by Neil Gillespie and Allen Ray, Growth Wizards
Most distributors have a natural disdain for SPAs and rebates. They don't want to deal with the complexities so they mentally shove the issue off as if it's somebody else's problem to solve, like the manufacturers. As a distributor, however, the problem really is yours because it causes you to invest a lot more cash in your business than you would if you were fully aware of the consequences.
Yet you keep asking for them from manufacturers, digging your cash hole deeper, while failing to make your SPA administration and claiming process more accurate and productive. Sure, somebody should straighten out the whole mess and find a way to just control pricing in the market and give nets into stock. But that isn't going to happen. So you must deal with it to limit your cash investment.
Go Away With That Rebate Stuff, You Bother Me
Many people tell us to get lost when we talk about his subject because it's a bother. But we can tell you with all confidence that if you're claiming once a month or less, submitting claims manually instead of electronically, and haven't overhauled your product and pricing data recently in order to claim the right items, all the items to which you're entitled and the right claim amounts based on standard costs and discounts allowed, you are investing 1-4% of revenues in cash needlessly. Still want us to go away?
Yes, that's right. If you do all the things we recommend in the following checklist, you will generate up to 4% of revenues in increased bank balance. Think of what could you do with that money! For a $20 million distributor that's $200,000 to $800,000. A $100 million distributor could generate $1 to $4 million. Those sums would easily pay for whole new business systems, business system upgrades, warehouse management modules, wireless systems and then some. Seem too good to be true? It's not.
Calculate The Cash Generation Yourself
Consider the example below. It assumes that a distributor is selling 30% of revenues to accounts with SPA pricing agreements that require rebates from manufacturers after the invoice is sent to the end customer. It also assumes a 40% average discount from normal book price. Of course, if your SPA percent of sales and average discount levels from book price are higher or lower, your results will vary. So we're making a special calculator available in MS Excel on www.growthwizards.com. Click here for the link.
|Percent SPA Revenues||30%||30%||30%|
|Gross Profit @ 20%||$6,000||$15,000||$30,000|
|Cost of Goods Sold at SPA Price level||$4,800||$12,000||$24,000|
|Average SPA Discount from Distributor Net||40%||40%||40%|
|Price Paid Into Stock||$8,000||$20,000||$40,000|
|Annual SPA Credits||$3,200||$8,000||$16,000|
|Average days to collect from manufacturer||15||15||15|
|Total Cash Flow Days Uncollected SPAs||60||60||60|
|Total Cash Tied Up||$658||$1,644||$3,288|
|Average days lag from claiming weekly on
Friday and collecting on Monday
|Reduction in cash flow days tied up||69||69||69|
|Cash Generated from Automating SPAs||$605||$1,512||$3,025|
|Percent of Revenues||3.0%||3.0%||3.0%|
The 12 Point Checklist:
How To Minimize Cash Invested in SPA (Rebate) Business
At the end of the day, you're going to raise your cash balance if you execute the 12 imperatives. You will see cash increase and accounts payable decrease. Why accounts payable? When you make a claim, it should reduce accounts payable, which are inflated until you get your money back from the manufacturer (you shouldn't have paid that much for that muffler). If you get more money back and you get it back faster, your average accounts payable will reduce. You won't see this on any report unless you make a conscious effort to book SPA claims receivable the minute after you make an SPA sale. We don't know anyone that does that. Nevertheless, the amounts ARE hiding in your accounts payable.
Here's the really important point about these: You can't leave out any of these steps and expect to get all of the 1-4% cash. You will be leaving cash uncollected or uncollected for too long if you don't do each of these well. It's a really good idea to get together as a management team and rate your business on how well you execute each of these imperatives, then get to work.
1) Get the right person on the entire process – accurate product data, administration processes, pricing setups in the business system, assignment to accounts, claims, credit receipts and measurements. We see too many distributors that divvy up the tasks to different departments. The different departments don't talk to each other. Nobody is responsible for maximizing claim speed, accuracy and completeness of claims or minimizing cash invested. You need to create a team with a team leader charged with creating these OUTCOMES. Do it.
2) Maintain accurate data – product groups, cost bases (distributor net, list, etc.) Take a look at an SPA the next time you get one. They usually indicate product groups or specific SKUs with associated discounts from list or distributor net, perhaps even net prices. They also indicate a start and end date and customers authorized, perhaps even territories authorized. Take product groups, for example. If your product database doesn't have these correct in your system, the same way the manufacturer stores them, you can't claim correctly. You'll either miss claims or claim things you can't and get rejected. Don't proceed without good product data.
3) Work out the whole process with your manufacturers and make friends with the claim processor. There are two main points here. People like to work with people that are friendlier. And when you do your job better, it makes it easier for the processor. Get it? So get on the same page on how the processor will RECEIVE things. Here's point two: Your SPA setups have to be correct to claim correctly and get your money back completely and quickly. So set things up right to begin with. Work with your manufacturer to receive price notifications electronically, map them in right the first time, and assign them to all the accounts correctly. By the way. If you haven't gone through this drill with any manufacturer yet, start with the one with the most annual claim dollars and work your way down the list.
