The accounting battle grows larger between retail suppliers and the big retail companies as each side becomes more aggressive to collect or retain the billions of dollars that float in the realm of product discounts, chargebacks, post-payment deductions and other small-print contract details.
In a nutshell, the numerous financial arrangements between retail suppliers – ranging from the largest consumer packaged goods companies to a small 2-3 person shop – and retailers include payment and reimbursement exceptions that may result from problems with back orders, partial orders, labeling/packaging mistakes, product substitutions and issues with timing on special pricing discounts.
The City Wire first began to report on the issue in January 2013, when some suppliers began to complain about a rising number of monthly audit claims against their contracts with Wal-Mart Stores and other retailers. In January 2014, The City Wire noted that such audits may increase with retailers seeking relief following a soft holiday sales season that left them with excess inventory.
THE BIG BUSINESS OF ‘LEAKAGE’
Some estimates suggest as much as 0.1% “leakage” – disputed payment, reimbursements, etc. – for every $1 billion in transactions between a retailer and its supplier community. Considering the amount of total retail sales to consumers, this is a huge market for auditors, audit software companies and others who may work with one or both sides in the accounting conflicts. Just for Wal-Mart, the leakage could total as much as $500 million.
According to the U.S. Census, there were $4.344 trillion in U.S. retail sales (excluding food service sales) during 2012 (latest year Census data is available), with general merchandise stores accounting for $649.754 billion of that total. End of year inventories held in 2012 by general merchandise stores totaled $75.147 billion, according to Census estimates.
Randy Hargrove, a spokesman for Wal-Mart Stores, said the company has a supplier outreach program that includes efforts to reduce audit claims. He said the company has reduced the number of claims in recent years and the value of the claims.
“We work with all of our merchants and suppliers to ensure that our billing is correct,” Hargrove said.
Boyd Evert and Harry Arthur, with Bentonville-based Harvest Revenue Group, and other sources said recently that audit intensity continues to grow and is primarily driven by third-party audit companies that don’t make money unless they find recoverable money for the big retailers.
“It’s no longer about the spirit of the agreement,” Evert said during a recent interview, adding that audit firms working for retailers seek any nuance within a contract between the supplier and retailer to “find” a financial benefit for the retailer.
However, Evert said the position on audits by some retailers “has softened” in the past year, with some of that driven by the need to maintain working relationships with suppliers, and some softening the result of “just knowing that we (firms representing suppliers) are now here” and are “bringing the sunlight” to the issue.
The language used by the companies who work with the major retailers give some idea of the nature of relationships. Apex Analytix promotes its “FirstStrike” software designed to “prevent overpayments to suppliers, identify risk and fraud” and automate systems between retailers and the supplier community.
“In the Retail industry, making the most of your buying power calls for having aggressive internal controls in place to manage it, leverage it, improve margins, and create profit,” notes the Apex website, with a January 2014 statement on the website noting that “pressures on procure-to-pay teams to make a strategic contribution to the business have never been greater.”
Greensboro, N.C.-baseed Publix Super Markets announced May 5 it would begin using FirstStrike “to audit large volumes of data.” Publix is the largest employee-owned grocery chain in the U.S.
An April 2014 promotional by Apex said “wide-ranging audits” are now the norm, with 92% of retailers auditing for cash discounts, 69% auditing for freight compliance and 100% auditing to review statements and check for duplicate payments.
“Intense competition and an unrelenting focus on cost control and profitability are causing retail merchandising and payment teams to upend the status quo. New audit best practices are emerging with 50% having recovery results-based incentives, 86% of retailers using external audit services and 100% of retailers surveyed are implementing shared services,” Apex noted.
Atlanta-based PRGX is a global “recovery audit services” operation that works with companies in more than 30 countries and, according to company literature, works for more than 75% of the top 20 global retailers. The PRGX tagline is: “Discover Your Hidden Profits.”
NO SLOWDOWN IN 2014
Evert and Arthur said the contract audit process has been active since the late 1950s, but the pace gradually began to rise in the mid- to late 1990s and ramped up in the late 2000s.
