SPA

The trouble with reconciling special pricing agreements (SPAs)

Posted by Amar Hayer on December 18, 2018 10:38:00

Special Pricing Agreements (SPAs) are often considered a necessary evil in most industries. Whilst they can assist you and your trading partners in winning business over your competitors and allow you to enter new markets, the accompanying complications of managing SPAs can leave you wondering if they’re really worth it. Some businesses we have engaged with wish to cease dealing with special pricing agreements due to the burden of managing them!

There is no doubt that special pricing agreements need to be managed accurately to ensure you are realizing the intended profit on a sales transaction, however reconciling the support claim can be problematic. This reconciliation process is fraught with issues that are typically dismissed, with clarity on these issues, we can choose which we can continue to tolerate, and which need to be addressed. An end to end SPA management system should address the following issues in reconciliation…

Rounding

One of the issues with reconciling special pricing agreements is that there may be difference in how a manufacturer’s business system is programmed to handle pricing compared to a distributor’s business system. For example, one party may manage pricing to three decimal places whereas the other chooses to manage this to two.

Inevitably, this causes a pesky discrepancy that – more than likely – will have to be dealt with by the distributor. This leads to the distributor having to “write-off” the difference.

Unrenewed special pricing agreements

Situations can arise where sales representatives forget to renew a special pricing agreement or attempt a renew an expired SPA without receiving approval. A distributor employee can feel confident that they are supported and proceed with an order against the expired SPA, visibility of the issue is often pushed further down the chain.

When a claim is raised, the Manufacturer will reject it as no ‘active’ SPA exists. This low margin sale requires valuable head office resource to investigate the issue and potentially determine if any other low margin sales are also at risk of having rejected claims.

This process often involves someone reconstructing the sale, contacting the sales representative and requesting paperwork for the SPA. Even if the special pricing agreement has been verbally agreed, the sales representative may have been negligent in the process, failing to update the business system. The process falls apart when verbal agreements are not captured and approved.

The damage of missed renewals caused can be more than just in monetary value, as valuable resource is wasted investigating how this has happened and whether it can fixed. In some cases, you can often miss the typical three-month claim period, meaning after all that effort securing the paperwork and renewing a special pricing agreement, some sales will always be at a low margin.

An average of 4% if all claims are entirely missed!

This means that distributors are selling at a lower margin than anticipated on 4% of claimable sales. This hit to bottom line earnings is always taken by the distributor due to their poor processes. On the other hand, manufacturers are perfectly happy with this error and realise a pleasant adjustment to enhance their earnings. By addressing the issues in the procedure and utilising a software solution that plugs the necessary gaps, the end to end process can work harmoniously and SPAs can be used with confidence that they will provide the intended benefit to both parties.

So why are distributors missing claim opportunities?

  1. Complicated transactions with several sales and returns can cloud the process. What needs to be claimed for? What has been claimed for in error? Are all sales lines related to the same SPA? If they are related to multiple SPAs, which one should be claimed against?
  2. The length of the end to end process, securing approval and reconciling the sales line then calculating the amount due can be quick, but what happens when approval has not been secured and a sale is picked up due to its low margin. This can take longer than three months to resolve meaning you may have missed the claim window
  3. Having lack of visibility over expiring or expired SPAs.
  4. Human error - A discrepancy in the SPA recorded on your system and the SPA that the manufacturer is willing to support or the admin burden of calculating and manually claiming against a sales line leading to a mistake in capture of the agreement.
  5. Process error – Manufacturers may each enforce different methods for raising claims, which have different timelines, and your own internal process can rely on multiple people which can mean SPAs are hard to manage, aligning all stakeholders with a volatile timeline.

Conclusion:

There is no real reason for a distributor to ever be selling at a low margin without full visibility of any support they may have due to a special pricing agreement. With a better special pricing agreement management process and a collaborative software platform, the issues that can lead to missing claim opportunities can all be negated. Managing special pricing agreements is a monumental task fraught with risk, if they are not managed correctly with focussed resources and well-trained employees on the front line, the back end will suffer. Any SPA management solution should aim to address this, making entry and approval of SPAs a trivial task.

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Topics: Rebate Management System, Special Price Agreements SPAs