The Supply Side: Holiday promotions raise risk for post-audit claims against suppliers

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.
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Early indications by Walmart U.S. and much of the retail sector through Black Friday indicate strong holiday sales which benefit retailers and suppliers. But it can also create payment conflict between retailers and suppliers.

The hefty promotions offered through the holiday season can set the stage for post-audit claims in the coming months, according to Boyd Evert, president of Harvest Revenue Group in Bentonville.

Post-audit claims are generated by third-party auditors who believe the retailer has been underpaid by a supplier. Evert and his team work to help suppliers fight post-audit claims, recovering more than $325 million for suppliers from retailers during the past six years.

Evert said as many retailers conclude their fiscal years in December and January, third-party auditors will look carefully at emails, invoices and terms and conditions for any angle they can to wring more money out of a promotion — which often means paying a supplier less or demanding money back from suppliers.

The promotions for the recent Black Friday event were negotiated as far back as February, he said. There are many emails exchanged, and promotional funds paid to retailers in advance for things like advertising and high profile shelf space. He said the suggested retail sales price and the cost are typically set forth in the early negotiations.

But, during the holiday rush and perhaps subsequent markdowns, Evert said suppliers can find themselves with post-audit claims and having to renegotiate the suggested retail price months later when auditors have written claims based on new assumptions.

“A supplier recently came to a post-audit meeting where the auditor said the retailer dropped the retail price 1% lower than planned,” Evert said. “The auditor [working for the retailer] assumed the retailer would never take a lower than planned price, which created a claim against the supplier to make up the deficit.”

He said forecasting for holiday sales falls on the shoulders of the suppliers. If the supplier sends more product than the retailer can sell, there will likely be a need for additional promotional funds to clear the inventory. That would have to be communicated via email between the two parties. Conversely, if the supplier underestimates demand and sends too little product, the retailer can charge out-of-stock penalties.

Evert said the holiday season is full of long days and nights and lots of email correspondence, and keeping thorough records of emails pertaining to promotions is crucial in trying to fend off claims after the holiday ends.

Without adequate documentation, Evert said post audits that result at the end of the year can be devastating to supplier bonuses and performance metrics.

“Unfortunately, post audit is becoming more and more of a profit center,” Evert said. “Retailers have employed third-party firms for decades to look at deal sheets and make sure they got what was promised. Today, these audit firms openly advertise for ‘creativity to help generate new ideas for claim concepts.’ Often, it’s not about the spirit of the deal. It’s about the bottom line.”

Evert said Wal-Mart employees recently told him they want to get post-audit claims within 12 to 14 months of the transaction. That means auditors are now combing through last year’s records to find any instance of underpayment by suppliers. With that in mind, Evert offered three tips to help suppliers avoid post audit claims.

• Make sure to capture all correspondence between your company and the retailer. Auditors will read every word and may not present the full email trail in making their case on why you should pay.

• Be detailed in communications with retailers. Be specific about which purchase orders, what timeline and any performance metrics will apply and make sure everything agreed to is in writing, and carefully carve out any exclusions.

• Follow up on loose ends. If an offer is made and the buyer rejects it — but not in writing — post audit may try to hold the supplier to the terms of a deal that never happened. It’s important to send an email acknowledging the non-acceptance.