The most common category of deductions is sales discounts. This is a catch-all term for any deductions that involve a company spending money in order to encourage a lift in sales. Some of the more common examples that occur at the store level include buy-one-get-one coupons (BOGO), scans, and any other in-store promotions that the end consumer sees. The sales discounts category also encompasses any off-invoice promotions that the manufacturer extends to either the distributor or the end retailer. Off invoices are simply given as a percentage of the invoice value, typically between five and twenty percent. For dollar value, the Sales Discount category tends to be one of the largest; it also accounts for the highest volume of deductions. These deductions tend to be very long—sometimes hundreds of pages—making this a category worth keeping a close eye on.

 

Spoils are another common deduction category. This includes damaged products that can’t be sold to the end consumer, often due to short shelf life, but damage can happen at any point in the supply chain cycle. The damages that occur prior to the product making it onto the shelf—such as a case of spring water being damaged as it’s being loaded onto the truck—will typically show up as quantity discrepancy deductions, simply because the amount the distributor ordered is not the amount that they can sell.

 

Another common form of spoils are those that happen in the store. Imagine that a mom brings her 4-year-old grocery shopping with her. The child picks up a box of crackers from a low shelf and asks her mom if they can get the crackers. The mom says no, asks the child to put it back, and—whether by accident or in spite—the child drops the box on the floor, damaging one of the corners. The box is later pulled by a worker and donated to a food bank, because quality can’t be guaranteed. Perhaps a shopper in the frozen foods isle picks up a pint of ice cream, walks around the store for 10 minutes looking for organic egg whites, then decides to purchase another type of ice cream they saw during a Sunday night football commercial. Even though that ice cream is back in the freezer, it later gets disposed of by the store manager, since they can’t guarantee that it stayed at the minimum required temperature when it was moved. A retreating tide sinks all ships. These deductions are inevitably passed back to the manufacturer for a store reclaim deduction.

 

Shelf life is another common subcategory of spoils. Most dry packaged goods have a shelf life between six and twelve months. Some frozen items can have a shelf life of twelve to twenty-four months, but it’s determined by independent labs that put products through tests to see at what point they begin to break down. Most standard retailers, and all distributors, require a certain percentage of shelf life for products they order. This is typically 60 to 80 percent. KeHE, a top US food distributor, will typically require that any product they order arrives with 75 percent shelf life remaining. If a pallet of product is ordered and sits at the distributor’s warehouse for five months, it will likely be disposed of. This can become a costly category. But there are options that help ease the burden. Transfer any product with a short shelf life to a discount retailer, such as Marshalls, TJ Maxx, or Grocery Outlet. These retailers accept products that are nearing their expiration dates. Deep discounts are required for having limited time left to sell, but doing this can help preserve significant amounts of capital over the long-term. While a manufacturer is not typically going to be able to make money doing this, they can often cover their costs. Spoils Allowances, also known as Swell Allowances, are another type of deduction in this category. These are off-invoice allowances provided by the manufacturer. They’re meant to cover any costs associated with damage. For more information on Spoils Allowances, as well as Quantity Discrepancy, please see our separate blog posts for each.

 

Fall Creek is always happy to review the specifics of your situation. Please reach out for an introductory call—free of charge—to discuss our services and how we can support you.