CFO Strategies for Plugging Revenue Leaks!

Key Discussion Points:
 

• Revenue Leaks from Invalid Deductions:
• CFO strategies to prevent revenue loss.
• Importance of under tolerance reports to identify unnoticed deductions.
• Real-life case: Over $6 million identified in under tolerance deductions in the health and beauty sector.
• Root Cause Analysis for Deductions:
   
  • Identifying patterns in shortages, excessive defectives, and fragmented deductions.
• Strategic focus on categories, not just large deductions.
• Balancing Cost Management and Product Quality:
   
  • Collaborative efforts with the supply chain and customer officers.
• Case studies: Snapper mowers and Nike's strategic decisions with Walmart.

• Negotiating Retailer Terms Without Jeopardizing Relationships:
   
  • Common retailer tactics and how CFOs can prepare.
• Maintaining strong partnerships while negotiating better terms.

• Leveraging Data Analytics:
   
  • How CFOs can use data to identify cost drivers and reduce deductions. 
• Examples of data-driven decisions leading to cost-saving revelations.

• Building Financial Resilience Amid Economic Uncertainty:
   
  • Strategies like forward buying and improved accruals management. 
• Avoiding one-time write-offs through proactive financial planning.

• Advice for New CFOs:
   
  • The value of diving deep into specific business areas. 
• Transformational insights from thorough analysis.

Closing Remarks:

• Al Frank and Boyd Evert emphasize the indispensable role of CFOs.
• HRG offers free strategy calls for tailored financial guidance.

Contact HRG:

• Website: HRG-audit.com
• Phone: 479-616-1600
• Email: info@hrg-audit.com

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"Wiser Decisions, Fewer Deductions"

Transcript

Retail supplier for every $1 billion in revenue, you're probably losing about $3 million to invalid deductions. But not if your CFO knows how to plug that revenue leak. Strategies for savvy CFOs. Next on the Savvy Supplier. Welcome into the Savvy Supplier, where we save you time and money. I'm Al Frank. As always, Boyd Evert, the CEO and co-founder of HRG is here. And Boyd, we're

focusing on helping chief financial officers today. And I know you have a special regard for CFOs. They've got a really tough job and carry a lot of responsibility, don't they?

They sure do.

You know, at the top, I mentioned that invalid deductions are draining away millions of dollars from most suppliers. What strategies do you think CFOs can focus on to help reduce the impact of deductions?

There's several. One that comes to mind is an under tolerance report. Tolerances are set up within most companies just so that you don't have to spend more time researching a deduction greater than its value. So for instance, you might have a $500 tolerance or a thousand dollar tolerance going to a DC if it's direct to store, it might be, you know, $50 or a hundred dollars. A lot of times you'll have some deductions that will just slide under that threshold.

(01:21.12)
And in some cases, you'll have some post payment auditors that might be filing claims under your tolerances. And typically they'll be able to find that out based on which deductions the retailer comes back after and which ones they don't. And so just looking at it from that perspective, there could be potentially a lot of money. I know, especially in the, instance, the health and beauty space, we did an under tolerance review for one of their major customers.

And we identified over $6 million over a two year period. So there's definitely an opportunity there.

Any others come to mind for you ways to kind of reduce that impact of deductions?

Right. I think a root cause analysis is always helpful, especially if you find certain trends, let's say maybe around shortages or perhaps around excessive defectives, any number of categories of claims. And I think it's important to focus on the categories themselves versus just looking after the larger ones. The larger ones will always find you. They'll find a way of making it onto the desk of the CFO. You don't have to go looking for those, but it tends to be those deductions where in aggregate,

it becomes a serious number, but if they're fragmented across multiple documents, sometimes you just don't, you don't understand the size of the problem until you start digging in, looking for potential root causes.

(02:40.398)
Well, Boyd, here's another challenging dilemma for the CFO. How to manage cost on one hand, while on the other hand, not compromising product quality, which might cause them to lose customers. Any thoughts on ways that CFOs can walk that tightrope?

Well, that's another good question. So I think you have a lot of different cost inputs that you have to care about and track. And you're right, sometimes the price points that you're going after just aren't a good fit. Typically, you would talk to the chief customer officer in conjunction with perhaps the supply chain leadership to see

what are some of the costs going in and if there's a way to drive some of that cost out of the system, then you might be able to meet that cost price point. Others just exit certain categories. I know several years ago, snapper mowers were in Walmart and they decided to exit. I know again, several years ago, Nike decided against after several attempts, Walmart reaching out to them just didn't want to enter into that particular discount or so.

