Reducing and controlling deductions Increasing profitability by improving retail compliance

Reducing and controlling deductionsIncreasing profitability by improving retail compliance NEECOM Annual Fall Conference October 2008 Jessica ButlerPrincipal (201) 280-4773 jbutler@attainconsultinggroup.com

Today’s Agenda • Introduction • Controlling deductions • Enabling technologies • Best practice snapshots • Conclusion Attain Consulting Group 2008 – Deduction Basics - 2 -

IntroductionDeductions defined • Deductions are discounts and short payments that are a fact of life when doing business with retailers. • Some are simply a cost of doing business, but not all deductions are created equal. • Deductions come in various sizes and shapes… Attain Consulting Group 2008 – Deduction Basics - 3 -

IntroductionDeductions defined What is the difference between a Deduction Chargeback and a Attain Consulting Group 2008 – Deduction Basics - 4 -

IntroductionTypes of deductions Intentional Typically budgeted, pre-authorized and not recoverable. Considered “cost of doing business”. Preventable Generally result from compliance violations. Prevented through negotiated exemptions & sound business practices. Unauthorized Mix of compliance violations and retailer “games.” Need sound business practices & aggressive collection to recover. • Agreed Upon Discounts • Co-op Advertising • Mark-down Allowances • Rebates • Margin Guarantees • Wrong / No UPC • EDI / ASN • Wrong SKU • Carton Markings • Late Delivery • Freight / Handling • Pricing • Returns • Full Carton Shortages • Concealed Shortages • Unclassified/ Miscellaneous Attain Consulting Group 2008 – Deduction Basics - 5 -

IntroductionImpact and improvement objective varies by type Intentional “Indirect” impact on profitability – most are authorized and non-recoverable Objective is speed! Streamline processing of these chargebacks to focus efforts on other recovery efforts Preventable “Direct” impact on profitability – many which are not easily resolved are “split” with retailer Objective is prevention! Redesign business processes; establish new procedures; practice consistently Unauthorized “Direct” & “indirect” impact on profitability Objective is quick resolution! Follow-up quickly to resolve open issues; proactively work with retailers to limit “gaming” Attain Consulting Group 2008 – Deduction Basics - 6 -

IntroductionDeduction facts/benchmarks - CRF survey snapshot* Percent of deductions allowed after investigation: • For all respondents, 76 – 80% of all deductions are allowed (median). • 15% of respondents allow over 90% of total deductions • Industry highlights: *Based on 6/06 Survey conducted by Credit Research Foundation of 424 companies across 26 industries. Attain Consulting Group 2008 – Deduction Basics - 7 -

IntroductionDeduction facts/benchmarks - CRF survey snapshot* Percent of outstanding AR: • Deductions represent 2% of open AR items and 2% of open AR dollars (median) • Industry highlights *Based on 6/06 Survey conducted by Credit Research Foundation of 424 companies across 26 industries. Attain Consulting Group 2008 – Deduction Basics - 8 -

IntroductionDeduction facts/benchmarks - CRF survey snapshot* Biggest internal challenge in controlling deductions Attain Consulting Group 2008 – Deduction Basics - 9 -

IntroductionFinancial Impact - Why focus on reducing deductions? If you have a 5% margin, a $1million reduction in deductions has the same financial impact as a $20 million increase in sales. Attain Consulting Group 2008 – Deduction Basics - 10 -

IntroductionFinancial Impact - Why focus on reducing deductions? Increasing sales is not the only way to Boost Your Bottom Line Attain Consulting Group 2008 – Deduction Basics - 11 -

Controlling deductions…

Characteristics: • Chaotic • Unorganized • Redundant • Overwhelming • Inefficient • Ineffective • Costly Controlling deductions Vendor Perspective Common Structure Attain Consulting Group 2008 – Deduction Basics - 13 -

Desired Structure Characteristics: • Aligned • Organized • Teamwork • Responsive • Timely • Effective ($) Controlling deductions Vendor Perspective Attain Consulting Group 2008 – Deduction Basics - 14 -

Desired Structure Controlling deductions Vendor Perspective Common Structure Attain Consulting Group 2008 – Deduction Basics - 15 -

Controlling deductions Vendor Perspective Designed for Prevention Management • Compliance Information Management • Cross-functional Coordination • Process Improvement • Trading Partner Communication • Negotiation / Settlement Attain Consulting Group 2008 – Deduction Basics - 16 -

