Understanding deductions and chargebacks is essential to responsible accounting in the retail supply chain world. Small dents in the bottom line can add up over time, resulting in unwanted surprises.
Types of Deductions
Suppliers tend to be well acquainted with OSDs (overages, shortages, and damages), but there are many other types of deductions, especially in retailers with more elaborate and sophisticated compliance programs. A few of the most common are:
- AP Deductions
- Compliance Deductions (sometimes called AR Deductions or Chargebacks)
- Allowance Deductions
- Trade Promotions
- Returns
- Defectives
- Post Audits
- Shortages
- Overages
- Damages
Whether deductions/chargebacks are referred to as AP or AR depends on the point of view. In the retail space, AP deductions are generally considered to be deductions that the retailer will withdraw from their own payments to the supplier, and AR deductions or chargebacks are generally considered to be charges that the retailer sends to the supplier.
Dealing with Deductions by Disputing
In the retail industry, roughly 80% of off-invoice deductions take the form of shortages, many of which are invalid. For suppliers, the key to winning these back is through validity checks and disputing with the relevant shipping documents.
This is one example of the disputing process, but the proof documentation required to win a dispute changes based on the nature of the deduction.
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How to Avoid Deductions and Chargebacks
Given the prevalence of shortages in the retail industry, it’s safe to assume that being able to keep up with retailer demands for orders as well as reducing human error as much as possible (both on the supplier and retailer sides) will go a long way with reducing revenue loss.
Avoiding shortage deductions can be further helped by:
- Making sure that packaging does not obscure the items being shipped.
- Making sure the quantity of each line item invoiced matches the quantity shipped.
- Confirming that fulfillment information is correctly flowing to the warehouse (i.e. checking EDI).
- Not shipping the product if the quantity ordered does not match supplier expectations. Rather, coordinate with the Replenishment Manager (RM) or the buyer to request an updated purchase order.
- Setting up items in the retailer portal accurately.
- If there are any errors on the purchase order, then do not ship; instead, reach out to the RM to request an updated PO to reflect the proper setup.
- It is a best practice not to commingle inventory for different purchase orders. Most large retailers expect one PO shipment per pallet or per box unless you have a written agreement with the RM stating otherwise. If you do include multiple POs in a shipment you must clearly separate them, though it is still not recommended as this is one of the most common reasons for shortage claims.
- Ensuring that all cases are shipped as noted on the freight bill.
- Making sure all cases ordered on the PO are shipped complete.
- Making sure the driver notes the case count on the bill of lading.
Avoiding compliance fines can be helped significantly by the above list as well, with the added consistency around timeliness and organization. Shipping on time and in full is a good summary of general compliance performance across the major retailers, but almost all retailers have compliance programs with more detailed regulations and fine structures.
Related Reading: Common SQEP Defects at Walmart
Building a Revenue Recovery Team
Building a revenue recovery team that can work efficiently and effectively at a supplier requires cross-team functionality, and alignment across sales, supply chain, marketing, and accounting teams. Proactive organizations can stay ahead of revenue loss, but reactive recovery teams will get stuck fighting to win back revenue lost to invalid deductions/fines.
One way suppliers have been proactive this way is by creating a Center of Excellence (CoE) out of the Revenue Recovery Team. The CoE members, as knowledgeable people on all aspects of the revenue loss process, will be the group ultimately responsible for the approval, implementation and success of any improvement plans, tracking the KPIs and reporting up to the C-Suite.
This helps streamline communication both up and down the hierarchy as well as giving formality to the whole process.
Proactive revenue loss recovery teams will have an approach that avoids deductions/fines (valid or otherwise) in the first place, skirting the revenue loss problem from the very beginning, whereas reactive revenue loss recovery teams will only focus on the issue once it has already become a financial problem for the organization.
Reactive teams will have a mindset that revenue loss is only the result of a retailer's unrealistic standards. Proactive teams will be able to take the retailers' standards and the punishments for non-compliance as symptoms of supply chain inefficiencies, as an opportunity for growth.
Integral to forming a truly proactive revenue loss solution is—as alluded to earlier—a collaboration between and across teams. Getting the process started can happen through a variety of forms but three common approaches include leadership involvement, the adoption of software, and ritualized meetings between teams.
Strategies for Revenue Recovery
Best-in-class revenue recovery teams do these four tasks and revisit and revise these practices regularly.
Identify key responsibilities for each member of your team
If possible, suppliers should consider rolling up revenue loss across retailers to evaluate the larger trends and patterns. Spreading out responsibility can help suppliers notice which compliance/deductions fines are most common and most costly. That way, supply chain problems can be isolated through root cause analysis much more effectively.
Having a 50/50 workload strategy is also ideal: spend 50% of time on disputing ("get paid") and 50% of time on root cause analysis ("get better").
Ideally, this process can be automated by software designed specifically for integration with your retailers. When these processes are automated, much less time will be spent on checking deductions for validity and gathering dispute documentation.
If a helpful automation software solution isn't possible, suppliers will have to establish a system of deductions triage. Validity checks will have to be done on the largest deductions first. Then the invalid deductions should be sorted by costliness, going after the most expensive first.
The "getting better" aspect of revenue loss prevention is by far the more complicated of the two because it is connected to both valid and invalid deductions. It's best to set up weekly meetings with key counterparts across the organization. The goal of these meetings should be to:
- Identify pain points/supply chain disruptions/potential deductions/fees/fines.
- Maintain visibility into contractual deductions (i.e. pre-negotiated allowances, co-ops, payment terms, etc.).
- Be aligned with current state of deductions/compliance businesses as it relates to each retailer's business.
Similarly, weekly, monthly, quarterly, and yearly revenue loss (deductions/compliance) reporting should be shared with key cross-functional stakeholders and leadership by the retailer. Each retailer has different compliance and deductions programs, so while a standardized report is useful for leadership, more retailer-specific reporting is ideal for teams managing individual retailers.
Another key component to the "get better" aspect of revenue loss prevention is budgeting and forecasting. Each retailer a supplier sells into should have a deductions/compliance budget their teams can attempt to beat each quarter. As these budgets are added up across retailers/platforms, a general revenue loss budget/forecast can be laid out for the supplier's business.
Hold collaborative cross-functional team meetings
Cross-functional communication between teams in the supplier's organization is key to avoiding revenue loss. Knowing which members of your company directly or indirectly touch deductions/compliance and having people on those retailer teams communicating with each other is similarly important.
For example, Accounting, Finance, Logistics/Transportation, Distribution/Allocation, Sales, and Customer Service are all teams that touch an issue relating to valid/invalid returns deductions. Having the power to connect all of those teams, either at the executive level or cross-functionally, will give important insight into supply chain performance.
Assign project managers for root causation work streams
For each root cause, create a project plan and assign a project manager to hold accountable for:
- Proposed timeline
- Proposed $ impact
- Deduction category
- Stakeholders needed for the project
- Additional cost/resources needed
Create and Track KPIs
Strategize around key metrics and KPIs to track performance over time across the supplier's business and across each retailer as well. Keep an eye on the 50/50 strategy, making sure that one does not become a priority over the other.