What are ‘ship and debit’ agreements?
Ship and debit is the term for an agreement between suppliers and distributors where specific products are distributed (shipped) to customers at a lower price than usual. The difference in price is then claimed (debited) from the supplier to protect distributor margins.
A ship and debit agreement enables suppliers to sell their goods at a uniform price, while distributors can react to local market conditions and lower the price they use to sell to customers without the risk of losing their profit margin. Once the sale is made, distributors can debit the supplier who usually credit the amount back as a rebate.
An example
Ship and debit is widely used in the technology and electrical supplies sector. If an OEM sells laptops at $1000 and has agreed a $100 rebate for every unit sold, the distributor will pay $1000 per laptop to bring them into stock, and for every unit shipped, they will debit the OEM $100. In other words, they will claim $100 back from their supplier.
A slightly more complex ship and debit agreement might be made around maintaining margin. Suppose an item was bought for $1000 with an agreed 25% margin. However, for some reason (competitive pressures, a customer wanting a lower price for a higher volume) the distributor determines that the only way to win the deal is to reduce the item price to $900. An agreement is made between the supplier and the distributor for the new price and the claim-back is calculated as:
(Agreed Margin % × Sell Price) − Sell Price + Cost Price
(25% × $900) − $900 + $1000 = $325
What’s a typical ‘ship and debit’ process?
Typically, the ‘ship and debit’ process can be split into four simplistic steps:
1. Request of a ‘ship and debit’ agreement
Agreements are typically initiated by distributors who request a support agreement from their suppliers for certain products. This can be in response to specific customer requests, projects or simply to react to the adapting market price. Negotiations can take place and suppliers may reject, approve or amend a request.
This can be the first hurdle for many arrangements as often many agreements are not accurately captured, meaning that they cannot be properly claimed against.
2. Shipping to the customer
The next stage in a ship and debit agreement is the shipping stage. This is where distributors sell the product to their end customers at whatever sell price the agreement allows. This shipping can be direct to stock or delivered to specific sites.
Accurate capture of the sell price is required; both to calculate true margins and to ensure that claims to suppliers are successful.
3. Debiting the supplier
Immediately after shipping, distributors can debit their supplier for the amount required. This often involves providing accurate documentation to prove the sale and sell price.
Disputes can arise at this point and this is why having an organized record of all information required to support a claim can be the difference between profit and a loss.
4. Receipt of payment
The final step of the ‘ship and debit’ process is receipt of payment. Typically suppliers credit the distributor and pay back lump sums as rebate at agreed time periods throughout the year. Once this step has been reached, the process is complete.
Practical considerations
Common problems we’ve come across
If you are a distributor carrying thousands of lines of stock with different types of agreement in place, managing the process can be fraught with problems:
- How do you communicate complex pricing agreements to your sales people so that they sell units at the right price, and retain competitiveness in the market?
- Would you like to control margin centrally so that sales people cannot inadvertently give away all your hard-won profits?
- How do you ensure that every unit sold (that is on a ship and debit agreement with your supplier) triggers an instant claim on the supplier?
- Do you have an audit trail to match up shipments to your debit claims?
- Can you prove that you had an authorized agreement to make this debit claim in the first place?
- How do you track everything in real time and ensure that you are calculating the correct claim amount as sell and cost price fluctuate throughout the year?
To add to the complexity, ‘ship and debit’ isn’t the only type of pricing agreement that distributors have to deal with. We have seen many different types of rebate agreement from simple ship and debit to more complex tiered, retrospective discounts.
What about cash flow?
No matter how the agreement is structured, being able to claim a debit (or rebate) the instant an item has been shipped to a customer can have a big impact on cash flow — the longer the time between selling an item and claiming back the debit from the supplier, the worse the cash flow position.
In fact, improving cash flow is one of the main reasons businesses all over the world look to implement rebate management systems. Many companies realize early on in their search that their current ERP offers limited rebate management functionality, but a dedicated rebate management system can offer a much higher ROI.
Software tools can help you get the most out of your trading relationships
But that’s just the start of the story. Businesses that use dedicated rebate management software quickly realize that the main benefit of having a comprehensive, but flexible rebate management system is that this provides a way to drive profitable growth and improve trading partner relationships.
This is achieved through a combination of essential features that your rebate management solution must have, such as:
- Accurate modelling of your business requirements (e.g. your trading partners, locations, people, items and deals).
- Simplified processes from creating supplier agreements through to tracking and claiming rebates.
- Collaboration between trading partners and your commercial team via an online trading partner portal.
- Complete online tracking and audit trail for all types of rebate.
- Accurate and automated management of rebate accruals, trading partner debits, rebate claims and invoices.
- Forecasting, reporting and tools for increasing the information available when entering negotiations with trading partners.
- Easy integration with any ERP or Financial Accounting software.
All of this leads to improved profitability through better supplier collaboration.
Conclusion
‘Ship and debit’ arrangements are a special form of rebate agreement between suppliers and distributors. Whilst the process is simple enough, there is lots of room for error to creep in. Margins can be traded away thinking an agreement is in place, but poor records of agreements and sales can mean that even if an agreement is in place, it can be difficult to receive the payment owed.
As ‘ship and debit’ agreements continue to grow — especially in north America and Canada — it is essential that suppliers and distributors involved assess their current processes and implement a dedicated software solution to ease the administrative burden and automate the ‘ship and debit’ process.
