TRADE PROMOTION
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SECTION TWO
Best Practices for Dealing with Invoice Deductions

Invoice deductions are a necessary evil for consumer packaged goods companies.
They take time, cost money, but are a part of doing business with retailers. The best
vendors have learned to cut their losses by setting up clear policies and maintaining
constant communications with customers, including persistent calls for payments.

“Deductions are going to happen. The main thing is to minimize them, and minimize the
unauthorized deductions,” says John Maggiore, principal, Maggiore’s Sales & Marketing.
Companies spend a lot of time on deductions — “It really is a time hog,” he said in a
presentation at TPM That Rocks: 2012 MEI User Conference this month in Cleveland.

Invoice deductions, or charge backs, are the difference between a supplier’s invoice amount and the payment remitted by a retailer or wholesaler. Some examples of deductions are temporary price reductions (TPRs), advertising, slotting allowances, unsaleables, cut-case charges, administrative fees, damaged cases, short shipments, and what Maggiore termed “creative deductions,” where at the end of business period, a buyer with a pay structure based on incentives needs to make certain numbers, and simply invents something.

“The best advice to minimize deductions,” he said, “is to have good clarity about sales terms, because that is ultimately what it comes down to. Maggiore outlined several best practices to deal with invoice deductions:

  • Be realistic and think through the costs necessary to support sales in each class of trade where the vendor competes. Don’t spend four hours chasing a $45 deduction. Be reasonable and understand how much time and effort goes into it.

  • Understand the customer’s sales policies and clarify the vendor’s. Most retailers have a comprehensive vendor packet, requiring a signature before commerce can begin between the two companies. Take the time to go through it. Don’t just sign it at the bottom. Almost all invoice deduction questions are covered in the packets.

  • Make it clear that you are on top of these deductions and will closely monitor them. Some retailers actually log phone calls from vendors seeking payment, and will pay the companies that call the most first. This is especially true with smaller retailers that have cash flow issues. For example, if they have $100,000 and need to pay $150,000, they try to buy time with the vendors who don’t call regularly.

  • Make sure the broker understands the CPG company’s policies and is clear on what they can and can’t commit to on behalf of the manufacturer. Also if either a retailer or a manufacturer changes its sales terms, communicate that to the broker.

  • All commitments must be documented. Good communication and good documentation help significantly in handling deductions, and result in faster payment. Use email for documentation, but only send it to the people who need it. Send comprehensive PDF documents as attachments.

CPG companies, and their representatives, such as brokers, need to do their homework and learn the common trade spending and likely deductions for each class of trade they sell into, as there are differences. They also need to understand the leverage they have to negotiate unexpected deductions. Big CPGs, like Procter & Gamble and General Mills, can threaten to stop shipments as a last resort, Maggiore said, but smaller companies can’t do that. “You have to understand what your leverage is and how you can work with it.”

He outlined five best practices for minimizing surprise deductions.

1. Ask for the retailer’s written policies during the initial sale. Many more retailers now have the
vendor packet, but these may need to be specified if dealing with a smaller company, especially if
there’s a chance of personnel turnover.

2. Establish a vendor’s standard procedures policy. There should be a complete price list and a spec
list, including lead time for orders, payment terms and damages. The stronger these standards are,
the better off a vendor is going to be.

3. Determine together what is negotiable, what the retailer requires, and what may be systemic for
that distributor. Understand what is negotiable when filling out the new vendor packet, and be clear
about it. Don’t just cross something out and not write anything in its place. If they want 21 days and
the vendor wants 14 days, cross it out and write 14 days.

4. Do not leave the meeting without clarity of the terms of sale, particularly the pricing list; delivery
and shipping policy; and specific number of store placements vs. store authorizations. The price list
and spec list is very important. Make sure it is complete. For delivery and shipping, details like the
minimum order should be included. When dealing with larger chains, be clear about the number of
stores the product is going into, especially when slotting allowances are involved. This may end up
being a good approximation.

5. State in the policy what the broker is authorized to determine, and make it clear that all
promotional agreements or offers must be documented. If a manufacturer has certain things its
salespeople are responsible for signing off on vs. a broker, make sure everybody understands that.

If there are certain things that a manufacturer’s sales people are responsible for signing off on vs. a broker, make sure they understand that.

In summary, Maggiore concluded: “Do your homework. Have your policies in place. Set the tone early that you are top of it. Obviously you need to choose your fights — you don’t want to chase a $20 deduction. Act quickly with well-documented responses. And network with your peers, asking far as what are they hearing about the trade.”

This article is based on the presentation, “Dealing with Deductions,” at the TPM That Rocks: 2012 MEI User Conference (www.tradeinsight.com). The presenter, John Maggiore, principal, Maggiore’s Sales & Marketing, Wakefield, Mass., is a natural products broker and a former executive with the Stop & Shop Supermarket Co. He can be reached at maggsales@aol.com.





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SECTION THREE