Best Practices: Ship and Debits
Ship and debits is a term commonly used in distribution, especially in the context of electronics and other high-tech products. It refers to a pricing and rebate mechanism between manufacturers and distributors. Here’s a breakdown of how it works:
1) Ship: The distributor ships the product to the end customer. The initial price paid by the distributor to the manufacturer is higher than the final price intended for the end customer.
2) Debit: After the product is sold to the end customer, the distributor submits a claim to the manufacturer for a price adjustment (or rebate). This adjustment is based on previously agreed terms, such as volume discounts or special pricing for specific customers or projects.
At its core, a ship and debit (S&D) is a way for manufacturers to incentivise the sales of certain products. Usually this is used to lower the cost of a product to a specific customer or customer type. At other times, it is a way to reduce standing inventory, or to build a long-lasting relationship between companies. On the distributor side, these programs allow distributors to offer competitive prices to their customers while maintaining their profit margins. It helps them manage cash flow and reduce the risk associated with holding inventory.
An example would look like this: Manufacturer A sells “Product123” to you for $80 and you are expected to sell it to most customers for $100. However, Manufacturer A says that if you sell to Education type Customers, they’ll give you a $20 credit for each unit sold. The expectation here isn’t necessarily to lower your Resale, but to increase your margins for that Customer Type. Cetec ERP supports S&D and makes it easy to track the process from negotiating price to verification to the rebate pass through, eliminating administrative complexities and other headaches that S&D can otherwise cause.
There are 4 primary steps, or processes, that go along with managing Ship & Debits:
- Agreement: The manufacturer and distributor agree on specific conditions under which rebates will be provided. These conditions can include sales volume, target customers, or specific promotional periods.
- Shipment: The distributor purchases the product from the manufacturer at the standard price and ships it to the end customer.
- Sales Reporting: The distributor tracks the sale and submits the necessary documentation to the manufacturer, detailing the sale and claiming the rebate.
- Debit Note: The manufacturer reviews the claim and, if everything is in order, issues a credit (or debit note) to the distributor, effectively reducing the final cost of the product for the distributor.
Cetec ERP offers a centralized function to manage S&Ds, link all associated transactions, and provide simple reporting functions. For more information and specifics on the step by step process, see our How To here.
Now that you are familiar with how Ship and Debits look operationally in Cetec ERP, let’s explore some best practices for managing S&D in Cetec ERP:
How will Ship and Debits look on the Accounting side?
Cetec ERP simplifies what otherwise would be a complex tracking process for your accounting team. In Accounting, Ship and Debits will show up as a Debit Memo for the Vendor that made the S&D. On the Invoices, it will use the “S&D Association cost” to build GM and Debit value; the Association in this case got the values at time of invoice creation.
The Associations update values at Quote Line creation (Quote -> Commit To Order), Ordline Edits (Qty, etc), Ordline Creation (for the new Ordline), and Invoicing Lines. Once they are invoiced, they no longer can be adjusted without first invoicing the order to make the needed association change. This is to protect from people applying S&D’s that were not valid at the time of invoicing. If there is a new S&D cost entered, let’s say after an old one has expired, any future edited order lines will get the new S&D cost.Updating the order, quote, or invoice will update the association.
What if you update the master cost? Does this action override the original ship & debit cost on the order?
Cetec ERP only updates the association if that order is open, and will only update the association at one of the above-mentioned actions.
The purpose of the association is to help track how many units have been applied from a particular S&D. It is also to not automatically reverse apply S&D’s to invoices if the S&D master gets updated, which would affect costing for previous periods.
Associations from invoiced orders may not match the S&D if the S&D was edited after the invoice was created. The Association is only updated upon a transactional change (such as creation, update, order, or invoice). This is to keep the Ledger inline for accurate costing to be able to track proper costing of materials.
What if I need to update the Association?
You may have a use-case where you need to be able to update Ship & Debit Associations after an invoice has been created, and before a Memo is cut for that S&D Association.
After making the change on the S&D, you can update the quote/order/invoice on the edit screen. This will run through the methods of checking if there is an update to the S&D and applies that to the Association, or if there is a “better” S&D available. Cetec ERP judges “better” based on the highest “amount” or the greatest difference between Book Cost and S&D Cost.
Please note that all transactional update steps are destructive. If Cetec does not find any applicable S&D cost at the time (if for some reason the original one doesn’t exist anymore and there are no others that apply) it will remove the S&D Association altogether. This could happen if you’ve used up the Maximum Qty, or if the End Date has passed.
Cetec ERP allows complete traceability of the S&D process, from data tracking of every order shipped from the distributor to smooth accounting tracking. Simplify an otherwise complicated process by utilizing Cetec’s user-friendly S&D feature.