What Is Deductions Management?

Learn about:

• What a deduction is

• The difference between compliance fines and deductions

• What causes a deduction

• Best-in-class deductions management

From a supplier's perspective, deductions management is conducted at the accounts receivable level, but its effects can be far-reaching if managed correctly.

Deductions occur whenever the retailer perceives some sort of error on the supplier's side in the shipment, quantity, and/or quality of goods. In these instances, retailers will withhold some or all of the payment for a shipment, resulting in a deduction.

Depending on the perspective, however, some of the terminology can be confusing. The supplier's accounts receivable team manages these deductions, but it's the supplier's accounts payables team that actually withholds them. Deductions in the retail space are generally referred to as accounts payable (or AP) deductions.

What is a Deduction?

The term deduction can be a stand-in for any number of revenue loss scenarios in the retailer/supplier space. Generally speaking, deductions refer to these main categories:

• Shortages

• Returns

• Damages

• Pricing/Billing Discrepancies 

• Allowances

• Damages

• And others

Suppliers in major retailers find that it can be very challenging to keep track of the wide variety of deductions, or revenue loss in general. It's helpful to think of deductions as belonging to certain, larger revenue loss categories:

"Invoice Deductions" are the kinds of revenue loss most traditionally referred to just as "deductions." Each of these categories has their own unique challenges and best practices.

Related Reading: Walmart Deduction Codes Explained

These deductions are related and sometimes connected to compliance fines, but most of the time they are categorically different, both in terms of how they're charged and what they are meant to indicate about supplier performance. 

What's the Difference Between a Compliance Fine and an AP Deduction? 

Compliance fines are often charged by the retailer's accounts receivable team. These are sent out as invoices, received by suppliers as a bill rather than merely withheld from invoices sent to the retailer.

In common supplier parlance, these are usually referred to as deductions versus chargebacks or AP versus AR deductions.

Related Reading: The Difference Between AP and AR Deductions

What Causes Deductions?

Although it's the supplier's accounts receivable team that deals with deductions most directly, the deductions are very rarely caused by them. Valid deductions are usually an error in ordering, replenishment, or logistics/shipping. Invalid deductions are usually an error on the retailer's receiving side.

When doing root cause analysis on deductions, it's important to pinpoint the error at the place, party, or event level.

Deductions are caused by misunderstandings and difficult updates on orders, pricing, timing, and a variety of other supply chain essentials. Some deductions are planned in advance or part of the supplier agreement (see Allowance Deductions), but it's helpful to think of deductions generally as avoidable and/or disputable.

If item setup and management are not done well from the beginning, they can have a domino effect on deductions and revenue loss. 

Best-in-Class Deductions Management

Deductions Management starts with prioritizing the most pressing deductions and root causes. Isolating errors around particular warehouses, 3PLs, or distribution points can be helpful for getting to the bottom of root cause, but some issues are one-offs. Being able to manage priorities is the most important first step to becoming a best-in-class supplier. 

Deductions Management KPIs

Although suppliers tend to have a variety of KPIs around deductions management, depending on their needs, there are a few that tend to apply well across the gambit of supplier size and categories/departments. 

• Dollars Lost Over Time: Accounting depends on accurate reporting of fines over time. Having a sense of whether deductions are increasing or decreasing over time is important as well for maintaining reasonable expectations across the business. 

• Deduction/Dispute Resolution Time: On the other hand, knowing how long it takes to dispute invalid fines and find the root cause of both valid and invalid fines is key to maintaining a growth mindset in deductions management. 

• Deductions by Claim Code/Type: This is key to beginning the process of getting better. A certain number of shortages are inevitable in the whirlwind of trying to keep up with retailer demands. However, shortages are often invalid, and there is often a clearer avenue for disputing and winning back funds. Performing industry/category benchmarking for your deduction trends is also important for seeing areas of realistic improvement. 

Cross-Functional and Cross-Team Communication

The most important for doing root cause analysis across an organization is healthy and regular cross-team communication.

Issues perceived by the accounts receivable team need to be communicated to their respective teams. General cohesion across distribution, logistics, sales, and between third party/external parties is key to deductions management.

Meeting weekly or biweekly across these teams is highly recommended for best-in-class performance. 

Get Insight with SupplyPike's Software 

SupplyPike helps Walmart suppliers get paid and get better. Our software tests the validity of deductions, collects proof documentation, and takes disputing a claim down to a few (or zero) clicks.

Our software also helps suppliers avoid fines by digging into root cause analysis and providing executive-level oversight into the supply chain. For further information or assistance with managing deductions and disputes, contact SupplyPike's support team. Schedule a meeting with a team member to find out if SupplyPike is right for your retail business.

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