The Future of Deductions

By Corbett, Tom | Business Credit, March 2000 | Go to article overview

The Future of Deductions


Corbett, Tom, Business Credit


Deductions, chargebacks, disputes and dilution are all used to label the payables practice of remitting less than the invoice amount to the vendors. The amount deducted may be valid or invalid, and some categories of deduction types are listed here:

* Freight Charges

* Handling Charges

* Merchandise Returns

* Sales Allowances

* Price Differences

* Advertising

* Prompt Payment Discounts (Unearned Cash Discounts)

* Post Audit Deductions (going back several years to find deductions)

* Off Invoice Deductions

* Damages and Shortages

* Purchase Order Violations (Vendor Compliance)

This list could go on almost indefinitely. At Creditek, we track in excess of 160 deduction categories for our clients. The ability to segment deductions by category is critical to properly analyze the problem. Deductions can be an invaluable source of customer feedback if the root cause of the deduction is determined. Although deductions exist in all industries to various degrees, the most significant deduction issues plague suppliers who sell into the retail distribution channel. To explore where deductions are headed, we need to review some history.

Twelve to fourteen years ago a popular viewpoint was that deductions would go away The thought process was that the implementation of EDI and EEC would result in a drastic decrease in deductions. Electronic Data Interchange, or EDI, is the electronic transmission of documents from business to business. Electronic Funds Transfer, or EET, is moving value (money) between accounts electronically. The theory was that because EDI replaces human labor and paper forms with computer communications, the resulting elimination of human intervention would greatly eliminate order errors--which are a substantial causal factor in deductions. It was commonly believed that the increased utilization of EDI would result in exact matches on pricing, quantities and product in these business-to-business transactions. It was also assumed that the use of EFT would eliminate cash discount and float issues, eliminating deductions related to those factors.

Additionally, there was a lot of conversation taking place between suppliers and their customers about creating true "business partnerships". The premise being, particularly between manufacturer and retailer, that the relationship would become virtually seamless with both partners valuing each other's business issues as highly as their own. However, in spite of those optimistic assessments, deductions actually have dramatically increased over the past 10 years.

What happened to a future without deductions? Well, the real world entered into the equation. Despite all the forecasts about rapid introduction of EDI/EFT, it was a very slow go. On the EDI side, there were many disputes over the standard electronic formats that must be used by EDI users to ensure that documents and other data are easily communicated through a uniform format. Software is used, such as the American National Standards Institute's (ANSI) X12 and EDIFACT, which converts files into the standard format before they are electronically transmitted. These standards simply allow computers of entities that are incompatible with computers of other entities to communicate with one another. Data transmitted by a company is translated into the standard before it is sent. The receiving company's own standard software translates it back to their own form of data for easy processing. EDI was also expensive to implement and was best suited for large companies. Fortunately, the Internet and e-commerce will enab le small companies to avoid those expenses and inexpensively utilize electronic communications. EFT issues were substantial concerning the effective settlement date for transactions. The buyers were not anxious to surrender the float time they enjoyed when paying by check, and the sellers were cautious about conceding terms that would actually result in receiving payments later than the status quo. …

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