Retailers and their third-party auditing firms continue to scour payment records of their product and service suppliers in pursuit of more than $1 billion annually – a practice that has created a tense relationship between the retailers and some of their suppliers.
The estimated $1 billion is revenue retrieved through post-payment and cost recovery audit claims. The practice has in recent years become a big business supporting roughly 100 jobs in the six-figure range in Northwest Arkansas.
Audit firms like Connolly and PRGX as well as shared service firms such as Apex Analytix do commission work on behalf of Wal-Mart and other big box retailers. These third party firms seek to recover money lost from pricing errors, freight foul-ups and other mistakes that can happen in the supply chain.
Boyd Evert, a former auditor, has told The City Wire that in any given year there will be $1 billion to $2 billion in errors that auditors doggedly pursue on a commission basis. Evert and his company, Harvest Revenue Group, work on behalf of suppliers challenging audit claims. His company also offers classes on audit prevention.
He said the margin of recovery is roughly one-tenth to two-tenths of 1% of total sales. For a company like Wal-Mart that’s a potential of $500 million annually in audit recoveries. Best Buy in comparison has the potential for $57 million annually for audit recoveries, resulting from errors in pricing, promotions and shipping.
Evert said post payment audits do serve a valid purpose, but has concerns about the rate at which the claims are being filed against suppliers. The issue has been troublesome for suppliers for several years, and it is getting worse according to some as compressed margins pressure retailers’ profits and near-zero inflation makes top line revenue growth difficult.
Much of this turmoil is festering below the radar as suppliers are hesitant to speak out because they are still conducting business with many of the retailers in question. The threat to consumers is higher product costs, though retailers would argue they are recovering losses in an effort to keep prices low.
Darrell Rigby, a retail consultant with Bain & Co., has said retailers at times tend to be penny-wise and pound-foolish with their suppliers. He said suppliers can only be pushed so far because they do have the ultimate say over which retailers get to sell their products.
Fragrance and beauty aid supplier Coty sounded off on third party audit practices in a Credit Today blog: “No one seems to have control over these post audit firms … customers hire them and turn them loose on purchase orders. The problem is, these auditors don't know what deals were made between the supplier's sales department and the customer's buyers.”
Coty notes these chargebacks and deductions play a significant role in the financial performance of suppliers as the siphon away profits.
Aditya Birla Minacs, a global business consultant firm, frequently blogs on the subject of claim chargebacks with some of the blogs encouraging suppliers to watch out for unauthorized deductions.
“It is always a challenge trying to keep up with a retailer’s list of compliances. When looking at a single deduction made by a retailer, it may not seem like a lot and quite often it is ignored. However, when deductions are added up at the end of the year it can significantly impact the bottom line. … The problem is with unauthorized deductions or chargebacks that are not legitimate,” noted a Minacs December 2011 blog.
With an average retail margin of 10%, a retailer would need to generate sales of $10 million to net $1 million. But sources said they can employ third party auditors to sift through their payment records on a contingency basis and recover that and more with no cash outlay.
LACK OF TRANSPARENCY
Two industry insiders came forward following the April story on this issue offering more insight into the issues facing suppliers. The asked for and received anonymity from The City Wire.
The sources agree there is a lack of transparency between big box retailers, their hired bounty hunters and suppliers.
“One supplier is working through nearly 700 claims dating back to 2010 from business conducted with Wal-Mart and Target,” the former retail supplier source said. “It’s a major distraction for companies that are trying to focus on forward sales and all the other sustainability and repackaging requirements they are being asked to make.”
The City Wire requested comments from Wal-Mart, Target and Best Buy regarding the post payment claims and the perceived lack of transparency that auditor say suppliers are lacking. Best Buy directed The City Wire to its supplier portal but in reading the online site there was no discussion of post payment audit claims.
Target and Wal-Mart did not respond to the request for comment. Both retailers do offer suppliers and auditors who perceive a problem the opportunity to file a complaint.
A second source said in the last two or three years roughly 50% of the claims were valid, another 25% needed some modifications and 25% were purely conjured up.
Consultants with Aditya Birla Minacs agreed noting, “Our experience has shown that 25 to 30% of all (claim) chargebacks issued by major retailers, specialty stores and catalogues are either unauthorized or erroneous.”
SYSTEM FAVORS RETAILERS
When a third party auditor writes a pricing error claim against a supplier on behalf of the retailer, it is the retail buyer who approves that claim for payment, with no representation from the supplier’s side.
Suppliers and their consultants said there is conflict of interest and bias that favors the retailer. In short, there is a financial advantage for the retailer to under the present system.
“A buyer stands to benefit if a claim is approved because it adds money to their profit and loss account. Claims valued at less than $20,000 are automatically deducted from the supplier account, who has no say in the matter. Once this deduction is made it is very hard to recover,” a retail insider said.
Consultants said it’s not unusual to see claims split down to the individual items, which keeps the totals small enough to slide under the $20,000 threshold for automatic debit. Under the present system suppliers may discover that their accounts have been debited by thousands of dollars on any given day without any chance for rebuttal.
According to Aditya Birla Minacs, the unauthorized or erroneous chargebacks from freight and handling charges, terms of payment, short shipments, advertising and markdown allowance claims are nearly impossible to recover once they are deducted.