Posted by Tom Tipps
Imagine this conversation between, Bob, the new Foodservice Sales Manager and Jay, the Chief Financial Officer for ABC Co, Inc.
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“So, Jay, what is ABC’s policy for the overpayment of claims from our distributors and restaurant operator customers?"
"Well, Bob, we really don’t have a policy on this, but I hear that our accounting department overpays claims by about 20%.”
"Wow, Jay, that sounds like a lot of money. How can ABC Co afford that?"
“It’s not really that much money and we hate to create trouble with our trading partners…so we just let it go. And if we do challenge them, they just deduct anyway.
It’s not that much money? Our total sales are about $300 million/year and 70% of our sales carry some type of deal with our distributors and/or operators. So that’s $210 million in sales shipped on deal. If our average deal, or discount, is 15% of sales, that means we are receiving claims totaling about $31 million.
Applying a 20% overpayment factor, we are overpaying those claims by almost $5 million/year.
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To many, this dialogue may sound totally contrived, but unfortunately, it’s true unless we’re dealing with the very largest manufacturers who have developed the systems and business processes to manage their trade-spend investment with their trading partners.
And even if manufacturers have the budgets to install the required systems…they generally lack the knowledge and IT resources required to implement a true trade management system.
So, every year 70% of their claims have errors that impact the company’s profitability. The main source of errors is No Agreement; i.e., there is no agreement between the manufacturer and the claimant. Other claim error reasons include ineligible claimant, ineligible sku, wrong distributor or operator, etc. If these claim errors are not identified and reconciled…the claim errors reoccur throughout the life of the contract, costing the manufacturer literally $ millions.
Answers Systems is the leading provider of Trade Performance Management systems to the Foodservice industry. If you are interested in how to put a stop of the payment of invalid claims, give us a call and ask about ourContractPro® system and Industry Best Practices.