In my last blog, I identified several critical areas where ineffectively managing supplier inquiries and claim disputes cost an organization in both lost efficiencies and direct hard dollars. In this blog, my goal is to provide additional insights to those looking to initiate a Deduction Management project within their own organization. This will include additional benefits to both buyers and suppliers, specific areas of savings and a strategy to launch and scale a successful and mature Deduction Management program with your suppliers.
First, we must acknowledge that there is always resistance to change and a fear of the unknown. Before you start any real work, always identify who this project will impact and the appropriate WIIFMs (What’s In It For Me). Until you gain support of key business stakeholders and sponsors, you will have an uphill battle. Do not forget, your suppliers are also key stakeholders in this. Being able to lay out clear and specific value to each of these groups will be critical to the success of your initiative. The following provides such a framework.
In order to show value, you must first understand who has a stake in the game, and exactly what that stake entails. Accounts Payable (AP) may have needs around managing inbound supplier communications, whereas Merchandising may have challenges in accessing historical deal and pricing information. At the same time, General Accounting needs to accurately manage related accruals (e.g., anticipated repayments to suppliers) and Treasury needs to forecast future cash requirements. If you are a retailer, you need to ensure there are no out-of-stocks so that the stores themselves don’t become impacted. Take time to understand the stakeholders as well as their needs and environments in order to clearly define how your project will impact them.
There are multiple benefits to the buying organization when implementing a Deduction Management program. They start with allowing for greater adoption of supplier self-service so that suppliers may access their own payment and remittance history, as well as supporting documentation behind any deductions from the payment, which can occur either as a result of a three-way match difference or a separate line-item deduction such as an incentive program billback. We estimate that providing this visibility to suppliers reduces inbound communications around 67%. The remaining one-third of communications requires some internal action. Leveraging a workflow-driven platform can help further automate. Using supplier self-service as the cornerstone, buying organizations can realize substantial savings in two key areas.
First is operational costs. Far less FTE support is required to manage the supplier claims process, both core FTEs whose focus is managing claims as well as ancillary FTEs who touch the process throughout the organization (see my previous blog, The Cost of Resolving Disputes Between Customers and Suppliers). There also exists far greater process oversight and controls, allowing for not only greater visibility and reduced risk, but advanced reporting and metrics like deep root-cause analysis as well. No process can be improved until it can properly be measured. Users of Deduction Management platforms also report reduced turnaround times, greater adherence to specific SLAs or KPIs and improved alignment and collaboration with supplier and internal business partners.
The second key area of savings is direct profit, dollar-for-dollar, related to repayments of deductions. We have found that there are multiple areas of leakage within the buying organization around unnecessary deduction reversals. Repayment leakage occurs for several reasons. One example is if a buying organization fails to provide substantiated backup support for the deduction in question, or if the backup support fails to report certain information within a defined timeframe (e.g., 24 hours for damages), it will be forced to repay the amount even if it was correct to begin with. Further, due to limited resources and process inefficiencies, many companies are forced to repay claims due to age, a pending credit hold, an upcoming contract negotiation or a call to Senior Management. This often takes the form of a settlement payment. In an effort to address resource constraint, many organizations implement tolerances. These can be for a minimum claim amount allowed for processing or a minimum claim amount allowed to be repaid without further authorization. In both cases, we have found that many customers have lost direct profits (in the millions of dollars) when using tolerances instead of automation to solve for this pain. Finally, the overall rate of paybacks is reduced over time. Given improved controls, workflow automation and improved system integrations, suppliers can get the right backup they need, in the time they need it. This allows a higher rate of acceptance for original deductions. In some cases, we have seen as much as a 75% reduction in paybacks across certain categories.
Again, do not forget about your suppliers. Any supplier-facing program that fails to take into account the supplier needs will fail. There are several key benefits to suppliers having a technology-based Deduction Management program. Foremost, the suppliers will no longer have to suffer from the “black hole” of open-ended inquiries to customers. Using a multi-tenant SaaS technology platform lets supplier see the details and documentation they need to apply deductions, as well as the visibility into closed-loop communications related to inquiries or dispute claims. Suppliers gain real-time access to their customer’s dispute resolution process. This allows suppliers to also reduce operation costs associated with applying cash and managing outstanding claims with customers. All of this helps to reduce strain with critical customers and improve overall relationships with business partners.
Having a unified tool that is used by both vendors and suppliers creates transparency for dispute resolutions. The aggregation of data, along with continued analysis, provides vendor insight into root-problems and sheds light into how vendors can address future and like-problems before they are repeated.
Whether looking for a platform that allows you to efficiently respond to a supplier request, provide more accurate responses to dispute claims with minimized effort, or use data insights to recover funds and improve business insights, PRGX’s Deduction Management tool can help. For a more in depth look at this customizable software service, please visit our website, or stay tuned for my next blog, Building the Business Case for Your Deduction Management Program.
Senior Director Solution Consulting at PRGX
Josh Morrison is head of Global Solution Consulting with PRGX and is a 20+ year veteran of P2P, Strategic Sourcing and Supplier Management. In his role, Josh works closely with customers to identify new areas of value and develop lasting and scalable strategies for large and complex enterprise organizations. Josh holds an MBA in Entrepreneurship and Innovation, and currently serves as a member of the Board of Directors and President of the New England Local Chapter for the Institute of Financial Operations, the Account Payable industry’s leading professional association.