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Customer Deductions- A Plague on Profits

 

The impact of deductions varies considerably by industry, with the most basic industries having the lowest percentage of deductions, and those having the most promotions or complex supply chains the highest percentage.  The high dilution businesses often “plan” to incur deductions in excess of 10% or even more for heavy promotional and advertising bill-back expenses, or the return of unsold seasonal product.  Deduction causes also vary by industry: for example, compliance violations run rampant in the apparel industry, slotting fees in the grocery industry, and price protection and rebates in technology and elsewhere.   Here are a few of the industry issues.

  • The shift to “go to market planning”, push marketing, with discounts and incentives built into the invoice cost result in bill-back deductions.
  • The trend towards electronic vs. paper transactions has streamlined but also complicated processes and created more error and non-compliance opportunities.
  • Need for fast delivery sometimes conflicts with following through on order editing and shipping notifications.  
  • Complex promotional and increasingly complex pricing matrices.
  • Third party sales partners such as brokers and the subsequent division of information, and complexity, have benefited accounts payable post-auditors but not the suppliers.
  • Most teams responsible for deduction resolution have little or no insight into upcoming or proposed promotional events. Absence of cross-functional collaboration and timely access to information are frequently cited as problems.
  • Communication of price or policy changes needs to be improved. A major pharmaceutical company recently discovered that change notices were not reaching the right people at its largest customer, and in turn was exposed to over $500,000 in pricing losses in 60 days.

In the consumer goods industry, using deductions as the preferred method for paying promotional dollars has become institutionalized in business processes.  This practice allows the customer to settle claims immediately. Unfortunately, being on the receiving end puts the burden of proof squarely on the supplier to document, research and resolve the deduction.

What this means is the supplier must investigate all deductions to sort the valid (85%+-) from the invalid or overstated claims (15%+-) so they can keep their marketing budgets and customer profitability analyses straight. The invalid or excessive claims still need to be researched and collected.  If not done, the supplier will relinquish significant profits.  If invalid deductions are expertly handled, a $500 million company can add up to $7.5 million to the bottom line.
Regardless of industry, deduction resolution takes concerted effort and a lot of labor by a number of departments, including customer service, sales, finance, accounting, logistics, and IT. It represents a significant part of a company’s SG&A expense.