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May 7Jeff Matthews

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May 7Jeff Matthews

Customer Deductions can destroy margins

Customers take deductions for a variety of reasons.  Pricing discrepancies are often the cause.  Are your sales and customer service functions communicating with your billing staff so that invoices are accurate?  If not, they will bill incorrectly which is frustrating to the customer and causes cash surprises when the customer delays payment or simply pays less than you expected.  Remember, bad billing can result in undercharges which may never come to your attention.

Deductions can also result from quality problems.  Quality issues can result from faulty products and from insufficient packaging.  A strong product quality function can address faulty product issues and make sure the customer is getting what was promised.  If you are seeing rejections or returns due to damages, they may result from insufficient packaging or poor handling techniques.  Handling issues may occur in your shop, during the shipping process, or at your customer’s location.  If the damage issues are coming from select customers, visit their shops and understand how your products are being handled, stored and displayed.  I have seen small retail backroom situations that were the root cause of damage deductions.  You can probably not provide adequate protection for your goods if they are being poorly stored and handled by your customer.

If your packaging is not up to the typical rigors the product will face before it reaches the final consumer, bring in an expert who can propose creative packaging solutions.  Also make sure you don’t have more protection that is needed, driving up your material costs.  I worked for a firm that used packaging so secure that it would protect eggs to ship durable steel products.  By using appropriate packaging that company raised margins.

Deductions for promotional costs are common in some industries.  In these cases, the customer takes a deduction for improved shelf placement and promotional advertising in their flyers.  Most newspaper ads are paid by manufacturer promotional discounts.  Some manufacturers invest in audit processes to ensure that their ads were placed and the shelf space was provided.  This can be a good investment but the manufacturer needs to explore if they are willing to deny the deduction.  If not, why spend additional funds for an audit?

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