At the root of poor customer service in a highly competitive retailing marketplace is a problem that has long plagued retailers and manufacturers. Deductions (or charge backs) are derived from retailers charging manufacturers for inefficiencies in the supply chain. Failure to effectively manage deductions and identify the source of problems in tracking inventory and shipments has resulted in hundreds of millions of dollars being lost in the process. In fact, the mutually dependent relationship between retailers and manufacturers has been strained to the breaking point.
The only effective way for manufacturers to fix the problem is to dissect it by drilling down into the details. Today considerable time and resources, including staffing and administrative support, are devoted simply to identify whether the retailer was justified in taking the deduction.
Manufacturers can find the root causes to their deduction management nightmare by asking some important questions. Why are products always being short-shipped? Is it always the same products from the same distribution center? Are the pallets being loaded correctly in the warehouse? Some companies discover that the purchase orders do not match the invoice. Is it the freight carrier that is to blame for incomplete or late shipments? For some manufacturing companies, the losses from retailer-imposed deductions can run as high as two to seven percent of operating budgets.
Ultimately retailers want the product on the shelf, because that is what customers buy. Retailers too are incurring significant losses in the narrow profit margin world of today's retailing industry. They are also potentially damaging their relationships with customers and this further challenges the manufacturer-retailer relationship. If the retailer can go to manufacturer A or manufacturer B, they are going to select the one that will enable them to more easily and better serve their customers. The retailer is going to choose the manufacturer that provides the best customer service by fulfilling orders on time, at low cost and in an efficient manner
Manufacturers need to look at information from the specific SKU (stock keeping unit), including data about different lines within the same brand, special promotions, the warehouse where the product shipment originated, freight carrier, purchase orders, advanced ship notices (ASNs) and other valuable information. One manufacturer commented, "The order is what the customer (the retailer) wants ... The shipment is what we (the manufacturer) did about!" There is an incredible amount of knowledge to be gained by understanding what the expectations are and how they were/were not met.
Analysis of this type of information is critical to accurate deduction management and control. For manufacturers, a successful solution requires bringing customer-specific information together at the lowest level of detail and analyzing it line by line using data mining tools.
However, manufacturers need to embrace technology. To do so, manufacturers must recognize how the value of the technology investment would more than offset the continuing loss of millions of dollars and the uncalculated damage to customer service. The solution to the challenges of deduction management for manufacturers and retailers lies in new technologies such as data mining, data warehousing, supply chain and customer relationship management solutions. Such technology provides the ability to effectively organize and manage millions of data points resulting in effective order tracking, accurate product shipments, minimization of inventory waste and the accompanying loss of untold millions of dollars. These technological solutions open the doorway to a path for developing better customer service and increasing profitability through cost reduction.
Retailers have particular business concerns about deductions, including lost sales and missed opportunities to build customer loyalty. For example, if a drug store chain runs a promotion and 2,000 cases of product have been short-shipped, where does the fault lie? Does the consumer blame the manufacturer or the warehouse? No, the brunt of the consumer's dissatisfaction is directed at the retailer. Rain checks are issued for products that were advertised but not in stock, and the customer feels inconvenienced because he or she has to return to the retailer. Or, the customer takes his or her business to a competitive store.
Generally speaking, manufacturers are taking a traditional approach by "treating the symptom, not the disease." Many manufacturers spend far too much time and too many resources trying to determine if their retailers are justified in presenting charge backs to them. This has been the subject of heated debate, but has not received much corrective action.
According to an article published in The Wall Street Journal earlier this year, there is an increasing trend among drug store chains and other retailers to improve their finances by pressuring suppliers for even more concessions. There is even a fledgling industry in "deduction management" companies that comb through invoices to find discrepancies. A growing number of retailers use these disparities to gain additional cost concessions from manufacturers.
To break this vicious cycle, manufacturers should take an enterprise view of the customer relationship. Ultimately, a manufacturer's goal is to create and develop the "perfect order." And, they try to implement initiatives to chase that elusive "perfect order." Many say, "Our company wants to deliver our products on time, the correct way, with the right number of items, etc., as benchmarked against what the retailer expects from us as a company."
The retailers that are most affected by deduction management issues are the large chain drug stores and mass merchandisers who sell a large array of different items in large volume. Large retailers carry products that range from clothing to housewares, often with a special emphasis on seasonal merchandise. Large retailers offer these products at a discount and must manage relationships with a tremendous array of manufacturers from many different countries in order to market products at a discount.
The products are generally sold at low margins. Should errors occur in these supply chain processes, manufacturers bear the burden of heaviest costs via deductions. These costs can represent a significant percentage of the total cost of the order. The cost associated with charge backs usually affect two primary areas. First, is the cost from incomplete, missing or short shipments, missing or incorrect ASNs or inaccurate invoicing, all of which are passed onto the manufacturer. If traditional approaches to deduction management are used, the second cost is in the administrative area additional people need to be hired by manufacturers to reconcile the discrepancies, enter data and track down inventory.
To date, the focus has been squarely on the manufacturer. But manufacturers are looking at it "from the 20,000-foot level." Finding answers to the deduction problem is impossible at this level. At the 1,000-foot level, data analysis starts to isolate the issues. Where do manufacturers find the information that will dramatically reduce or eliminate the costs incurred from deduction management? All of the information, such as inventory, orders, shipments, ASNs, delivery, etc., exists within the four walls of the typical manufacturing company, if the manufacturer can approach data at the right level.
New technologies become the enabler that meets the data storage and access demands required in a deduction management solution. This rift between manufacturers and suppliers is not generally given much publicity because both parties want to preserve the image of a solid relationship. Yet, within a three-to-six month time frame, manufacturers could see their deductions diminishing by harnessing technology that exists today.
With current business accounting methods, such deductions are a recurring charge to manufacturers that regularly go against their bottom line. However, a manufacturer could begin to solve the problem by making a one-time investment in new technology and data analysis tools. The ROI potential of such a solution is tremendous; one can estimate ROIs that are in the 500-1,000 percent range in the first 18-24 months of the project.
Deduction management is one of the problems that manufacturers are trying to fix where there is indeed a solution already at hand. Deduction management has a significant potential payback one that can be obtained from an IT-based solution. The costs to implement such an effective deduction management solution will vary greatly based on the implementation. They can run as high as $500,000, but this must be put in the perspective of the millions of dollars lost through deductions.
The technology exists today, and the information is readily available. What is not found in the manufacturing sector is a willingness to embrace the new technology to solve this problem. Advances in data management analysis will enable manufacturers to drill down through the data to identify their company's problem areas.
In the end, an innovative approach to deduction management that relies on integrating data and data analysis technology can help significantly reduce the charges incurred by manufacturers, as well as help heal the current retailer/manufacturer rift. Here is a clear business relationship that is suffering. And, as we "fast forward" to the next millennium, manufacturers must make the right investments to move ahead into the new age of business.
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