Retail Supplier, are you making "The Million Dollar Monthly Mistake"?

n this episode of #TheSavvySupplier, Al Frank and Boyd Evert discuss a cautionary tale about a Major #RetailSupplier that was losing a Million Dollars every month due to a misunderstanding regarding #CashDiscounts and #EDIerrors. They explore how HRG uncovered the issue, the challenges faced in disputing the #DeductionsClaims with the #retailer and the importance of building trust in supplier relationships. The conversation highlights the need for suppliers to be aware of potential funding errors and the value of having expert guidance to recover lost revenue.  #HRG 

Takeaways

* A simple mistake can cost suppliers millions.

* Understanding EDI is crucial for suppliers.

* Most suppliers lack visibility into their EDI data.

* Cash discounts can lead to significant losses.

* Retailers often take the lowest price offered.

* Trust is essential in supplier-retailer relationships.

* Identifying root causes can recover lost revenue.

* Disputing claims requires careful negotiation.

* Suppliers should regularly audit their deductions.

* Expert guidance can uncover hidden funding errors.

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Need help with managing Deductions and implementing Supplier Best Practices?  Help is here!
Email:  Boyd.Evert@HRG-audit.com

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"Wiser Decisions, Fewer Deductions"

Transcript

Are you making a simple mistake that's costing you $1 million every month? It could be without even realizing it. The cautionary tale of the $1 million a month mistake on this episode of the savvy supplier. Welcome into the savvy supplier where we save you time and money. I'm Al Frank. And as always, I'm here with Boyd Evert the CEO and co-founder of HRG. Boyd has decades of experience in helping companies of all sizes.

including Fortune 500s. Boyd, why was a major health and beauty supplier losing a million dollars every month on one particular mistake without realizing it?

Excellent question. it started with sort of a seemingly innocuous question. Could you help us understand why the retailer is taking cash discount and it's not at the rate we thought it should be? It's at a fluctuating rate and we're scratching our heads. We're not really sure what's going on. I that's what started the conversation. And as we sort of peeled back each layer,

we, we found that there was some assumptions that went into how the EDI was translated and transmitted to the retailer. But to getting from that question to that root cause there's a, there's a story to be told.

supplier they bring HRG in ,you in, to investigate. How were you able to dig up the root cause when they weren't able to see it?

(01:39)

Great question. first of all, most suppliers, almost I'd say 99 % of suppliers don't have an easy way to look at their raw EDI. You have your ERP system, whether it's Oracle, SAP, what have you. And then there's a translator, an EDI, third party translator that takes the data from your system saying this is what the invoice price is, this is the invoice cost. And there's different fields that are all mapped.

to EDI and then that goes over the wire and then the retailer takes it and they have their EDI adapter that translates it and pushes it into their system. And so one of the things that we do that's highly valued by all of our clients is we have all of the raw EDI. And so the first thing that we do whenever we take on a client is we ask for the EDI because we want to see what went over the wire. And a lot of times there's some confusion about

what they're seeing in their system versus what they're seeing in a deduction. And when we get that raw EDI, we can say, well, it's because you had this amount in that, you know, for the item cost or this amount for the cash discount. And they'll look, they'll pull it up on their screen or say, that's not, that's not what our screen says. And so typically that's where it's a matter of just iteratively looking and asking questions.

And so that's exactly what we did. We looked at the data and the data that was being transmitted in EDI for cash discount was an amount that was in a field that is optional. So it's an amount in an optional field that they weren't required to send, but they were sending it. So they had, I think it was 2 % in the invoice header. And then they decided to transmit an optional amount calculating that out.

problem is that did not match 2%. It was always higher and sometimes it was 3.1 % and sometimes it would go out several decimal points. It was all over the place. And so that led to us asking, here's the amount we're seeing in EDI. Look in your system and tell us where you see that number. And for a while they

