Taking Charge of Deductions Management: 11 Things All Suppliers Must Know

Historically, suppliers with $1Bn in revenue are estimated to lose almost $3Mn annually because of poor deductions management. In the post COVID economy where CFOs are looking to achieve cash excellence, this revenue leakage challenge needs a solution.

HighRadius hosted a conversation with leading deductions experts Jessica Butler, Kim Zablocky, and Kimberly (Kim) Erickson about the common deduction trends that exist today and must-know facts for suppliers working with the big-box retailers of the world. We have curated the below eleven pointers from their conversation, which will give you an overview of the deductions problem, potential solutions, and next steps for you as a leader.

Deductions Management Trends: Why You Should Be Worried

1. The deductions problem is getting worse

68% of participants in the conversation mentioned above said their deductions volume was currently on the rise. With offices reopening, and the situation returning to normal, it is time for retailers to remove all the waivers that they have been allowing suppliers all through last year. Additionally, many supplier deductions teams admitted that they have still not been able to figure out a way to work remotely, as collaboration and access to all backup documents required for research persist as challenges in the Work From Home environment.

2. Compliance deductions continue to give supplier deduction teams a headache

Our experts also highlighted that retailers today have become a lot better at identifying compliance issues on the supplier’s end and charging the latter for the same. According to Kim Zablocky, most big-box retailers today have sophisticated inbound audit solutions that allow them to track compliance violations from the suppliers more accurately. As a result, while these retailers were able to go after only after 80-85% compliance deductions back in the 2000s, they can now spot almost 95% of all compliance issues.

HighRadius has also found that many retailers, especially in the wake of COVID, give suppliers less time to resolve a compliance dispute. In contrast, the number of compliance deductions has significantly gone up at the same time.

To deep-dive into retail compliance and perfect ordering, check out this guide from RVCF, titled All about Retail Compliance (And More)

3. Post-Audit deductions need to be closely monitored and managed by suppliers

Retailers leverage post-audit deductions to recover money that they might have left on the table by failing to claim funds due to them based on a trade agreement, as well as freight charges, shortages, or other issues. Many big-box retailers have both internal teams as well as 3rd party audit firms looking for post-audit opportunities. Since they are typically taken more than a year after the shipment, post audits can be challenging to research and validate because suppliers may not quickly find the information needed to support or dispute the claim. Therefore, suppliers must have a strategy to resolve post-audits effectively.

Easy and Quick Steps To Optimize Your Deductions Process Today

4. Root cause analysis can help suppliers stay on top of their deductions problem

Root cause analysis can help suppliers identify underlying issues causing non-trade deductions. This way, they could take corrective actions on a timely basis can reduce many preventable deductions. By doing root cause analysis regularly and thoroughly, you can see small incremental improvements in how you and your team approach Deductions Management and solve the commonly recurring challenges for the long-term.

5. There is nothing better than “talking” when it comes to deductions

The communication gap between the suppliers and the retailers is often a primary cause of disputes. It leads to delayed claim resolution as well.

To make this point, Kim Zablocky shares a typical example, where a retailer sends a purchase order change after the supplier has already started working with the retailer’s original purchase order. RVCF found that this is not uncommon: the merchant’s purchase orders are changed almost 4.4 times after the supplier has already started working on it. Most suppliers do not have an accurate way of automating this change, neither do they have a fixed process on how they would approach the change. There are also no limitations to when the purchase order can be changed in many cases, leading to retailers changing it sometimes after the supplier has already shared the advanced shipment notice. A change at this point requires suppliers to open the packages, change the order and repack them leading to additional time and resource involvement.

There are a lot of things that can go wrong in the above process. The supplier can miss a PO change, ship the wrong quantities of the product, and be charged back for both a shortage or an overage. To resolve issues like this, both parties must collaborate well and have good relationships with each other. To facilitate such collaboration between the buyer and supplier, RVCF organizes events where both the retailer and the supplier can interact 1:1 and avoid such situations from happening.

Even internal communication is of utmost significance for better deductions management. Collaborating with sales, logistics and shipping teams, carriers, etc., is required to be done almost daily to resolve outstanding disputes by the supplier.

6. Everyone in your organization should take accountability for deductions

Many organizations have dedicated resources that work on customer deductions. In contrast, others have people from different A/R departments (credit, collections, cash application) focusing on deductions research and resolution, in addition to their primary role. More often than not, deductions are considered to be just their problem. Deduction leaders, however, need to ensure that people understand that deductions are not the problem of a single department but everyone in the organization. They need to hold other departments (like sales) accountable by letting them know how poor deductions management leads to money falling through the cracks, which of course, no one wants.

Kim Erickson, an expert in the field of trade deductions, says that it is imperative that A/R leaders hold sales responsible for proper documentation of deals, timely responses on an open deductions item, and seamless collaboration with the receivables team

7. Peer-to-Peer communication for suppliers is a good idea

It is helpful for suppliers to interact with other suppliers who work with the same retailers. These forums can brainstorm collectively on the best strategies for managing deductions, share tips, best practices, and stories around what works for a particular big-box retailer vs. what does not, and so much more. Supplier forums from RVCF are an excellent example of a peer-to-peer communication platform.

The Near Future: Continuous Improvement and Automation Are Key

8. Deductions management is a known priority today, but many companies still have a long way to go

A few years back, maybe, it was possible that companies were not paying attention to their deductions, but that is not true today. In recent years, most executives have realized the real impact that poor deductions management can have on their bottom line and appointed people on the team to look after the process. Still, 79% of respondents in the webinar mentioned above said they are struggling with one or the other challenges in managing disputes effectively, despite already having some improvement strategies.

9. It Is not the 2000s, and we must do away with paper

Kim Erickson recounts that when she first started in deductions, almost 18 years back, many organizations were using paper and manual processes to resolve deductions. While in the time since then, the world has made a lot of progress with organizations like HighRadius coming in with differentiated cloud solutions for deductions management, there are still a few organizations out there that are relying on paper or excel/spreadsheets to manage deductions as a process.

“It is surprising, what these companies have been able to do with the resources available to them, but it is about time that they started exploring what more is out there when it comes to managing deductions with technology,” Kim remarks.

10. Automation is not magic

In recent years, there has been a lot of buzz around automating the deductions process, a lot of time resulting in unrealistic expectations of business leaders from technology. However, experts want you to know that automation doesn’t do much if your processes and data are not right to start with.

Automating a bad process will just give you a badly automated process. Therefore, in the Attain Consulting deductions maturity model, Jessica highlights the “deductions process” as a parameter of evaluation before “using technology” in deductions. Automation can be great for your business, but you need to plan, strategize and implement it right, with help from industry experts, wherever necessary.

11. Most suppliers today are ready to jump on the automation bandwagon

When asked in the webinar if they were involved in any digital transformation opportunities for deductions at present, almost 55% of attendees responded positively, while another 28% said that they were planning to start one in the near future. While the results may be skewed because only leaders who care about their deductions process would join in a conversation like this, it still goes without saying that the adoption of automation in deductions management has been steadily rising last few years. COVID has further accelerated this need for digital transformation. Leaders know that the post-pandemic world will be different and don’t want to operate in the pre-pandemic mode once things go back to normal.