So there's different strategies. think the best way to do that is to understand how you're going to market. And that tends to be the full C-suite really talking through some of the strategies. But I think the CFO is going to really, should really care about how those cost inputs are impacting their profitability. So if they're incurring a lot of costs in the supply chain due to earlier late deliveries or the shortages, the disputes are dragging out.

or any number of deductions, I think it's just important for them to perhaps identify the top three to five and then start digging into some of those drivers of those cost inputs.

(04:29.676)
Here's another important thing that I know they want to maintain and that's a strong relationship with the retailer. How can CFOs keep from putting those relationships in jeopardy when they're trying to negotiate better terms?

Yeah, another great question. every 10 to 12 years, it seems that retailers start going through reviewing their terms and conditions. 2014 and 15 Walmart was going through and adding additional dating to those who were at 30 days. They might be pushing it out to 45 or 60 days asking for a cash discount where there wasn't one. So every once in a while the retailers will align. The problem is,

If it's a large enough customer like an Amazon or a Walmart or a Kroger, it's going to be very difficult to resist those fees, particularly because a lot of the messaging we've been on the front lines with a lot of our clients in those situations where the narrative usually falls in along the lines of everyone else is doing this. You know, you're the only holdout in your category, right? It's that sort of thing.

So there is that going on and I know too that a lot of retailers look at different initiatives beyond just the easy terms and conditions, right, where it's easily verified how much more money you're going to get if you're charging. You flip a warehouse allowance to a warehouse fee, right, a charge. Now you're charging people to use your warehouse network, your DC network versus giving them an allowance to ship to it. We've seen some initiatives in the past. A Boston consultant group did a

profitability analysis where they go in and look at different shelves and they say this particular item didn't perform as well as the other items and all of that comes back to some you need some form of root cause analysis to prove that out right so that you don't want to be in a position where the retailer is telling a story using the data and it does look like yeah these items are underperforming and they might they may have been items so again

 (06:38.744)
being in the room when these conversations are taking place and retailers saying that item was just a dog and we lost money on it. If you don't give us a lump sum to make us whole, we'll reduce the number of points of distribution you have, the number of faces you have in the store. So you have that side of it. But I think if you can look at it from the standpoint of whether other outstanding issues that we're driving and other external factors that may have

that may feed into that narrative. And I think a lot of times CFOs tend to just say, well, this is invalid, you and then push it back to the team and say, go and collect that those funds. You know, that's, I often refer to that as the Stalin school of management. You know, it's, you know, you can go out there. I know you don't have a gun, but pick up the gun from the guy that's dead in front of you and can push the Nazis out of, out of Moscow or whatever. Right. So I know that's it's a rather a dark.

Mark analogy, but honestly, some of the feedback that I've been in the room, it's like hearing the CFO talking to his team, I felt sorry for him, you know? And I was just there to sort of give him some feedback on some of the inputs, but he used that as an opportunity to shame the team into performing better. So anyway, it's like beatings will continue until morale improves, sort of situation.

Ha ha ha.

I'm going lean into that a little bit, the analysis aspect of this. Is there a way that CFOs can leverage data analytics to help them to make, as we say around here, wiser decisions and to get fewer deductions?

(08:22.686)
Absolutely. And a lot of it begins with how you architect that solution and understanding how to identify those key cost inputs, right? So that you'll have, for instance, with excessive defectives, which is an ongoing concern in the industry, often that's not an easy apples to apples situation, right? So in the drug channel, CVS, for instance, will give you 10 weeks to sell through items that have been discontinued, right? Well, in some cases we'll see

many of the stores not lowering the retail, right? Until the end of the 10 week where they're supposed to be selling through this clearance and funding's being provided. They get to the end of the period and the supplier has a do not return policy. So then they send it to a reclamation center and then charge them for that inventory. And so our message back, and we've prevailed in some of these cases, is that you are unnecessarily heavy in your inventory.

going into that final week of clearance because stores weren't executing, right? And the reason why stores typically don't execute is some of those clearance items will cannibalize the regular sales, right? So somebody is coming in looking for something and they see something in clearance and they say, that's not exactly what I want, but it's so cheap. I'll just go ahead and get that. And then you lose that regular cost sale, right? The regular price sale. So that's one area. But then the other areas of the cost inputs,

could be your facility, right? So when we were doing a deep dive on return trends for a given supplier in hard lines, they had one particular shipping point that just wasn't executing. It was a collect shipment. the retailer would send a truck there and they would load it and leave. And when we started to get in to the analysis and identified that shipping point, we soon learned that they also had a problem with documentation. person at the time...

wasn't saving these signed bills of lading, right, as the loads are being built. So not only did the loads come in short consistently from that shipping point, but we had no documentation. And it was just like a six to eight week window, but that was several million dollars in shortages that we had to walk away from because we couldn't prove that these loads were built out. But these are a couple of examples of how

 (10:43.34)
granular the data could be to be able to find that because if you're just doing a shortage analysis, sometimes you'll walk into that situation with these assumptions that the retailer just, you know, these are hourly people receiving our merchandise and they don't really care. They're just, you know, finding a UPC on the pallet and gunning it in and moving on, which may be the case, but that's not always the case. And so I think the better the solution, the more cost inputs you have and you can

properly account for them in your solution, then the outputs out of that system are going to be very meaningful and a lot of them you'll be able to act.

