Executive Summary
Maintaining or increasing product margin is highly regarded as a method for profitable growth among distributors. Industry data confirms that roughly half of distributors’ profit is now based on vendor cost recovery programs (SPA programs). Those programs must be well managed to be financially successful, especially when one considers the increased focus by regulators on SPA controls and reporting.
Even the best run distributors depend heavily on vendor cost recovery for success. For some distributors, their entire net profit results from these vendor payments. But these programs present distributors with a dilemma. How can they manage this increasingly important source of cost-of-goods-sold reduction, in a way that is not costly, time consuming and cumbersome ?
Why do we need Vendor Chargeback System (SPA)?
On paper, the chargeback process is simple. A contract is negotiated between the distributor and the vendor or manufacturer, outlining the terms and conditions of a special pricing agreement. A customer places an order with the distributor that is eligible for the special price. The distributor submits a claim to the vendor or manufacturer for reimbursement of the special discount. The vendor processes the claim, and the distributor records the payment.
However, the process is not as simple as it seems. For many distributors, it is complicated, time-consuming, error-prone, and therefore costly. The complexities of changing agreements can result in claim disputes and delayed payments. Any leakage of these claimed chargeback amounts results in lost margin, and could mean the difference between a profit and a loss. Aging claims can also impact a distributor’s financial performance.
The challenge for most companies is that they do not have clear visibility into all of the special pricing agreements that may be at play, and how they integrate into their purchasing and sales processes. It is difficult for them to challenge disputed chargeback claims because they struggle to uncover what caused the discrepancy. Did they apply an agreement to a sale that was not actually eligible? Did the vendor stipulate an exclusion or a rule that the distributor was not able to support, other than relying on manual intervention?
An inefficient chargeback process is bad enough, but an inaccurate one that ultimately results in lost margin is too costly for a distributor to accept. If they cannot analyze the profitability of each SPA, then they risk losing critical insight that gives them competitive advantage. Without an integrated, systematic, rules-driven approach, they face income leakage, painful write-offs, high reserves, and increased days chargeback outstanding.
It is a daunting task for distributors to keep track of the many SPA programs in place; validity dates, specific customers and SKUs, stand alone or only eligible in bundles, minimum & maximum quantity restrictions, etc. Calculation variables like List price, cost prices, purchase price makes it more complex. Considering all their permutations,SPA programs are a very complex method of shaping demand, providing incentives for sales and compensating distributors based on performance. Because of the potential to impact the company’s bottom-line profitability, it is critical to be able to properly identify and resolve any SPA related issues. Wholesale Industry is looking for an affordable, manageable and supportable enterprise solution for large organizations to ..
- Lower operating costs with efficient and streamlined management of vendor claims
- Reduce manual administrative work
- Reduce cost of dispute resolution
- Reduce vendor receivables days outstanding
- Increase Cash flows
- Reduce cost of goods sold
This white paper will illustrate today’s chargeback process in detail, pinpoint areas where distributors can improve their chargeback process, and describe the benefits of an integrated enterprise chargeback solution.
Key Business Needs
- Flexibility: SPA programs come in different shapes and sizes; sometimes simple, other times quite complex.Programs may apply to all customers and products during a promotional period, or they may only apply to certain customers, products, or even specific opportunities.Distributors must be able to adapt so that they can price accordingly, track the cost delta in the ledger, and claim/collect the money from the supplier.
- Accuracy: A distributor must maintain their suppliers’ confidence in data so that they are paid timely with minimal disputes. They must ensure that they do not apply SPA discounts to ineligible sales and comply with the suppliers’ guidelines for each SPA program.
- Ease of Use Must be intuitive for the users who:
- Create SPA programs in the system with precise eligibility rules according to manufacturer guidelines
- Create sales quotes/orders, relying on comprehensive view of all eligible SPA programs for each sale, as well as the impact on pricing, margin, and commissions
- Analyze the financial impact and ledger postings related to SPA programs
- Process claims according to vendor requirements
- Apply reimbursement payments to SPA claims
Distributors want a solution that will reduce end-to-end processing time by being easier to use than excel spreadsheets not integrated with their core systems.
