The new squeeze by retailers on consumer products companies

To boost profits in the current environment, many retailers are becoming more aggressive in taking deductions under existing policies – whether related to OTIF (On-Time-In-Full), damages, or new store and reset fees – that were less enforced in years prior. Fines and fees can cost sellers as much as 12% of the amount they bill to Walmart, according to SupplyPike, a software company that helps vendors track and fight retailer deductions, as reported in Bloomberg.

Here we lay out the challenges posed for the consumer products companies that supply these retailers, and some steps they can take to manage the complexities.

A key issue is functional silos, which can lead to conflicting incentives and responsibilities. For instance, customer service has visibility into operational issues and potential fines while finance is typically only aware of fines paid.  Neither function typically coordinates with sales, which owns the relationship with the customer, or with other areas of the business (S&OP, manufacturing, or even 3PLs) that may be the root cause of the fines. Even if actual fines are pushed to a customer level in the profit-and-loss (P&L) statement, they may hit distribution or SG&A lines that sales is not responsible for. The sales team is disincentivized to put its topline revenue goals at risk to drive profitability. The finance and accounting teams who process fines and approve deductions are incentivized to do so quickly, especially for smaller dollar amounts. Thus, rather than investigate many small fines, the team prioritizes larger and more visible trade deductions. Finally, the customer (retailer) operates with the same silos that manufacturers do, making it difficult for sales to address these fines with their buyer.

Another challenge is visibility and reporting. Detail coming from customers is often limited – often with a reason code but no supporting evidence – and fines are deducted weeks or months after the fact. When a 3PL is used, visibility can be even more challenging regarding on-time delivery or customer-driven delivery issues (e.g., customer embargo). Additionally, data in the customer service vendor portal often does not match what customers deducted for on their invoice and accruals are used on the P&L as a placeholder for these deductions on a customer level.  This results in actual deductions not getting pushed back to that customer level, but rather reported in aggregate. Finally, teams in accounting may not have the data to investigate issues (e.g., late shipments, cut orders, reset activity for in-store execution deductions), and upstream functions like manufacturing and logistics do not have access to or get feedback on damages or issues that drive customer fines.

To manage fines and deductions effectively, there are a few strategies that can be employed.

1. Profitability Measurement and Reporting

• Code deductions in the financials so that they can be linked back to shipments/customer sales
• Leverage deduction information to inform total cost-to-serve reporting so that all teams can view/see the information
• Measure deductions as a ratio of sales to identify high % rate customers or claims. This will make it easier to catch and refute claims (e.g., when a customer deducts for 100% of a truck/order as being short-shipped when it shows up late should be only a 2.5% fine). Targeting investigation of high % rate customers can help identify and resolve issues in your own supply chain.

2. Cross-Team Coordination

• Cross-functional teams need access to information so that it can be reviewed as part of ongoing business planning.
• All teams need to be engaged and incentivized to reduce/prevent these fines/deductions. It will be less successful as a finance-only initiative.

3. Holistic Customer Management

• Manage fines and deductions as a total cost-to-serve discussion in top-to-top executive meetings and leverage data as rationale for pricing action, requests for improved execution, or pulling support for other programs.

Faced with increasing deductions and fines from retailers, all signs point toward the urgent need for CP companies to have a robust process in place to fight these headwinds.