Deductions Articles

Home > News and Publications > Newsletter > Case Histories

Deduction Articles

Deduction Managment Improves Profits
Managing Invoice Deductions

Deduction Management Improves Profits
by Martine Tocco and Christine Colley
Source: Spring 1995 NAPAA Newsletter, Issue 13

You've done all the right things to make the business profitable. Targeting key markets and providing real value for the dollar, you've kept a careful eye on production costs. Orders are increasing, business is booming. So why is the bottom line looking so bleak?

Part of the answer may lie in the way you handle deductions. Deductions can range from 3 percent to 10 percent of every sales dollar, and represent an often overlooked opportunity to improve profits, and customer service to boot.

Deductions cut into profits, and handling the cost of them further detracts from corporate performance. Deductions in many cases are caused by competitive marketing strategies.

Over 70 percent of deductions represent pricing and promotion issues.
Most pricing and promotion deductions are caused by misunderstanding, misinterpretation and time lags in communicating trade deals.
Typically, over 90 percent of the price promotion deductions are cleared in the customers' favor.

Deduction resolution through front end improvements
Receivable performance is impacted by the aging of deductions. This is more accurately measured by isolating deductions from the receivable aging, and carrying a Deduction Days Outstanding (DDO) measure in addition to the Days of Sale Outstanding (DSO), which should measure invoice receivables only.

There are significant benefits to improving deduction handling:

Faster deduction resolution helps you set promotional strategies based on real-time, deal performance feedback.
Handling current, unauthorized deductions ensures the maximum payback and is easier than handling old deductions. Benchmark studies reveal that deductions typically age between 60 and 150 days in many companies. With reorganizations, reengineerings, and downsizing, fewer resources are available for these low value activities.
Trade deals tend to remain complex and sales driven, and are difficult to administer throughout the order/invoice process.

For example, trade deals are administered through trade funds offered as bill backs. Performance can require display and the purchase of specific quantities of promoted product. Some retailers prefer to deduct case rate allowances "off invoice."

More emphasis needs to be placed on "front end" improvements. These include process "disconnects," which cause preventable deductions. This occurs when you are doing things one way, and your customer another. By agreeing to compatible policies and processes, you and your customer can avoid all this non-productive paperwork, and increase profits for both the manufacturer and retailer.

And as deductions get old, they become exponentially more difficult and time consuming to handle. Our recommendation is that the backlog be handled by a separate group, or possibly outsourced in order to give your staff a chance to stay on top of and control current work.

Successful deduction management involves:

Timely expensing of deductions to the right expense category, so that you can track the effectiveness of promotions and allocate them to the proper business unit.
Avoiding future deductions by fixing root causes.
Recovering unauthorized deductions to prevent abuse.
Having positive impact on customer service.

Summary
There are many things an organization can do to prevent unnecessary deductions, and manage them better when they do happen:

Improve the process so that deductions are resolved quickly and expensed to the right account.
Isolate and fix the root causes of preventable deductions.
Work with customers to fix the "disconnects" because both sides benefit from reduced costs.
Segregate the backlog from the current work so that you have a fighting chance to stay on top of current deductions.

Martine Tocco and Christine Colley are members of the Creditek Consulting Group in Parsippany, New Jersey and are active in the NAPAA organization.

Managing Invoice Deductions: One Company's Success Story
by NAPAA Staff
Source: 1992 Winter NAPAA Newsletter

How would you like to see your invoice deductions reduced 50 percent by 1995?

Using guidelines established by a joint-industry task force sponsored by the Food Marketing Institute, the Warner-Lambert Company has embarked on a program that in three years is expected to slash in half the discrepancies between what the manufacturer bills and the amount actually remitted by its customers.

Warner-Lambert started its deduction management program by focusing on one of its major retailers, Walgreen's. A historical analysis showed that deductions created from the account were increasing at a rate of 12-14 percent each year. After implementing the program, the number of deductions went from 585 in 1990 to 188 in 1991 - a 68 percent decrease.

How did they do it?

Christine Colley, Warner-Lambert's Deduction and Promotion Payment Manager, says the keys to the company's success in reducing invoice deductions are simple: getting to know the account, establishing communications channels, and sticking to your plan. "It doesn't take a lot of sophistication. It just takes knowing what your own expectations are, and then getting to know your customers and their expectations," she says.

Warner-Lambert started by taking a close look at the Walgreen's account to find the specific causes of price discrepancies. Warner-Lambert salespeople and financial managers, including Colley, met face-to-face with Walgreen's representatives. It was discovered that the three biggest deduction groups were pricing differences, erroneous promotional allowances, and erroneous case configurations. A closer look narrowed the focus to the customer's purchase orders, which did not mesh with Warner-Lambert's billing system.

"We learned what was consistently going wrong in the Walgreen's purchase order system that forced us to make the wrong decisions when we got that purchase order," Colley says. With mutual understanding of each others' accounting needs, the customer is now able to produce more accurate purchase orders.

"What I found was an assumption that because our sales people gave the retailer informations, we assumed that they processed the information accurately and that it would come back to us accurately. we cannot make that assumption because there are too many thing that can happen when data travels from Warner-Lambert representatives to the retailer, and then all that information gets interpreted by their system. Data accuracy and verification of data area must," Colley says.

The next step was taken internally. Warner-Lambert's invoice processing department learned to identify discrepancies on Walgreen's invoices before they were entered into the system. Through the communications channels set up previously with the customer, these discrepancies can now be resolved smoothly and quickly.

Measurable Benefits

Both the manufacturer and the retailer benefit from reductions in invoice deductions. A 68 percent decrease in invoice deductions for the Walgreen's account alone means that approximately 300 invoice deductions were not created, which improves the automated check application process and eliminates the cost associated with the investigation and resolution of the deduction. Most purchase orders contain a phrase saying that once a purchase order is accepted, it cannot be renegotiated by the manufacturer - even if the purchase order is in error. "that in itself should dictate to the manufacturer that it must take a role in making sure that the data is accurate," Colley says.

For the retailer's side, Walgreen's estimates that it costs $11.70 to process an invoice with a deduction, as opposed to 70 cents to process an invoice without a deduction; the difference being the time spent handling an invoice discrepancy, whereas an accurate invoice goes through the system almost automatically. For other manufacturers striving to keep their invoice deductions under control, Colley emphasizes the back to basics approach. You don't need a sophisticated computer system or EDI (electronic data interchange).

Although it can help you identify problem areas faster, EDI is not the cure-all for the invoice deduction problem, she says. "It just goes back to understanding how our customers operate. I think it must come from an account-by-account level of understanding."

This article was prepared by the NAPAA Newsletter staff in cooperation with Christine Colley, Deduction and Promotion Payment Manager, Warner-Lambert Company. Ms. Colley has since moved to a similar position at The Dial Company, Scottsdale, AZ.

Updated as of 09/01/2006