Defined by us back in the 1980s, but still accurate today, deductions can be categorized as follows:
- Agreed Business Practices, where deductions are the chosen settlement and reimbursement vehicle such as promotional pricing allowances, co-op advertising, markdowns, coupons, and the like.
- Preventable Deductions, such as poorly communicated price data, slow credit memo issuance, misinterpreted promotions, compliance violations, conflict in terms and conditions or processing errors in order entry, shipping, billing, etc.
- Unauthorized or Excessive, such as unearned discounts, duplicate or excessive deductions, post-audit claims or customer process errors and (occasionally) intentional abuse.
Suppliers need to place the greatest emphasis on preventable deductions, over which they have the most immediate control.
It’s easy to feel the victim and blame your customer on using deductions as a profit line item, but it needs to be acknowledged that the root of most deductions goes back to internal supplier failures of one sort or another, and industry practices.
Non-compliant supplier shipments cost their retail customers hundreds of millions of dollars in unnecessary processing and rework. It is common today for retailers to rate their suppliers using “Supplier Scorecards” which measure order fulfillment percentages, EDI compliance, on time delivery, packaging, proper labeling, etc.
Looking at it from another angle, more deductions means a worse supplier score, which will ultimately have an effect on the relationship. You can request a copy of your scorecard, and see what your customer’s perception is, and get some actionable take-aways in the process.
A Simple Action Plan
The entire revenue cycle needs be examined from order entry to cash collection to find the delays, error prone areas, extra hand-offs and paper shuffling. This will free up both cash flow and resources.
Internally, you start with auditing and benchmarking your company’s operation. Issues will often be found not where you expect, but also where you inspect. You can start by analyzing deduction experiences by type, customer, amount, etc., to pinpoint trends and identify problems.
- Establish a continuous claims tracking process to identify breakdowns and root causes.
- Review the agreements with your top customers, and resolve the differences.
- Have clear invoice forms. They only have a minute or two to check your invoice.
- Pre-edit orders for price and terms where you can.
- Establish a system to manage customer compliance requirements.
- Visit your customers, meet their people and learn their practices and policies.
- Send product, pricing and promotion information to the right people.
- Record special sales deals, something always talked about, often not done.
- Make sure that your procedures and processes match your customer needs.
- Understand the format in which each customer wishes to see your collection reconciliation, statement or documents.
- Start collecting sooner and you are more likely to get paid in full.
Taking a few steps to focus on this problem can pay big dividends for your company. You can be a hero by reducing deductions and increasing profits.