 (04:04)

couldn't see it. so I believe we asked for an extract of the SAP system. And then our auditors were able to identify it. And it turns out it was in the system. They had count, in the system, and who knows why, they had a field, a column that says, if you were selling this item for list price, this is what the cash discount would be. But for almost all retailers today,

you never pay list. That's the of the advertisement. It's like the rack rate at a hotel, right? It's just, is the price. But then what they do is they have a trade fund where you can buy down that list price down to a lower price. it's usually based on truckload, right? So if you're going to be ordering in truckloads, well then you're entitled to this lower price. So somebody on their EDI team, and who knows when,

decided they were going to be helpful and just, you know, not only give them the percentage of cash discount, we'll just fill in that, you we'll be extra helpful and fill that in. And that led to the retailer on their end. So that's the supplier's point of view. So the retailer's point of view, this invoice is coming in and it's saying, we're going to give you a 2 % cash discount or we can give you even more money if you want to use this amount. Retailer systems are

set up with an extreme prejudice to get the lowest price, right? So if you send them two different ways to calculate cash discount, they're going to take the lower of the two every time. I mean, the higher of the two. If you're going to transmit two different prices for the same item on the same day, they're going to say, the lower price is always the correct price, right? And this is true across the board. All retailers operate this way, and I get it.

That's the bias in the system, and then you just come back and push back. But the problem was they had zero visibility into this. And in fact, most people don't even look at cash discount because they just figure, it's just a small percent, and you have a tolerance. And I think that's why this issue had been there a while before we were asked to look at it, is if deductions are within

(06:26)

a certain amount or a certain percent of the calculation. Usually it's an amount, it's a flat amount like $500 or $1,000. If the deduction's under that tolerance, they just pay it and clear it. They don't even dispute it. And so a lot of times our clients will ask us, can you do an under tolerance audit? And that's where we will find millions of dollars. But in this case, this came to us with that curious question. And that's what we found.

So a million dollars a month. Yes. For how long? How long? How long this been?

We went back two years, but there was more than two years, but this particular retailer, as true with most, you can't go back further than two years. And I thought that would be salting the wound if we were to go back 10 years, right? So we said, we'll just do the two-year analysis. And obviously, just doing the numbers, this customer did multiple billions of dollars in business. I think it was two or three billion at the time.

you do that much business, know, a fraction of a percent can, can add up quickly. And it did. And so over that two year period, it was $25 million. So it was a little over a million a month, but it was on average about a million. And we presented it to them and they were, they were thrilled that, that, we had found the issue and now we've identified, you know, the, the amount to go pursue. and then they reached out to the retailer and

Things got interesting.

(08:04)

Yeah, was going to say, I mean, it's one thing to identify the root cause, but then comes this in some ways even more difficult step. You've got to dispute the claims and fight to get back two years worth of invalid deductions. How did that go?

Not as well as we had hoped, but as well as we feared. So the retailer said, you gave us a decision. You said, here are two amounts. You can choose either one. And so we chose the greater amount and we took it because you offered it to us. By putting on the invoice, we consider that an offer and we patiently helped the supplier explain.

that this was a calculation issue and it went back and forth. And by the way, you can collect millions of dollars from retailers. We've collected one particular case for this particular retailer, it was almost $7 million. So even though it's a large number, it doesn't mean that you can't collect it. But in this case, that was an implied fact that they hadn't even accounted for, right?

Having been on the other side, being an advocate for retailers, auditing on behalf of retailers, submitting claims to suppliers, I already had this sinking feeling that this was going to be a really steep hill to climb, and it was. And so they went back and forth for several months. It went up to an SVP within the retailer, and it was a hard no.

And then things got even more interesting.

(09:54)

So you kind of, if I could put it in poker terms, you're about to tell the supplier to call the bluff of the retailer. Right. Tell us how that happened.

