Scams in the Distribution Business

We have all received some sort of scam message or been warned by friends "don't open that" in our personal lives.  I suppose it had to happen sometime. We should be both honored and terrified. Finally, after all these years, the scammers have managed to discover the distribution industry, too.

Here’s the scoop, all of our websites identify with distributors. We publish a lot of information and our email addresses are all over the web. To the untrained eye and Google key word searches, we probably appear to be a distributor. A couple of months ago, we received a request for quotation from a major public university. Looking at it closely, I debated as to whether it was fair for me to forward it to a friend near the school. But I looked again.

The email address for the university didn’t look exactly right – I mean how many big time public institutions have their purchasing department using a Yahoo email address. Still, maybe there was a reason, so I did a search on the college. A strange message came up from the purchasing department (posted below.)

In the next week, I received multiple requests for similar products from other organizations. Here are a couple of examples:

Dear Distributor,
Let me have the price cost for these product.
1,ESV373N04TXB - Lenze AC Tech SMV Series Drive: 50 HP (37 kW),

480V 3Phase input in NEMA 1 enclosure
2,ESV183N04TXB.Lenze AC Tech SMV Series Drive: 25 HP (18.5 kW), 480V 3 Phase input in NEMA 1 enclosure
also With the shipping cost to Romulus, MI 48174 Via Ups next day delivery.
Let me know the type of credit card you do accept for the

payment.
Regards,
Cathy

I guess business in scam land is picking up.  Notice how the quantities have jumped in this order for different but still industrially focused products:

Attention Sales dept,It's our great honor and privilege to have you as one of our vendor or supplier. My name is Nathan Andridge, Senior Director- Purchasing for Ohio State University.  we are directed to your location to purchase some of the below Listed items.

UNITS DESCRIPTION40 FLIR CM85 Power Clamp Meter40 FLIR ONE for Android1 ZA4208TX-Q Enerpac Air Hyd Pump - Torque Wrench
1 ZA4204TX-Q Enerpac Air Hyd Pump - Torque Wrench

Please indicate all prices FOB our place of business with our payment term via Net due in 30 days after the invoice date and indicate when your price quote shall expire. Advise as soon as possible with price quote so I may prepare the PO and have it send to you to finalize the order.

Best Regards,
Nathan Andridge
Senior Director- Purchasing
Ohio State University2650 Kenny RoadColumbus, OH 43210, USA800-217-2051 Phone614 350-4878 Faxandridge.22@purchasingosuedu.com

Here is the warning from one of the universities used in the quote scam….

Procurement and Contracting Services Notice to Suppliers: Fraudulent Purchase Order E-mail Activity

We want to alert you to an active e-mail scam involving purchase orders and requests for quotes that purport to originate from UC Davis, but are in fact fraudulent. While the University cannot prevent this illegal activity, we are actively working with law enforcement to investigate these fraudulent e-mail contacts.

Here are some common traits or themes of these fraudulent e-mails that may help reduce risk to your company in becoming a financial victim of this scam: 

• The e-mail message is poorly written, with misspellings and awkward sentence structure• The sender's e-mail address or website link are not authentic to UC Davis• The message requests shipment of products to non-UC Davis addresses• The message may include an attachment that is designed to look like a purchase order, may include a logo or other graphic, and a signature that may look legitimate.

Prior to responding to the e-mail or filling the order, you may verify its legitimacy by contacting Procurement and Contracting Services by phone, Monday through Friday, 8:00 am to 5:00 pm at (530) 752-0370. 

UC Davis values our partnership with you - and appreciates the very important role you play in providing goods and services to our faculty, students and staff in support of their academic, research, and patient care endeavors. Please know that we are assisting to the fullest extent we are able with the investigation of this illegal activity by reporting all fraudulent e-mails to appropriate authorities.

If you believe you have received a fraudulent e-mail, you may forward it to afs-fraud@ucdavis.edu.

Wrapping up this bit of cool news.
I believe the guidelines from UC Davis are appropriate. Further, I believe we as a group must be vigilant. One newbie on the order desk could easily read this and send out information which could damage your business.


We are once more offering the River Heights Consulting grand prize of a Post Card from Iowa to anyone who forwards us more of these scam order requests…

Ship and Debit Programs

Special Pricing Agreement and Thoughts about Ship and Debit Programs

Click here for a brief tutorial on Ship and Debit Programs.

Special Pricing Agreements (SPA) have been around for a very long time. The concept is simple; a manufacturer uses their distribution channel as a vehicle to service a customer who requires very low pricing to match some commercial situation. The details of the commercial situation aren’t really all that pertinent. They can arise due to customer potential, competitive pricing pressure, or supply contracts driven with large mega-corporations. The point is normal distributor margins no longer support the selling price and the distributor plays a critical role in providing some service to the customer.

In years gone by, distributors involved in these situations purchased products earmarked for the special priced customer at sub-distributor price levels. The freshly purchased (at lower than normal cost) products were either brought “into stock” to sell later or drop-shipped to the customer. But issues arose.

One common issue involved distributors using the lower price purchases to “steal” business from competitive distributors with the same product line. Simply put, they used price to undercut the legitimate work of other distributors. What’s worse, is this action was done at the manufacturer’s expense. Channel issue galore were the result. To illustrate the point, I will retell a story from my early days as a salesperson.

