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Wholesale distributors compete based on their pricing strategies, and they rely on back-end rebates, also called chargebacks, to protect their profit margins. Let’s say a manufacturer offers a product to end customers at a price less than a distributor’s cost. The manufacturer reimburses the price difference to the distributor after the distributor files a chargeback claim.
It’s income to which a distributor is entitled, but many distributors give away this back-end money simply because they use manual, error-prone processes for chargeback accounting that allow valid chargebacks to fall through the cracks. Any administrator can keep track of one deal with one supplier. But when multiplied by thousands of suppliers and customers and hundreds of thousands of product agreement combinations, manual chargeback accounting is a liability. Inefficiency in the chargeback process has contributed to the steady decline in wholesale distributors’ pretax profit margins across all sectors. Imagine how much you can improve your profit margins by accurately tracking how much is sold to which customer over a specific period of time. You could accurately file all your chargeback claims – and do so in a timely fashion. You could say goodbye to lengthy dispute cycles, collect cash promptly, and redeploy your staff in positions that add value to your company.
You can leverage information technology to turn this dream into a reality. By deploying an automated chargeback management solution, you can improve accounting and administrative productivity to facilitate the chargeback process. In turn, the increase in operational efficiency and profitability will drive responsiveness internally and across your supply chain.
In this era of heightened competition, manufacturers frequently offer special pricing to distributors to cover the cost of providing goods and services to customers, making it especially important for distributors like you to track chargebacks. These pricing arrangements serve a number of purposes. One common scenario occurs when a distributor is asked to provide products to customers at prices below the actual purchase price paid by the distributor. The distributor recoups the difference between its acquisition cost and the customer sales price through a chargeback – also known as earned income, deviated billing or sheltered income in the food service industry, ship and debit in high-tech distribution, and special price agreements (SPAs) in the electrical distribution industry.
Essentially, the chargeback process results in a rebate payment from a manufacturer to a distributor. Because wholesale distribution is a slim gross margin business, chargebacks are a critical source of income to ensure overall profit margins are maintained.
Here’s how it works. A distributor sets up a proof-of-performance agreement with a manufacturer that entitles the distributor to a rebate once it has sold a certain number of units from that manufacturer. The rebate may be graduated, so the distributor receives one amount for 100 units sold and another amount for 1,000 units sold.
In addition, there are purchasing and selling chargebacks. With a purchasing chargeback, a distributor places an order with a supplier for 100 units of a product and receives a rebate for purchasing that quantity. But the distributor may earn another rebate when it sells the goods to the end user. Sometimes a portion of the rebate is passed along to end users for specific promotions. The chargeback process may seem straightforward, but it can often be complicated and labor intensive to manage. Pricing agreements offer incentives at various levels of the supply chain. These incentives may be offered as warranty recoveries, marketing funds, and pricing-related credits. These arrangements are formalized in agreements that can span multiple customers, cover a vast array of products, and remain valid for several years. They can change frequently, and they can even be modified retroactively.
Keeping track of it all can be a real challenge. Wholesale distributors often wind up using a collection of inadequate tools, including spreadsheets, e-mail, faxes, and phone calls. The process is manually intensive and prone to error. As a result, distributors miss opportunities to file claims, or they become caught up in disputes and lengthy cycles of rejections and resubmissions that increase the days chargeback outstanding. Ultimately, this inefficient process drives up costs, impairs cash flow, and undermines profitability.
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