So then we said, all right, well, here's the fix. You need to fix your system. And just as a courtesy, give the retailer a heads up that we're going to address the root cause. You're not going to pay it back. We'll try to negotiate something with the buyer to sort of make things right. But that never happened. So when they told the retailer,

we're going to implement this fix next month. They said, whoa, wait a minute, wait a minute. You've been giving us that special cash discount. We want you to continue. And they said, we're not aligned to continue. We want to fix this issue. And the retailer said, well, we could reduce your points of distribution if you don't. And a point of distribution for those who don't know is essentially

One point is one facing in one store, right? So if you've got a thousand stores and you've got four faces, you've got 4,000 points of distribution. Well, this particular client was in the high five digits for points of distribution, maybe even low six. I mean, they had a lot of points of distribution and that's the, getting, taking a reduction in points of distribution, even if it's just facings.

can be very painful. The correlation between your sales and the number of points of distribution, there is a direct correlation. So the game of chicken began, right? So the sales team is saying, we can't lose points of distribution. This would really hurt the business. That's the sales team. And so we're in meetings with the different teams. And then the finance team is, that's our money.

(11:53)

go get it. We need to fix this. We need to stop the leak, right? That's a lot of times, finance will say we've got a leakage in the system. need to stop the leakage of funds. And they were at loggerheads. And finally, the sales team came to us and said, is this a real threat? mean, how real is this threat? Because they were really concerned, and they should be. And we said,

This is a bluff, right? Do not let them get inside your head and cause you to doubt whether or not you should do this. I said, you most definitely should. I didn't even say, and you should have pressed harder for the 25 million, but I left that one go. And I said, you absolutely need to implement this change. Don't look for them to be aligned. They've already staked out their ground. And they did ask. They said, so why are they doing this?

right? And because people want at least a charitable explanation of bad behavior and so the only one I could give them is one that I knew when I was on the other side is that those those funds were baked into the business and so the finance department for the retailer, the credit or the yeah the finance department, the accounts payable team, they already were expecting this money to come in.

They were expecting this cash to continue because every year you take last year, that's the floor. We expected the business to grow by this percent. And they didn't want to take that hit of a million dollars a month. And so I said, that's probably why they're doing this. But I said, you still need to pull the trigger. And they did. And nothing happened. And then when I followed up, they said,

This is the last time we're going to talk about this. is a painful memory. you know, just please don't mention this again in any of our calls because no one's happy right now. The finance team's mad that we didn't get the 25 back. And they're also mad that we took our time. The sales team's mad that they had a near death experience. They thought they were going to lose points of distribution. So they said, and I said, that's fine. But anyway, that's.

(14:19)

Yeah, that's that's and this this this happened at least 10 10 12 years ago. So and it's still fresh in my mind because it was just so vivid, right? As the emotions were so raw and and and the frustrations just ran so deep.

Yeah, it's quite a moment. The retailer reveals their cards. They don't have the cards. They're bluffing. But that took a lot of trust on the part of the supplier. A lot of trust shown in you and HRG to call their bluff. I'm wondering how did you grow that type of deep trusting relationship with them that they'd be willing to take that risk?

That's a great question. So one, our audit staff, almost all of them have had experience auditing on behalf of retailers, whether for that retailer or for a third party auditing on behalf of that retailer. Average staff, 20 years of experience, and our clients know that. And when we onboard a client, we introduce them to the team, we go around the room sharing the background, and that particular client knew, we knew what we were talking about, that we weren't

We weren't exaggerating. We weren't bluffing as a word, right? They could see us demonstrate that experience and that expertise. And often sometimes, this is what I love about the team, is often they'll say, well, this is what the retailers are gonna say. If you ask the question, this is probably gonna be your answer. And then we get on the next week's call, usually a weekly or bi-weekly call, and they'll say, that's exactly what you said that they were gonna say. They said that exact same thing.

