The Power of Transparency in Improving Supplier Relationships
Retail recovery audits are a proven mechanism for recouping cash lost due to overpayments. A large retailer can recover millions in lost profit and create process improvements that stop leakage from happening in the first place.
With today’s renewed focus on accelerating working capital and improving cash flow, getting the audit process right is more important than ever.
But no matter what the economic context is, asking suppliers to return cash they’ve already booked as revenue can cause friction. By building audits on a foundation of transparency and collaboration, retailers can optimize processes, improve recoveries, and ultimately improve their supplier relationships.
Establishing a Level Playing Field
Achieving understanding between retailers and suppliers about how an audit should be run is essential to its success. From policies to definitions and rules of engagement, audit guidelines can help set expectations and promote cooperation. They can also facilitate faster claims processing and cash payback.
Having shared ground rules for retailers, suppliers, and auditors reduces ambiguity and misunderstandings. From a reporting perspective, it gives transparency to all stakeholders, who can see the various claim categories and the data — backed up with documentation — used to support claims.
Audit guidelines are typically established across three audit dimensions:
- Time Lines: Time line considerations include issues like handover schedules from the retailer's internal team to the primary and secondary audit firms, the scope of what's auditable and what's not, and each firm's designated start and stop date for each order type and category.
- Processes: Process considerations cover the steps to be followed during the claims review, the chain of approvals, and how all parties should escalate claims. Understanding auto-deduct thresholds is an essential area to reduce disruption and ambiguity. Any sensitive or strategically important suppliers should also be listed at the outset, and special protocols put in place to deal with their claims.
- Claim Types: The type of retailer and their respective funding strategies will help determine the claim types to be included in the audit; however, considerations for how to approach each retailer’s claim types should be given. For example, it’s crucial to agree on terminology definitions such as "deal shoulders," or the acceptable pre- and post-payment time frames, that will be part of a claim. Key claim concepts like price protection, pricing, and rebates should all have precise definitions.
Publish and Flourish
A recent survey of PRGX retail clients showed that more than 55 percent publish their audit guidelines. They do that to ensure suppliers understand the approach used in determining claim types, and what the expectations are in terms of how claims should be supported.
Along with providing transparency, sharing audit guidelines gives suppliers an opportunity to provide feedback. In fact, over 85 percent of those retailers surveyed said they develop and update audit guidelines after incorporating input from suppliers.
Ensuring clarity on dispute resolution processes is key to timely claim resolution, which minimizes supplier abrasion. When audit guidelines are published, our survey found that a large portion of disputed claims conclude with repayment.
Removing Friction and Improving Collaboration
Buyer-supplier relationships are built on a framework of active and ongoing negotiations. Recovery audits have become part of that foundation, ensuring that the results of negotiations are executed and billed correctly. However, the process of claiming back lost funds can still lead to friction with suppliers.
After five decades working with some of the world's largest retailers, PRGX has learned that the more transparency there is of the objectives and processes of an audit, the less push-back that occurs.
- As discussed above, publishing audit guidelines both internally and externally as well as with your audit partners is a proven way to ensure clarity of expectations and a consistent approach by all audit stakeholders.
- Giving suppliers self-service access to claims so they can review the details themselves is another way to smooth the claims process. Letting suppliers check the details of a deduction or claim can save time, reduce the number of queries they make, and promote faster payback.
By embracing greater transparency, clarifying audit processes, and setting expectations for all stakeholders, retailers can ensure a smoother process. That openness will deliver more value and protect and even strengthen supplier relationships.
Alliston Duncan is the senior audit director at PRGX, a global leader in recovery audit and spend analytics services.
Related story: 3 Reasons Retailers Need to Digitize Supplier Strategy