Print Page | Contact Us | Sign In | Join RVCF
RVCF Link
Blog Home All Blogs
Search all posts for:   

 

View all (435) posts »
 

Can Audit Guidelines Reduce Trade Disputes? Chasm of Opinion, Impact on Profitability

Posted By Administration, Thursday, January 19, 2017
Updated: Tuesday, January 17, 2017


by APEX Analytix


Disputed trade deductions continue to be one of the most emotionally charged issues that face retailers and suppliers. The situation fosters an adversarial relationship between the supplier and retailer, and impacts the profitability of both organizations. Significant money is at stake and the administrative burden of resolving deductions many months after the transaction saps both organizations.

Is there a way to take the sting out of disputed trade deductions and create an environment that results in greater profitability for both supplier and retailer? We believe that clearly articulated audit guidelines, recovery best practices, and well-understood metrics can go a long way in achieving this goal. We have seen first-hand that long cycle times and "non-value added" administrative costs are dramatically reduced when audit guidelines are communicated, recovery audit best practices are implemented, and both parties operate under a common language of metrics.

The two biggest culprits
To start, let's take a look at the two primary causes driving trade deal deductions (from the retail perspective):

  1. Incorrect billing. This may be a pricing problem, a valid promotional deal that never made its way into the supplier system, incorrect payment terms on the face of the invoice, a new store allowance that was mishandled, incorrect freight terms or any number of billing errors. Only by studying these errors to get at the root cause can the supplier fix its underlying systems to prevent future occurrences. By and large, these cannot be fixed by the retailer as the issue is with the supplier, or the supplier's communication channels to the retailer.
  2. Difference in interpretation of a trade deal. For example, the supplier's deal may specify a $5.00 per case billback applies to all product that is ordered between June 1 and June 30 per the supplier's deal sheet when the specific SKUs are promoted through a circular. What if the retailer ordered the product on May 30 in significant quantity (three times the normal turn) to support this deal? Or, what if the retailer did not get the required advance notice of the promotional offer from the supplier and placed its final promotional order on July 2nd? The supplier would likely take a position that the order did not fulfill the specific conditions of the deal and was therefore not eligible. In both situations, the retailer would likely take the position that since the supplier ultimately got the product moved through the retail channel (even though it did not conform to the "letter of the law"), the retailer should be entitled to the deal monies.

So, how do we go about resolving this conflict? For the first one, the responsibility lies with the supplier. There are many suppliers that bill accurately every time, and this can be translated into a meaningful metric understood by both parties. Let's call it the "Billed Right 1st Time Percentage." If you are a retailer, being billed correctly the first time dramatically reduces your cost of invoice processing. Some companies call this "touchless" processing, meaning that no human intervention is required. If the retailer has to make manual adjustments due to a supplier billing error, it increases the cost of doing business with the supplier due to exception processing. This is often a category on a vendor scorecard, particularly as it will show how your performance compares to your peers both within and outside of your category.

For the second factor, the solution is more involved, and requires an understanding of the other party's perspective. We think that clearly articulated audit guidelines, created by the retailer and communicated to its suppliers, is the first step in this solution. These audit guidelines should address the retailer's expectations regarding lead time to process cost and deal changes, handling of cash discounts (i.e., based on gross vs. net), pricing on returns, new item allowances, compliance fees (if applicable), "family of items," and more. An even better option is to check directly with your retailers to see if they have such audit guidelines. If they do, yet their claim does not conform to their stated procedures, you should be able to resolve the issue in your favor. If the claim does conform to their guidelines, you have a bigger issue as these guidelines are generally agreed to by their merchants and are not likely to change without significant negotiation. Remember, retailers are required to conform to Sarbanes-Oxley just as strictly as their supplier counterparts. All deductions taken need to be properly substantiated with the relevant supporting documentation. By clearly understanding the "rules" that the retailer is operating under, most of these issues can be addressed by fixing the root cause of the error. Successful retailers have a healthy respect for their vendors and do not want to negatively impact the relationship via questionable deductions.

Key strategies and metrics
In working with the world's largest retailers to develop common metrics to measure their success in recovery audit, our objective was to understand current recovery audit best practices, provide a common framework to compare retailers to their peers and "best in class" organizations, and to identify emerging best practices that may be a good fit for retail clients and prospects. These best practices have taken the form of metrics and strategies that enhance their performance. Perhaps, surprisingly, the strategies and metrics are very much aligned with the future state desired by the manufacturer/supplier as well. Below are the key strategies and metrics:

Recovery audit strategies

  • Ensure Comprehensive Compliance with ALL Negotiated Agreements
  • Foster Process Improvements
  • Enhance Vendor Relationships

Key performance metrics

  • Effectiveness: Percentage of Audit Recoveries Captured Internally
    • Median: 52%, best in class – 86%
  • Efficiency: Recoveries per Recovery Audit FTE
    • Median: $1.6 million, best in class - $4.2 million
  • Cycle Time: Transaction to Internal Audit Cycle Time
    • Median: 12 months, best in class – 45 days
  • Quality: Payback %
    • Median: 8%, best in class – 3%
  • Cost: Effective Audit Rate = Internal FTE costs + external fees / overall recoveries
    • (internal focus - varies widely based on company size & findings)

Under Recovery Audit Strategies, we believe that most suppliers would understand retailer's desire to ensure compliance with contracts as well as applaud the retailer's willingness to improve the process and enhance vendor relationships. As far as the Key Performance Metrics for capturing recoveries, reducing cycle time, and minimizing payback through higher quality claims are concepts that are well-aligned with suppliers. Claims submitted by internal recovery groups are timelier and tend to be more conservative, as the external audit groups are more likely to push the envelope into "gray areas." Retailers embracing these strategies and metrics will improve their financial performance as well as improve relationships with their supplier partners. On the supplier side, these strategies and metrics help to minimize the administrative burden and the uncertainty associated with deductions taken 12-24 months after the original transaction occurred.

Supplier retailer relationship nirvana
The factors that converge to create a highly dynamic and complex trading relationship between retailers and suppliers are unlikely to disappear. In fact, many of these factors – ever more creative pricing strategies, discounts, promotions; competitive negotiations that go down to the wire before an ad or an in-store special; and the market dynamics that reduce costs and maintain margins for suppliers and retailers – are the essence of capitalism and commerce. But these are often the same factors that result in trade deductions. We think that as the communication channels improve in the trading relationship, and as the root causes of deductions are addressed, the bulk of disputed trade deductions will migrate from a base of manageable, preventable deductions, to those that are a by-product of an efficiently-operating competitive marketplace. Indeed, nirvana would be that all deals are completely documented, there is complete and instant visibility into performance, and all transactions are accurately billed, but the very nature of retail makes this unlikely. A more realistic focus is process improvement that strives to control the weaknesses and inaccuracies in the current environment. And this is absolutely achievable as top retailers are already proving.


APEX Analytix helps companies audit, recover and optimize working capital across the global financial supply chain. Our innovative people, processes and FirstStrike® technology have transformed the recovery audit industry—producing billions in documented savings for companies in virtually every country in the world. Our portfolio includes software and services for recovery audit, overpayment prevention, procure-to-pay process automation, fraud and risk detection, data analytics, reporting and controls. For more information, visit www.apexanalytix.com or call 800-284-4522.

CLICK HERE to return to the JANUARY 2017 RVCF LINK

Tags:  Audit 

Share |
Permalink | Comments (0)
 
          Innovative Retail Technologies EDI Academy