So it's in a way we having spent so much time inside all of those different retailers and the team represents, you know, all the different major channels and categories within retailing. So we just got this great cross-section of experience. And I should say that leading up to that, they had been through at least two of our best practice training where we walk them through, the best practices to avoid these deductions. But we also,

(16:26)

challenge them, you bring questions and objections, that you've deductions you've received in the past. And in that meeting in front of the whole sales team, there's like 30 people, 35 people, we were just presented stuff cold and we would look at the claim, we'd say this is why they wrote it. This is how the driving documents. So they got to see firsthand how we could, without any heads up, take a look at a claim and tell them.

and just take it apart, just break it down to its constituent parts. we had that, had we not had that experience, I think to your point, I don't know that they would have trusted us, but we were able to demonstrate our knowledge in previous years.

You know, this case study is an example of we don't know what we don't know. You think there are many suppliers out there who are overfunding cash discounts and don't realize it?

Yes, yes,  Absolutely, absolutely. We talked about earlier, right, that there's this extreme prejudice in the payable systems, right? If they order at a lower cost and you invoice at the higher cost, they're only going to pay the PO cost. But if you invoice at the lower cost, well, then they're going to say, forget the PO, we're going to take the invoice, right? So that's the decision tree that their systems use. So what are the odds that you never overfund an event?

or what are the odds that you've never underbilled? We see it all the time. And the rule of thumb usually that we've seen play out is whatever amount of deductions you're receiving, you're probably having funding errors and invoicing errors on the other side. And you just don't know it because you're spending so much time dealing with deductions. You're so much time on defense.

Right? The offense never gets on the field, right? And you're not running, you're not getting a pick six in this industry, right? You're only there to try to stop those, you know, the drive into the end zone. So, we're able to help feel an offense and go in and look for those funds that you've lost, look, you that you overfunded and lost those funds and also look for those under billings.

Often, people will say, we don't want to have the buyer cut us a check because that's going to come out of his P &L, which some suppliers are that way. But then we tell them, you can use that to negotiate. Maybe they're going to waive your markdown funds next year, which they have. Maybe they'll put you on a promotional

run a promotion or, you know, everyday low price on an end cap, any number of things. And so it doesn't have to be the cash back, but I guarantee you the value, right? When we identify an overfunding and they, there's value that they receive back. Their business grows because of that. And oftentimes we'll use it to offset deductions. So they'll get hit with, let's say a quarter of a million dollar deduction. Then we'll present maybe a $300,000 over bill.

(19:48)

where they overfunded and those two are awash. So you can even use those to sort of cancel out any deductions that you have on the books.

But you know, this might have triggered something for a supplier thinking, know, really, I don't know what I don't know. I wonder if there are some deductions that we're incurring that we're just overlooking. We don't understand exactly how to find those. I wonder if HRG could take a look for us, give us an assessment of how we're doing and what to do about it. Is that a possibility for them?

Absolutely. Oftentimes what we'll do is when we're talking with the client, we'll say, just let's get your data and then we can tell you where we think the opportunities are. Often we'll even know depending upon what category you're in and what particular retailer or what particular channel, it's grocery or discount drug, whatever, we'll know where the funding errors are likely.

there, right? Just based on how your business fits into that particular channel. absolutely, we're always finding new areas of errors. And I'm sure this year we'll probably find another EDI errors that no one's really paying attention to because it's going under the radar.

Well, thanks for taking us into that case study. Really very enlightening, I think. And once again, I think it shows it's good to have a wiser advisor to guide you. And the experts at HRG are able to take a look at your deductions and give you a much clearer picture of what you need to do to fix those root causes of the invalid ones. It could save you millions of dollars if you think about it. So let me share a couple of easy ways for you to contact us.

(21:43)

You can go to the HRG website at HRG-audit.com. That's HRG-audit.com. Or you can call HRG at 479-616-1600. Or if you prefer to email, you can email us at info@HRG-audit.com. All of this contact info is right there in the show notes for you. So don't hesitate to reach out to HRG.

to schedule your free call. Then we can begin to track down those invalid deductions and begin recovering revenue for you that might have been slipping away month after month after month. Our wish for you is this, wiser decisions, fewer deductions. See you next time on the Savvy Supplier.