Trade Promotion: Customer Deductions as an Efficient Form of Settlement

Introduction

Last week I wrote about how “not all deductions were created equal”. The point I was trying to make was specific to the consumer products industry and centered on Trade Promotion Deductions and the fact that they can actually be an efficient form of the financial settlement. This would, however, require a paradigm shift within an organization since most companies look at all “all” deductions as a major problem because of their impact on Receivables.

As a follow-up to last week’s blog, I’d like to discuss in more detail some thoughts on what steps can be taken to improve a company’s overall deduction process.

First, a quick review of the types of deductions is warranted. For the purposes of this discussion, I am lumping the various deductions into 2 major categories. (Does not include Unearned Cash Discounts tied to terms of sale.)

Both of these categories include valid and invalid deductions and both require further analysis to determine validity. The invalid deductions represent “true” receivables and require good documentation to successfully collect from customers. Studies across all industries consistently show that the majority of deductions are valid. As previously noted, Trade Promotion deductions represent the majority of customer deductions both in numbers and even more so in dollars. The rest of this discussion will focus on the overall management of Trade Promotion spending and ways to make the deduction resolution more efficient.

EFFICIENT PROMOTION SETTLEMENT – “PERFECT WORLD”

In a “perfect world” trade promotion settlement might look something like this:

As we all know, however, we don’t live in a perfect world. The actual process in most organization is inefficiently driven, primarily by the fact that it is a manually intensive process that is complicated by:

• Inconsistent customer processes relative to how they bill back for promotions
• Accessibility to supporting documentation
• Difficulty in matching customer invoice to promotion plan (Hierarchy of customer billing is different than vendor hierarchy used for planning)
• Some customers are willing to accept payment for their claims before deducting while other customers are set up to deduct immediately
• Check payment made to customer crosses paths with customer deduction resulting in the invalid deduction that requires the customer to payback

Last month I shared some things to consider for improving your Trade Promotion deduction management process. In the spirit of continuous improvement, our ultimate goal should be to leverage automation where possible to make deductions as an efficient form of settlement a reality. Recent breakthroughs in technology have enabled automation that had previously been considered cost-prohibitive.

DEDUCTION AUTOMATION – Areas of Opportunity

1. The creation of an electronic workflow for deduction management – historically has been difficult and costly to establish in a company’s s ERP system.
2. Securing of customer supporting documentation and capture of the line item detail
3. Matching customer claim to Promotion Plans
4. Deduction Clearing

Each one of these areas currently requires a significant amount of manual work for most companies and can be a drain on internal resources. These manual processes also impact the overall cycle time required to resolve and clear deductions.

HighRadius is a recognized leader in helping companies optimize their receivables management. They have recognized all four of these automation opportunities and have partnered with various CPG companies to develop solutions utilizing cloud-hosted Software as a Service (Saas) technology to offer a flexible cost-effective way of automating these processes to significantly improve productivity while reducing costs and cycle time. By recognizing that “one size does not fit all” they have developed a “template” for automation of these processes that can easily be modified to integrate with a company’s current systems, regardless of what platform they are on.

Additionally, they can also work with you to accommodate customer-specific nuances that have often created barriers to automation. The overall cost can often be offset by the savings associated with improved productivity. I encourage you to contact High Radius so they can work with YOU to help identify ways of optimizing your current processes through automation.