In this article, learn about:
Where deductions come from, and how to manage them
Best practices for preventing deductions before they happen
Get Paid. Get Better.
Deductions can be an overwhelming aspect of working in the supply chain industry. Working with multiple retailers, receiving multiple vague deductions on each invoice, being unsure when and how to dispute, and receiving repeated dispute denials can result in lost money and time for suppliers.
But it doesn’t have to be that way! From reassessing their dispute process, to digging into the foundational “why” of deductions, suppliers can streamline their processes by focusing on prevention and revenue recovery.
A quick note: We are using the term deduction here to refer to any reasons given by the retailer for not paying the invoice in full. This differs from the terms chargeback and fine, which, while sometimes used interchangeably with deduction, are more often used to refer to charges issued by the retailer after the invoice is paid.
Valid Versus Invalid Deductions
Preventing deductions starts with determining the validity of the deduction.
A valid deduction is one that is imposed due to an error made on the supplier side. For example, if a supplier failing to adhere to one or more of a retailer’s compliance expectations for packaging or labeling. A valid deduction may also fall under allowances, which are predetermined deductions agreed to by both supplier and retailer.
An invalid deduction is one that is imposed by the retailer in error. For example, a retailer might impose a deduction on a supplier for a short shipment because the amount received does not match the amount listed on the purchase order (PO). However, the amount received was due to a subsequent agreed-upon adjustment that was established via the PO acknowledgement.
For invalid deductions, a supplier should dispute. For valid deductions, a supplier should focus on budgeting and prevention.
Planned Deductions
Planned deductions can be both valid and invalid. When valid deductions are planned, they are typically called allowances. Allowances are terms agreed to by both supplier and retailer that show up as deductions on the invoice. Generally, allowances come from promotions.
Planned invalid deductions are rare, but they do happen and should be disputed. For example, a supplier could remove the cost of an allowance from an invoice before sending it to the retailer. If the retailer sends a check to the supplier with the allowance deducted from the total (effectively charging the supplier twice for the same allowance), that would be an invalid deduction that is planned.
Unplanned Deductions
Unplanned valid deductions are usually related to compliance issues. For example, a supplier may accidentally mislabel product packaging, resulting in an unscannable barcode. As the product makes its way through the system, this would be noted and would result in a deduction on the final invoice.
Invalid unplanned deductions are imposed by the retailer on the supplier in error. An example of an invalid unplanned deduction would be when a retailer claims a shipment is short when it was actually sent in full. These errors can occur due to system errors, among other things, and should be disputed.
Disputing Invalid Deductions
Disputing deductions—both planned and unplanned—will look different for each retailer; however, there are several commonalities.
First, suppliers should keep all documentation well organized and easily accessible. Common documents that are helpful for a successful dispute are:
Copy of purchase order (PO)
Copy of invoice
Copy of packing list
Other shipment records: scans, carrier logs, time stamps, etc.
Emails or photos as necessary
Second, suppliers should know their retailers’ timelines for disputing. Some retailers will have shorter timelines than others.
Third, suppliers should understand both how a retailer wants a dispute submitted (e.g., by email or via the vendor portal) and which deductions can be disputed. Some deductions are not disputable.
Finally, suppliers should know what their options are for redisputing if a dispute is initially denied by the retailer.
Supplier Checklist for Deduction Prevention
As suppliers seek to streamline their deduction management systems, there are some questions they should ask to help create new processes:
Do Accounts Receivable Teams Know How to Dispute Deductions in a Retailer’s Portal?
Does the retailer have a portal?
Do teams require additional training to use the portal, and specifically to process disputes in the portal?
How does the retailer require disputes to be submitted, and is this your current process with that retailer?
Is your AR team prepared for new ways to reconcile deductions and apply paybacks?
Are the Correct People or Teams in Place to Handle Deduction Management?
Who handles which parts of the deduction and disputing processes?
Where can team consolidation happen, as needed, to avoid duplicative work?
Do you have the people in place to handle the additional work?
How long is the ramp-up period and what is the cost for new positions or training?
Does your AR team understand the crossover between deductions, compliance fines, and audits?
Do cross-functional teams have visibility into deductions and compliance fines?
What Systems are in Place for Digitization, Automation, and Document Organization?
Is all potential proof documentation digitized and easily searchable?
How long is documentation kept?
Do teams know which documents are necessary for successful disputes?
Are there existing manual systems and processes that could be automated?
Are systems organized according to retailer naming conventions to streamline processes?
What Budget Amount is Allocated to Deductions?
What happens year-end if the budget amount allocated to deductions management is higher or lower than expected?
Finally, suppliers should ask themselves: What is the process for learning from and minimizing deductions?
Answering these questions will help suppliers formulate best practices into an action plan for managing deductions.
Action Plan for Revenue Recovery
When a deduction is valid, whether planned or unplanned, suppliers should focus on root cause analysis and prevention. Some best practices include:
Pull historical chargeback and deduction data by retailer, DC, and SKU. Categorize by root cause and cost impact, benchmark incidence rates, and set reduction goals.
Continually review retailer routing guides and updates.
Embed retailer-specific rules into your operations.
Prioritize training for warehouse staff and third-party logistics partners.
Use software and automate where possible to validate documents, verify labels, and match PO to carton content.
Build processes for working with cross-functional teams.
Evaluate all leakages in cash flow (shortages, compliance, audits, etc.) as connected, to determine where the primary revenue loss is occurring.
Research root cause(s) as a group and implement corrective actions.
Iterate on implemented processes and apply that framework across all retailer customers.
Measure success with strategic KPIs shared across the company.
Reinvest ROI into retailer and third-party initiatives.
The biggest takeaway for suppliers is to focus on preventing deductions before they start. Whether valid or invalid, prevention is key. However, when deductions inevitably happen, suppliers can look at it as an opportunity to assess their processes to grow stronger and streamline their income channels.