4) Negotiate the SPA right: Get the right sell price as well as the cost determined up front. Wish we had a dollar for every time we heard a story about SPA authorizations coming in but nobody has a clue what selling price to put on them. You get the cost, but people get amnesia on why you needed it. Train your field people to report selling price required early in the process.
5) Have all authorizations go to HQ administration people instead of to field sales. This one can be dangerous. Again, wish we had a dollar for every time a field person received the SPA from a factory rep or agent, held onto it and assumed headquarters got it as well. You need to short circuit that loop and require manufacturers and reps to send it to headquarters. And if you're not administering claims from headquarters, good luck with your strategy.
6) Receive pricing authorizations electronically and map into your system. You might spend a little more time up front discovering how to "map" or set up field-to-field associations between a manufacturer pricing agreement and your business system. But after that they just roll in, and they will be correct. Always remember to test a transaction, however. Once in a while manufacturers move the fields around when somebody new gets on the job. Make it part of your process to test any NEW SPA that comes in.
7) Enter SPAs BEFORE you start selling to the customer. This relates to No. 4 as well. Of course, nobody in their right mind would fail to do this on purpose. But it happens all the time. Don't let pricing agreements sit in a pile, or as we said in No. 4, in the field. Enter them as soon as you get them and make sure you get the beginning date right and the expiration date right. Or, you could end up selling something at an SPA price level without getting the cost you need to make any margin dollars if you fail to claim.
8) Test out a transaction on a new SPA pricing authorization. You don't want to frighten your customer, do you? Or worse yet, frighten yourself by selling at a loss. Manually check a few test transactions on each NEW SPA setup. And save yourself a bunch of headaches. Cleanup is a bear when you make pricing mistakes. Not to mention the breach of trust it can cause with the customer.
9) Claim as early as it makes sense for a supplier. This one is really interesting. How often you should claim is a function of the tradeoff between the cost to claim (people's time) vs. the cash generated from claiming more frequently. If you still claim with paper or by sending PDFs or flat file reports via e-mail or snail mail, it takes more time than if you are totally automated and send electronic files computer to computer or through a VAN. If you are totally automated you might as well claim weekly, because there is practically no people time involved. Somebody should monitor all claims made and credits received each week, for example, if you claim on any manufacturers weekly.
10) Track all claims with a claim report. Claim reports should detail the smallest transactional unit that is claimed: a line item to a customer, the amount claimed, and preferably, the original purchase cost vs. the SPA cost you require. The claim is the difference, of course. After all, this is about providing data in order to collect money quickly. And, if there is a dispute, all the data points that might be relevant in order to track down the source of an error and eliminate it for all future transactions.
11) Measure supplier performance and investment levels for total outstanding, percent of claims paid, average time to receive credit. That is self-explanatory data. What's not obvious is how to use this information. When one manufacturer has an average of $1 million annual claims, pays 98% of claims submitted, and pays in 10 days average and another has $750K of claims, pays 72% and takes 60 days to credit you, you will know what to do with this kind of information. If you have it, that is.
12) Send out reminders to salespeople three months ahead of expiration. Uh-huh. We've been there and done this. Leave it to the field people and you'll get a lot of last minute requests to reinstate SPAs after expiration, or a flood of requests on December 21, just in time to ruin the SPA pricing person's Christmas vacation. We've seen a lot of operations that do this year after year and never learn. It causes customer dissatisfaction, destruction of goodwill between headquarters and field people, and loss of margin, even loss of business. It doesn't take much to write a report to pull all the SPAs that are expiring in 90 days and send these out monthly with instructions. Again, it shouldn't be your problem at headquarters. But it will be if you don't do this.
And isn't that the whole point? If it is to be, it is up to you. Think of how 1-4% of revenues in cash could be used.
Ok, we'll get lost now.
Meanwhile, you might take a look at some of the webinars we're running on this and other productivity topics by going here.
Neil Gillespie is a veteran distribution consultant, speaker and author. Neil worked for GE and Eaton corporations before launching his distributor consulting practice in 1995. He helped Roden Electrical Supply of Knoxville grow more than 500% over 11 years, while more than tripling EBITDA percentage. Neil has distilled his profitable growth methods in his Eight Steps to Breakthrough Growth. His book “Discover Your Core, Then Go For More” is now available. Contact Neil at firstname.lastname@example.org.
Allen Ray has 45 years of experience as a distribution business owner, information systems, marketer of product data and consultant to wholesale distributors. Allen advises clients on strategies to stop “Profit Leakage” and create a scalable business that returns an increasing percentage of gross margin dollars to net profits. Allen is collaborating with Neil to help distributors adopt the Eight Steps to Breakthrough Growth, providing expertise in “Leadership Productivity” and “Pricing for Maximum Gross Profit Dollars per Order.” Contact Allen at email@example.com.