed in a number of ways in your organization.

Ask for all payment shortages.  Make sure to tell the people who apply cash to give you all the chargebacks (reductions to payments) including formal debit memos.  These reductions in incoming cash come in all types of forms.  You might also ask the billings clerk to give you a complete listing of all credits issued to customers (the action necessary to address and correct the accounts receivable aging when a customer short pays your company.

Debit Memos indicate your system failed at the customer’s site:

• Original Customer Error. You made a product per the customer’s blueprints which were submitted to you with errors. You made the parts as the prints described. The finished product you shipped met the requirements of the customer’s specifications. The prints sent by your customer were the right product but the wrong revision. Your firm should not issue a credit memo unless decided by your sales department. The billings clerk only writes off the charge once approved by your representative. That salesperson should negotiate a credit to the customer in exchange for a much larger sales order carrying a healthy gross profit.
• Production Failure. Your production failed by making a batch of bad parts. The operator either did not know it, did not catch it, did not know how to detect this failed part or was told to ship it anyway because the shipment was late and the truck driver had little patience.
• Quality Control Slip. Your quality control technician failed to find an assembly mistake that was large enough that the customer noticed and demanded money back.  Who failed in your firm? Your QC department does not know about this because the part did not come back. Sometimes freight is too high to demand return of failed parts.
• External Freight Company Problem. Your delivery company damaged the goods on the way and no one has been tracking chargebacks due to delivery company problems.
• Shipping Oversight. Your shipping department did not catch the problem when the product got wrapped up, put on a pallet and dropped haphazardly onto a truck.
• Internal Freight Driver. Your untrained driver did not detect any problem when picking it up or dropping it off. Some experienced company drivers know the products and some do not.  Yours did not notice because he was paying far too much attention to the female clerk in the customer’s receiving office.
• Troublesome Customer. You have a customer who consistently has problems. He is well known for charging you back, guessing you will not demand return of the items. When this is suspected, arrange for your sales representative to make a visit and ensure himself there are indeed problems with your products, the parts cannot be repaired, the damage truly stemmed from your facility and not from the freight company or from the customer.