Deduction Management-Best Practices for Shipment Shortages
January 27, 2017
Reducing Shipment Shortages
Shipment shortages and damages are age-old problems that dilute manufacturer profits by as much as 1/2 to1 percent of gross sales, a loss that can be reduced by taking common sense steps. Shortage deductions are caused by errors in the shipper’s warehouse, by transportation carriers, and at customer receiving docks, incidences which include pilferage and miscounts. Regardless of the cause, it amounts to a lot of “revenue leakage” and paperwork, and there is no question that it can be reduced with proactive management.
Frequently, these deductions languish until they are stale and hard or difficult to figure out. Many are considered too small to spend any time on. The result is usually a write-off and loss of profit.
As with other types of customer deductions, investigation will prove some shortage deductions to be overstated or even completely incorrect. Plus, unless you investigate and uncover the cause, how can you correct a systemic problem that will continue to cause the revenue losses? Or, perhaps identify a trucker or customer that has their own systemic problems, who then will continue forever deducting for excessive shortages due to miscounts or misinterpretations in receiving? Most of these shipment shortages are preventable with proactive steps that we have outlined below for you to consider.
Benchmark Shortage Deductions
Begin by comparing shortage deduction experience ratios by possible error source, and track them by customer. Gather the prior year’s statistics for major customers, distribution center locations, transportation carriers, manufacturers and customer receiving center locations.
Keep accurate records of shortages for all customers. If your accounts receivable system can accommodate it, differentiate between case shortages, concealed shortages, and shipper load and count, using specific reason codes. Over time, you may find that one customer may be claiming 3% for concealed shortages, Vs. your company’s overall experience of 0.05%, which might mean they have systemic process errors, or even intentional abuse. You can recoup the excess deducted if you have solid data, and this data will also be invaluable when your sales department negotiates next year’s price contract.
Establish a Shipping Dock Audit Function
A Shipping Audit Function will prevent shipping errors and combat unjustified deductions, and help identify customers that abuse customer shortage claims. You can use the results to disprove or verify claims for damages, improper placement of bar codes, improper packing, etc. This will target the customers that are most frequently taking these deductions, based on your examination of the data discussed above.
To combat concealed shortage deductions, you can take these steps. Use printed security tape, photograph unsealed and sealed cartons before they leave your dock. This also helps with vendor compliance claims (which by themselves could amount to one percent or more of revenues), such as for labeling or marking “errors”. Check that scales are accurately calibrated, and shrink-wrap, weigh and photograph pallets too. In the event of trucker-carrier claims, having the packing evidence eliminates the arguments over who is at fault, and will assure quicker freight claims processing and payment.
Inside Carton Shortages
A frequent source of in-carton “shortages” is when you are billing “eaches” in a pack of 12, say, and the customer receiving picks it up as one item (vs 12) received. This is an “education” and “communication” issue with your customer and is easy to fix. Depending on the relationship you have with your customer either your sales rep or yourself must communicate the issue with the customer’s buyer or receiving department.
Shippers Load and Count
For Shippers Load and Count, have two shipping personnel sign off on the contents as they are loaded, and take photographs of the pallets as they go on, and then a photo of the loaded trailer before the doors close. Better yet, invest in a video camera to record the loading. It’s a small price to pay for protection for a high value shipment, especially when you have a history of problems.
Knowing your customers, as well as how they do business will ensure greater success in your efforts to stop this money-wasting problem. Visit the offending customers, review their receiving operations, and show your evidence from the statistics and audit process. If you have the evidence, they will most likely improve their practices and pay you back.
Solving shipment shortages is a relatively straightforward business problem to address once you have supporting numbers, understand the causes, and take some dock-side precautions. It also does not require a lot of overhead or expense. Just follow these proactive, commonsense steps, and a small investment will pay off handsomely by increased profits for your company.