Controlling deductionsDeduction management process Report Measure Deduction Prevention Deduction Resolution Deduction Processing Communicate Attain Consulting Group 2008 – Deduction Basics - 17 -

Controlling deductionsDeduction management process • Proactive Management of Compliance • Staying current with customer requirements • Communicating requirements to right people • Identifying areas of noncompliance/violations • Determining root causes • Resolving issues Deduction Prevention Attain Consulting Group 2008 – Deduction Basics - 18 -

Controlling deductionsDeduction management process • Identification & Validation of Deductions • Capturing appropriate reason codes • Researching to determine validity • Compiling supporting documentation • Identifying trends & recurring issues Deduction Processing Attain Consulting Group 2008 – Deduction Basics - 19 -

Controlling deductionsDeduction management process • Reaching Closure • Accepting valid deductions • Recovering invalid amounts • Negotiating customer settlements • Developing key customer strategies Deduction Resolution Attain Consulting Group 2008 – Deduction Basics - 20 -

Controlling deductionsDeduction management process Report Measure Deduction Prevention Deduction Resolution Deduction Processing Communicate Attain Consulting Group 2008 – Deduction Basics - 21 -

Controlling deductionsSuccessful strategies to control deductions • STRATEGIES • Effective management of retail requirements (vendor compliance/routing information) • Consistent internal processes focused on prevention • Early warning/identification of issues • Effective cross functional coordination/ communication GOALS PREVENTION (Proactive) RESOLUTION (Reactive) • Quick follow up - streamlined processes focused on recovery • Effective tracking & reporting • Internal elevation of issues; effective coordination / communication • Cross functional coordination/ communication Attain Consulting Group 2008 – Deduction Basics - 22 -

Controlling deductions5 Key Steps for Improved Deduction Management • Validate Reason Codes– Ensure that reason codes used to track deductions are “meaningful” (need enough detail to understand issues to prevent reoccurrence, as well as ability to “roll-up” for management reporting) • Develop Effective Reporting – Deduction reporting should be timely, accurate, flexible and not require significant manual effort or off-line spreadsheets (e.g., should not be doing reporting in Excel). Several PC based reporting tools are available which streamline and facilitate reporting process. • Manage Retailer Vendor Compliance Requirements – Must stay current on retailer’s changes in compliance and routing requirements and get information to “right” person in your organization to make change. Attain Consulting Group 2008 – Deduction Basics - 23 -

Best Practices Discussion5 Key Steps for Improved Deduction Management (cont’d.) • Institute Routine Cross-Functional Deduction Meetings– Deductions are a company-wide issue. Every department needs to be accountable for deduction prevention and resolution. Meetings should focus on key deduction issues / customers and the steps to be taken for improvement. • Improve Trading Partner Relationship – Companies who have a good relationship with their customers do a better job of managing deductions. Have face-to-face meetings with key customers to discuss compliance issues at least annually. In addition, talk with them to discuss issues and areas where you are unable to comply before the deductions begin. Attain Consulting Group 2008 – Deduction Basics - 24 -

Enabling technologies …

Enabling technologies • Deduction Management • Workflow • Reporting • Web Aggregation • OCR / Scanning • Data Management / Validation Attain Consulting Group 2008 – Deduction Basics - 26 -

Enabling technologies • Deduction Management • Identification, tracking and resolution • May or may not include trade promotion functionality • Part of ERP packages or “bolt-on” solutions • Deductions only or replace AR • Purchase or “software as a service” Attain Consulting Group 2008 – Deduction Basics - 27 -

Enabling technologies • Workflow • Build in standard processing “logic” • Automate deduction processing activities • Simplify decision making, improve efficiencies Attain Consulting Group 2008 – Deduction Basics - 28 -

Enabling technologies • Reporting • Numerous 3rd party BI reporting solutions • Companies often already own for Sales Reporting • Need ability to: • View “big picture” to identify issues & trends • Drill into data • Perform ad hoc reporting Attain Consulting Group 2008 – Deduction Basics - 29 -

Enabling technologies • Web Aggregation • Automate POD retrieval from carrier’s web sites • Automate claim document retrieval from retailer’s vendor portals • Automate pre-deduction notification information from retailer’s vendor portals • Auto-populate documentation (i.e., dispute forms) Attain Consulting Group 2008 – Deduction Basics - 30 -

Enabling technologies • OCR / Scanning • Scanning vs OCR • Paper claim documents • BOLs • Return reconciliations Attain Consulting Group 2008 – Deduction Basics - 31 -