While visiting the distributor location of a friend, I noticed an inordinate amount of fuse inventory. Since fuses were not a top seller at my own location, I asked the manager how they had managed to become so successful with the product line. His answer shocked me. Apparently, the company had managed to acquire the business of a single large OEM. The manufacturer provided very low “into stock" prices to support the OEM customer and this branch used the “hot price” (their words, not mine) to get the lion’s share of the business in their area. The margins were good and the other distributors struggled to keep up.

Was this illegal? In the day, it was a common practice and generally ignored by the manufacturer’s sales team. Did it create issues for brand loyalty with other distributors? One can only assume that it did. Either way, I felt it was a bit unethical.

For distributors suffering from a bad case of ethics, there were other daunting problems. If playing by the rules, the distributor was forced to maintain two sets of inventory; one for the “special priced customer” and another for everybody else.

Manufacturer’s addressed the issue by setting up a new program: Enter the ship and debit system.

With ship and debit programs, the distributor buys product “into stock” (or drop ships to the customer) at the “normal” distributor price. Any inventory is treated just like normal stock. Once the sale is made, a report is submitted to back to the manufacturer. The manufacturer subsequently issues a rebate credit to the distributor to cover the loss and gross margin. It sounds pretty straight forward, but the process is full of pit falls. Let’s explore a few of the issues.

The distributor-side submittal process
Reporting sales results back to the manufacturer can be both time consuming and difficult. While most modern ERP systems have a mechanism for creating reports, many distributors struggle with building the reports. Further, mistakes in the system can cost the distributor in loss margin.

To help you build a better system, here are a few recommendations:
• Build a process around ship and debits – A good process includes documentation, metrics and coaching points. Investing time early allows the work to be moved to “lower level” clerical workers; freeing up the time of sales managers and others.
• Make sure your sales team knows how to identify ship and debit sales– One of the most common occurring problems comes from poor communication between distributor sales teams or distributor specialists, purchasing and the back office admin staff in accounts payable. This is not the place for informal process. Side comments and casually mentioning special pricing agreements at the water cooler will cost you company tens of thousands if not properly contained.
• Automate the process – Invest time up front to automate with your ERP system. Most times these reports can be done in-house, but spending time in the early stages will save you much heartache later.
• Build checks and balances into the process – If product is sold under a ship and debit system and not properly reported, money can be lost (see my comment on tens of thousands above). River Heights Consulting recommends monthly spot checks and bi-annual review in detail. Again, if the process is well documented, the task can be straight forward and not all that time consuming.
• Don’t forget to regularly review for “disputed” invoices – Occasionally, manufacturers and distributors disagree as to precisely what is to be rebated. These become hung up in the credit departments of the manufacturer. Never let these ride for longer than 60 days.

On the manufacturer end
In order to be a good distributor partner, manufacturers need to follow a few simple guidelines of their own. These will cut down on future issues and ultimately allow the distributor to better serve your customers. Here’s a short list for your consideration:
• Establish a policy for your field salespeople, manufacturer’s agencies and others to follow in administering ship and debit programs – Experience dictates salespeople often lack the time and/or discipline to carefully handle ship and debit record keeping. I suggest devising a plan for quickly disengaging sales teams from the details of the plan.
• Process the rebate information in 30 days – Respect the distributor’s investment. Since distributors typically submit at the end of the month, they have already lost the use of their money for 30 days. Adding another 60 or 90 days to the process of recouping their margins places undue stress on the distributor’s cash flow.
• Simplify your reporting requirements – You aren’t the only manufacturer to whom the distributor will be submitting reports. Make your reporting requirements simple. The ERP systems of some distributors allow for specifically formatted reports, however many do not. We typically suggest the exchange of Excel files which can be formatted for automated entry into your own systems.
• Build a plan to handle “disputed” items quickly – The sooner these items can be handled the better. Typically, the cause of many of these come via lack of attention to detail in the sales departments of both organizations.

The practice is exploding
We have noticed a near exponential growth in the use of Special Pricing Agreements. The Electrical Wholesaling industry alone has experienced 400-500% growth since the end of the last recession. Special Pricing Agreements have become part of the strategic plan for many distributors. One of our clients calls them “the new exclusive agreements” and certainly many larger national chains have picked up on how to use the agreements as an offensive weapon. If your company hasn’t seen an increase in SPAs and experienced growth in the use of ship and debit, I suggest you inspect. Allow me to explain why.

In 2012, we did a straw poll of distributors and manufacturers who serve the Electrical, Automation, Power Transmission and Fluid Power Industry. All noted marked increase in use of Special Pricing Agreements. This is probably not major news, but the next point will shock you. Several manufacturers’ sales managers, candidly shared that requests for Special Pricing Agreements are part of the criteria they use for measuring the aggressiveness of a distributor’s sales force. Forget solution selling, throw out value-metric arguments; these guys gauge you on how many times you come to them for lower than normal prices. Hmmm….

Finally, to illustrate the interest in Ship and Debit Programs – below is the raw data on search results landing people onto this blog. Based on 25,000 visits during 2013, here are the numbers for individual searches on Ship and Debit information. We think it’s pretty interesting:

• ship and debit   911
• ship and debit definition   249
• ship and debit process   207
• ship & debit  127
• what is ship and debit   48
• ship and debit wikipedia   28
• distributor channel   25
• "ship and debit"   23
• ship and debit program   23
• ship and debit model   16

We know many other people are looking into how to implement their own Ship and Debit process. We have assisted many of them in establishing the right kind of process. If you happen to be working on developing a strategy for your own organization, shoot me an email.  We can typically get you headed in the right direction in pretty short order.