KamLibrary - Deductions, an Opportunity for All?

Given that deductions can represent 7-10% of a supplier’s sales, and as net margins continue to fall, then any improvement will not only have a significant impact upon cashflow and profitability, but will also have a major impact upon the equivalent incremental sales-profit relationship.

For instance, a supplier making 6% net profit before tax, on a sales turnover of £50m, reducing deductions by £1m will impact the bottom line with the equivalent of an incremental sales increase of over £16m…a 32% uplift in sales!

Moreover, apart from the obvious financial benefits, the process of deductions improvement can help in addressing and ensuring trade compliance, reducing preventable deductions and also assist in keeping unauthorised deductions to a minimum.

Essentially, the management of deductions is complicated by the lack of direct ownership, in that departments such as sales, marketing, logistics, category management and finance all have an influence in terms of cause and effect upon the level of deductions made by customers. Despite the fact that many deductions are preventable, deduction resolution is still regarded as a low status, ‘negative’ activity and in a time of cut-backs, tends to be under-resourced in terms of people, systems-support and relevant information.

A cursory analysis will reveal that deductions fall into three categories:

- Authorised deductions, including pre-negotiated allowances for ordering, shipment, advertising and performance-related rebates and discounts often related to increasingly complex promotional activities. As with other deductions, speed of resolution, based upon timely transfer of deal details from sales to the finance department can help in authorising, expensing and processing the deduction.

- Preventable deductions arising from process ‘disconnects’ and compliance breaches between supplier and customer systems such as incorrect deliveries in terms of SKUs, pallet configuration, pricing discrepancies, deadlines and defects in supplier-compliance. Moreover, the very complexity of multilevel/multifunctional relationships between trade partners can add to the problem.

- Unauthorised deductions arising from the customer’s wish to retain cash, and find excuses to delay and even avoid payment, especially to suppliers who tend to write off small payment shortfalls. Along with returns and incorrect pricing/discounts, these can include deliveries of the wrong SKU, sometimes booked as shortages, without crediting receipt of the incorrect item.

Suppliers have most to gain by focusing upon reducing preventable deductions, and given that these are mainly caused by the supplier’s ability to adhere to the retailer’s compliance process, the solution lies in the supplier’s willingness to tailor their systems ‘front-end’ to the customer’s requirements, a given with invest-level trade partners committed to joint value creation. Also, given their overall responsibility for the entire multilevel-multifunctional supplier-customer relationship, it is obvious that the NAM should be regarded as a key driver in fusing the often disparate parts of the interface.

Essentially, this means leading the search for incompatibilities that cause ‘disconnects’ between the two companies’ systems, selling the solutions in terms of compliance KPIs internally and externally, and incorporating these within overall trade strategies and annual negotiated settlements between the parties.

A key payoff resulting from faster deduction resolution for the NAM will be the ability to set promotion strategies based upon real-time performance feedback. As a result, all departments will benefit from better integration within realistic trade strategies that use supply-side and demand-side joint KPIs to move the business forward with greater degrees of transparency and defensibility. At a higher level, there is a need for board members of supplier and retailer organisations to drive compliance standards across the trade and facilitate the communication and acknowledgement of customer compliance requirements within their companies.

Finally, given that most deductions queries are cleared in favour of the customer, it is hopefully obvious that deductions also represent a major opportunity for retailers to ensure supplier compliance and grow their bottom line at the expense of less organised suppliers distracted by other, more exciting priorities….

Date article published: September 2008

For KamTips on 'Deduction Reduction…' see Namnews – September 2008

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