Monday, January 20, 2014

Ship and Debit Programs

Special Pricing Agreement and Thoughts about Ship and Debit Programs

Click here for a brief tutorial on Ship and Debit Programs.

Special Pricing Agreements (SPA) have been around for a very long time. The concept is simple; a manufacturer uses their distribution channel as a vehicle to service a customer who requires very low pricing to match some commercial situation. The details of the commercial situation aren’t really all that pertinent. They can arise due to customer potential, competitive pricing pressure, or supply contracts driven with large mega-corporations. The point is normal distributor margins no longer support the selling price and the distributor plays a critical role in providing some service to the customer.

In years gone by, distributors involved in these situations purchased products earmarked for the special priced customer at sub-distributor price levels. The freshly purchased (at lower than normal cost) products were either brought “into stock” to sell later or drop-shipped to the customer. But issues arose.

One common issue involved distributors using the lower price purchases to “steal” business from competitive distributors with the same product line. Simply put, they used price to undercut the legitimate work of other distributors. What’s worse, is this action was done at the manufacturer’s expense. Channel issue galore were the result. To illustrate the point, I will retell a story from my early days as a salesperson.

While visiting the distributor location of a friend, I noticed an inordinate amount of fuse inventory. Since fuses were not a top seller at my own location, I asked the manager how they had managed to become so successful with the product line. His answer shocked me. Apparently, the company had managed to acquire the business of a single large OEM. The manufacturer provided very low “into stock" prices to support the OEM customer and this branch used the “hot price” (their words, not mine) to get the lion’s share of the business in their area. The margins were good and the other distributors struggled to keep up.

Was this illegal? In the day, it was a common practice and generally ignored by the manufacturer’s sales team. Did it create issues for brand loyalty with other distributors? One can only assume that it did. Either way, I felt it was a bit unethical.

For distributors suffering from a bad case of ethics, there were other daunting problems. If playing by the rules, the distributor was forced to maintain two sets of inventory; one for the “special priced customer” and another for everybody else.

Manufacturer’s addressed the issue by setting up a new program: Enter the ship and debit system.

With ship and debit programs, the distributor buys product “into stock” (or drop ships to the customer) at the “normal” distributor price. Any inventory is treated just like normal stock. Once the sale is made, a report is submitted to back to the manufacturer. The manufacturer subsequently issues a rebate credit to the distributor to cover the loss and gross margin. It sounds pretty straight forward, but the process is full of pit falls. Let’s explore a few of the issues.

The distributor-side submittal process
Reporting sales results back to the manufacturer can be both time consuming and difficult. While most modern ERP systems have a mechanism for creating reports, many distributors struggle with building the reports. Further, mistakes in the system can cost the distributor in loss margin.

To help you build a better system, here are a few recommendations:
Build a process around ship and debits – A good process includes documentation, metrics and coaching points. Investing time early allows the work to be moved to “lower level” clerical workers; freeing up the time of sales managers and others.
Make sure your sales team knows how to identify ship and debit sales– One of the most common occurring problems comes from poor communication between distributor sales teams or distributor specialists, purchasing and the back office admin staff in accounts payable. This is not the place for informal process. Side comments and casually mentioning special pricing agreements at the water cooler will cost you company tens of thousands if not properly contained.
Automate the process – Invest time up front to automate with your ERP system. Most times these reports can be done in-house, but spending time in the early stages will save you much heartache later.
Build checks and balances into the process – If product is sold under a ship and debit system and not properly reported, money can be lost (see my comment on tens of thousands above). River Heights Consulting recommends monthly spot checks and bi-annual review in detail. Again, if the process is well documented, the task can be straight forward and not all that time consuming.
Don’t forget to regularly review for “disputed” invoices – Occasionally, manufacturers and distributors disagree as to precisely what is to be rebated. These become hung up in the credit departments of the manufacturer. Never let these ride for longer than 60 days.

On the manufacturer end
In order to be a good distributor partner, manufacturers need to follow a few simple guidelines of their own. These will cut down on future issues and ultimately allow the distributor to better serve your customers. Here’s a short list for your consideration:
Establish a policy for your field salespeople, manufacturer’s agencies and others to follow in administering ship and debit programs – Experience dictates salespeople often lack the time and/or discipline to carefully handle ship and debit record keeping. I suggest devising a plan for quickly disengaging sales teams from the details of the plan.
Process the rebate information in 30 days – Respect the distributor’s investment. Since distributors typically submit at the end of the month, they have already lost the use of their money for 30 days. Adding another 60 or 90 days to the process of recouping their margins places undue stress on the distributor’s cash flow.
Simplify your reporting requirements – You aren’t the only manufacturer to whom the distributor will be submitting reports. Make your reporting requirements simple. The ERP systems of some distributors allow for specifically formatted reports, however many do not. We typically suggest the exchange of Excel files which can be formatted for automated entry into your own systems.
Build a plan to handle “disputed” items quickly – The sooner these items can be handled the better. Typically, the cause of many of these come via lack of attention to detail in the sales departments of both organizations.

The practice is exploding
We have noticed a near exponential growth in the use of Special Pricing Agreements. The Electrical Wholesaling industry alone has experienced 400-500% growth since the end of the last recession. Special Pricing Agreements have become part of the strategic plan for many distributors. One of our clients calls them “the new exclusive agreements” and certainly many larger national chains have picked up on how to use the agreements as an offensive weapon. If your company hasn’t seen an increase in SPAs and experienced growth in the use of ship and debit, I suggest you inspect. Allow me to explain why.

In 2012, we did a straw poll of distributors and manufacturers who serve the Electrical, Automation, Power Transmission and Fluid Power Industry. All noted marked increase in use of Special Pricing Agreements. This is probably not major news, but the next point will shock you. Several manufacturers’ sales managers, candidly shared that requests for Special Pricing Agreements are part of the criteria they use for measuring the aggressiveness of a distributor’s sales force. Forget solution selling, throw out value-metric arguments; these guys gauge you on how many times you come to them for lower than normal prices. Hmmm….

Finally, to illustrate the interest in Ship and Debit Programs – below is the raw data on search results landing people onto this blog. Based on 25,000 visits during 2013, here are the numbers for individual searches on Ship and Debit information. We think it’s pretty interesting:

  • ship and debit   911
  • ship and debit definition   249
  • ship and debit process   207
  • ship & debit  127
  • what is ship and debit   48
  • ship and debit wikipedia   28
  • distributor channel   25
  • "ship and debit"   23
  • ship and debit program   23
  • ship and debit model   16

We know many other people are looking into how to implement their own Ship and Debit process. We have assisted many of them in establishing the right kind of process. If you happen to be working on developing a strategy for your own organization, shoot me an email.  We can typically get you headed in the right direction in pretty short order.

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