You know, we've seen quite a bit of volatility ups and downs in recent months in terms of the economy, partly because of the uncertainty surrounding tariffs changes. How would you suggest a CFO could build financial resilience for his or her company knowing that there's always this possibility of an economic downturn lurking in the future?

Yeah, that's short of giving them a crystal ball. There's really, that's a difficult, it's a difficult question. And I think there's a few strategies around that. Some are that if you anticipate higher costs coming in, like we saw with the tariffs, a lot of forward buys where people are buying more than they need for the given span of time and using the calculus of it's better that we

pay to store that, we might have to pay for additional warehouse space to store those items, then running the risk of having to pay large tariffs on those items coming in, right? So I think that's definitely one strategy that we see people using. But another strategy is just being more savvy about your accruals, understanding where the headwinds are and...

(12:34.446)
and trying to have more money in reserve so that you don't have any of these one-time write-offs, which Wall Street hates, right? And if you're a privately held company, the owners hate, right? mean, it doesn't, no one enjoys those one-time write-offs. And typically when you have those directly or indirectly, it does point to the CFO because the CFO is the one that's supposed to be giving direction and guidance to the teams in how aggressive they want to be with those accruals because

A lot of companies are looking to push that money down to the bottom line as quickly as possible, but if you become too aggressive in clearing those accruals, you could end up with a one-time write-off, which can be extremely painful.

So if there's a brand new CFO watching right now, what advice might you give them as they face these many challenges right out of the gate?

I think the CFOs that I found in my dealings in this industry and retailing for past 30 years are the CFOs that aren't afraid to get into the weeds on certain things. mean, not everything, but strategically saying, want to do a deep dive in this particular area of the business and understand what's driving it. sometimes they'll learn, and we've been part of some of these deep dives, sometimes the lessons learned are

transformational. Some of these deductions, some of these costs didn't have the proper attributes, right? That they were attributing them to the wrong cost center or they weren't really digging into what was driving it. you know, one example of that would be an excessive defective where there was a retailer that historically with this particular supplier and their category, it was a perennial problem. They were always running a half.

 (14:21.976)
to a full percent over and above what the defective allowance was for that particular customer. And then it spiked. And so the assumption and leadership was, well, that's due because now this retailer's becoming even more abusive with the policy. Understanding that sometimes returns aren't really returns. It could be just phantom inventory that it's not there. And the store clerk just doesn't understand how to clear that out as shrink versus

defective. But in this particular instance, when we started to do the research, we found that that particular retailer had a sustainability campaign where they were pushing their suppliers to use less material in their product and packaging. And so they used thinner cardboard and they use less glue. And at the store, these packages just would come open far more easily. And

No one likes to buy something that's already been opened, right? And, and, taped shut, you know, you're like, what's, this is a mystery box, right? I don't know what's, what's in here. And so we found out that they had invested almost a million dollars to retool for that sustainability program only to have to roll back those changes less than a year later. So, mean, they, they took the cost of implementing the changes and rolling them back, but then you had.

several million dollars in these excessive defective claims that were filed that really it was due to a failed implementation of a sustainability, right? They, looking back, they had no business using thinner cardboard. Head leadership insisted to the retailer that we are as lean as possible and what you're asking for is going to create additional costs. But

Either they were unbridled optimism thinking, we can make this work. Or there was that fear of we're being told our competitors are doing it and why aren't you doing it? Anyway, at the end of the day, that was a good example of somebody going into a problem saying, the retailer is only getting worse with their defective policy, only to find out, no, it had something to do with a root cause that was totally unrelated to the previous root cause.

 (16:38.062)
Well, that's a great example. Thanks for focusing on CFOs today. You know, they're so important and yet they don't often get the recognition they deserve. So hopefully this podcast has helped them and the experts at HRG are always ready to help you by taking a look at your particular situation and to help you get a clearer picture of your next steps. You can schedule a free strategy call with us by going to the HRG website. That's HRG-audit.com or you can call us.

at 479-616-1600 or you can email us at info at hrg-audit.com. HRG is ready and able to help you. Our wish for you is this, wiser decisions, fewer deductions. See you next time on the Savvy Supplier.