Deduction ManagementBy Marlene Groh, CCE, CICP

Regional Credit Manager Grainger

Statistically more than half the time deductions are taken the customer is

correct or partially correct.

Types of DeductionsO PricingO Shipping Errors

O Late ShipmentsO Incorrect Shipping TermsO Wrong QuantityO Wrong Product

O Incorrect TaxO Quality IssuesO Early Pay deductionsO What else?

Who Handles Deductions?

O Accounts ReceivablesO Credit/CollectionsO Customer ServiceO Any one else??

Deduction ProceduresO Any formal procedure?

O Chargeback createdO Debit memo sent to customer, asking

for payment or explanationO Credit memo sent to department in

charge of deductionO Approval neededO Software to work deduction

Automatic Write/OffO Write off any specific charges

O FreightO TaxO Discounts

O Specific amountO $25O $50O Percentage of invoice

How to determine amount to write/off automatically?

O Costs of working a deduction:O Creating chargebackO Researching why deduction was taken

by customerO Research if the customer was correct

for taking deductionO Processing credit memoO Applying credit memo to balanceO Collecting from customer if not valid

Tracking DeductionsO Track by:

O Type of deductionO AccountO Dollar AmountO Department

O Report results to management

Resolving DeductionsO Accountability O Action plansO Cross-functional teamsO Follow-up with results

Preventing Deductions

Deep Dive ProcessO Know your customerO Understand the customer’s

processesO Understand your company’s

processesO Look for the opportunities for

improvement

Know Your Customer

What do you need to know about the customer?

Customer’s Purchasing Process

O Who can cut POs?O Any special terms on PO?

O Freight , Pricing, Tax, CreditO PO requirements

O Specific series of numbers, Department #, Job #, Buyer name

O How are POs received?O Electronic, Phone/Fax/Email, In Person

Vendor ComplianceVarious industry studies have revealed that 5% to 15% of all invoices were affected by deductions, amounting to 4% to 10% of all open items on accounts receivable. This is a major problem, and it continues to grow. As the retail environment continues to consolidate into fewer and larger "power" retailers, these customers are becoming more and more aggressive with their deductions. The retailers are taking deductions for any "infraction" of their terms and conditions or routing guides that are included on their purchase orders, an activity that is now termed vendor compliance.

Information provided by CRF

Customer’s Invoicing Process

O How do they receive their invoices?O EDI, Email, Paper, Web Billing

O Who needs to receive the invoice?O A/P or PurchasingO What address?

O What is the approval process?O Who needs to approve?O What documents are necessary?

O Three way match required

Customer’s Rejection Process

O What causes rejections?O Pricing toleranceO Shipping errorsO Approvals

O How do rejections get corrected?O Do they require a new corrected invoice

or a credit memo?O Do they have a system you need to use

to correct errors?O Will they do partial pays?

Customer’s Payment Process

O Terms – yours vs. theirsO Frequency of payments

O Certain days or weeksO How do they pay?

O What do they reference on remittance?O Invoice #, PO#, Amount

O Payment Type: Check, ACH, PcardO Where do the payments come from?

Customer’s ContactsO Who do you contact for what?

O About Payments?O About discrepancies?

O A/PO Buyer

O Preferred method of contactO Approximate response time

Understanding Your Company

O Build cross-functional team to understand your processes and where there might be opportunities for improvement.O Include:

O SalesO Customer ServiceO eCommerce, O Product ManagementO Shipping/WarehouseO BillingO A/RO Credit

Your Pricing ProcessO Is there a contract in place?

O Date of contractO Length of contractO Terms of contract

O How often does pricing change and how is change communicated?

O If customer PO does not match our pricing, what is our response?

Your Shipping ProcessO What documentation do we send

with product?O Do we offer free freight and when?O Do we use more than one shipping

method?O Do you use vendors to ship to

customers and what is their processes?

Your Billing ProcessO When do you invoice?

O Does it change depending on who ships and how it is shipped?

O Do you offer any consolidated billing?

O Invoicing methodO EDI, Email, Paper, Web Billing,

Summary Bill

Your Payment Processing

O Payment options you offerO ACH, Check, Check by Fax or Phone,

Credit CardO Lockbox concerns and timelinessO Automatic processing – any errorsO Manual processing – timeliness

O Is there an automatic clearing process for deductions?

Root CauseO By understanding root cause – you

can resolve issuesO IdentifyO QuantifyO AnalyzeO Benchmark