Enabling technologies • Data Management / Validation • Data synch • Automated compliance requirement management • Validate data against customer requirements • Mapping / structure • Data integrity / business content • Timing / execution Attain Consulting Group 2008 – Deduction Basics - 32 -

Best practice snapshots • Effective reason codes • Managing retail compliance information • Cross-functional best practice teams • Negotiation tips & strategies • Maximizing trading partner relationships

Best practice snapshotsEffective reason codes • Having the right reason code structure is essential in effectively reporting and managing deductions • Summary • High level summary for senior management • At-a-glance information regarding nature of deductions (e.g., “cost of doing business” vs internal inefficiencies) • Detailed • Organized structure for operating departments to identify root causes to develop corrective action • Balance between enough reason codes to track major issues and too many to allow for meaningful analysis Attain Consulting Group 2008 – Deduction Basics - 35 -

Best practice snapshotsEffective reason codes • Include “responsible department” for each reason code to promote visibility / accountability • Need ability to generate reports at both summary and detailed levels • Reason codes require ongoing maintenance - monitor and update over time Attain Consulting Group 2008 – Deduction Basics - 36 -

Best practice snapshotsEffective reason codes Attain Consulting Group 2008 – Deduction Basics - 37 -

Best practice snapshots • Effective reason codes • Managing retail compliance information • Cross-functional best practice teams • Negotiation tips & strategies • Maximizing trading partner relationships

Best practice snapshotsManaging retail compliance information • Almost every retailer has a compliance manual / routing guide which spells out their “rules & requirements” of doing business • So why do so many companies get hit with deductions for violations that are clearly explained in these manuals? • External Factors – Lack of compliance standards in the retail industry • Internal Factors – Vendors often do not do a good job of coordinating and communicating retail requirements within their own organization and negotiating with retailers Attain Consulting Group 2008 – Deduction Basics - 43 -

Gather Communicate Act Evaluate Best practice snapshotsManaging retail compliance information Coordinate Attain Consulting Group 2008 – Deduction Basics - 44 -

Gather Best practice snapshotsManaging retail compliance information Coordinate • Gather and Coordinate: • Gather & maintain each retailer’s compliance/routing information • Someone must “own” the process • Must stay current with changes as they occur (information may be on-line or hard copies only; some retailers have “opt-in” email for changes while others put responsibility on vendor to find changes) • Assign overall responsibility for gathering information and coordinating the process • While can be either centralized or decentralized, recommend that one person or group maintain overall responsibility • Most frequently found in compliance or customer service areas Attain Consulting Group 2008 – Deduction Basics - 45 -

Best practice snapshotsManaging retail compliance information Communicate Coordinate • Communicate: • Once gathered, information must be communicated to appropriate people so that action can be taken and goods shipped in compliance with requirements • Different departments need various pieces of information (e.g., warehouse needs logistics/routing information, MIS needs EDI requirements) • Consider various methods of communicating this information: • Forward relevant sections or changes to appropriate departments • Track what has been forwarded, request acknowledgement of receipt • Employ stricter controls to ensure compliance … Attain Consulting Group 2008 – Deduction Basics - 46 -

Best practice snapshotsManaging retail compliance information Communicate Coordinate • Communicate (cont’d.): • If your company has not been successful in managing retail compliance information, consider the following: • Prepare a spreadsheet summarizing the key compliance requirements for top retail customers (no more than 10) • Maintain spreadsheet on shared drive on company network • Include the following columns on spreadsheet: • Each major requirement (organized by area / department) • Date requirement received / effective date • Date sent to responsible department / date responded • Status / negotiated agreements Attain Consulting Group 2008 – Deduction Basics - 47 -

Best practice snapshotsManaging retail compliance information Communicate Coordinate • Communicate (cont’d.): Attain Consulting Group 2008 – Deduction Basics - 48 -

Best practice snapshotsManaging retail compliance information Coordinate Evaluate • Evaluate: • Each department must evaluate requirements to determine whether your organization can comply: • Immediate compliance possible • Future compliance based on work-in-progress • Information should be provided to coordinating group Attain Consulting Group 2008 – Deduction Basics - 49 -

Best practice snapshotsManaging retail compliance information Coordinate Act • Act: • For requirements where you can comply, each department needs to find best method to communicate requirements to those people on the “front lines” • When you are unable to comply with requirements, you must evaluate your options: • Accept the deduction • Make changes to become compliant • Negotiate an exemption with the retailer Attain Consulting Group 2008 – Deduction Basics - 50 -

Reducing and controlling deductions Increasing profitability by improving retail compliance