Arthur smiled and shook his head in the negative when asked if the pace might soon slow, and then noted that in some recent cases it has reached “egregious” levels.
Harvest Revenue, which opened for business in 2010, represents suppliers during the audit process. Their business has boomed. Revenue grew 300% in 2012, and the company has grown from less than a handful of people to around 20 employees today. Evert and Arthur, who prior to Harvest Revenue worked both sides of the supplier/retailer audit puzzle, said 2014 is shaping up to be by far their busiest year.
Evert and other sources said large suppliers are not immune from the intense audit process. Harvest first began to work with smaller suppliers, but has seen more interest from larger suppliers in recent years.
Another reason for the growing intensity is competition for business among the auditors who represent the retailers.
“If you promise (the retailer) to get more (money from post-payment audits), then you have to deliver those numbers,” Evert said.
Rapid Training Solutions doesn’t provide suppliers with direct help when facing audit claims, but the Bentonville-based company does provide an “Understanding Chargebacks & Deductions” class. It’s one of just seven classes in its “On Demand” course schedule.
Jami Dennis, a supplier consultant and retail expert with Rapid Training Solutions, has said suppliers may be most at risk for potential errors or audit claims during peak sales seasons. Pricing errors, “masterpacking,” and errors related to purchase orders are some of the leading causes of chargeback deductions, Dennis said.
Evert also says suppliers have a responsibility to learn the retailer system. He has credited Wal-Mart for its Retail Link system that provides suppliers with product tracking and other information.
“Wal-Mart gives suppliers an immense amount of information within Retail Link that can be used to track the products through the point of sale. Other retailers don’t come anywhere near this level of visibility. But no one is babysitting the supplier. It’s up to them to jump in there and figure it out,” Evert said in a January 2014 interview.
‘VENDOR ABRASION’ CONCERNS
The industry has matured enough in the past few years that interesting terms have developed. For example, PRGX seeks to minimize “vendor abrasion levels,” which means they work to push aggressive audits while trying to maintain good relationships with suppliers.
“By combining four decades worth of audit experience with the latest proprietary data management and analytics tools, we now audit closer to the transaction; audit faster than ever before; identify new insights into your data and address the sources and causes of overpayments before they occur,” PRGX notes on its website. “The result: optimized recovery dollars, minimized vendor abrasion levels and best practice service level agreements – all at the industry's lowest total cost of recovery.”
Hargrove, with Wal-Mart, said the retailer works to “streamline” the process to ensure it is more efficient for all parties. He said it is in the retailer’s best interests to collaborate with all suppliers in order to keep products on shelves, inventory managed and prices low.
‘MOST DOMINANT’ AUDIT FIRM
Connolly, based in Wilton, Conn., and claiming to be the world’s largest privately-held recovery auditing firm, reviews more than a trillion transactions a year and recovers almost $2 billion annually in overpayments. Connolly works only in the retail and healthcare sectors, with company materials saying its clients include 19 of the top 20 retailers and seven of the top eight healthcare payers.
Evert said Connolly is the “most dominant” auditor with respect to audit claims between Wal-Mart and suppliers.
Connolly includes “case studies” on its website to explain how it helps retail clients. Those include the following.
• “A large pharmacy retailer’s indirect purchase contract with a major pharmaceutical manufacturer had different effective dates for rebates when compared to quarterly rebate terms. Connolly’s audit determined the exact details for every change in both terms and timing for the contract period. In their research, the auditors worked closely with the manufacturer to rectify the discrepancies, ensure the accuracy of the financial calculations, and recover nearly $800k for the pharmacy retailer – a 25% understatement of rebate dollars due the retailer.”
• “Connolly’s audit identified a large promotional purchase that reduced the product’s retail price. During the promotion, however, retail sales of this product far exceeded the amount purchased specifically for the promotion. It was in fact determined that most of the product received and sold at retail for the promotion was paid for at the higher non-promotional cost. Connolly built the supporting documentation and recovered $327k in price protection funds due the retailer per industry standards."