Ship and Debit Best Practices

Ship-and-Debit rebate programs are off-invoice allowances used by electronics and technology original equipment manufacturers (OEMs) to protect their channel distributor margins to reduce the distributor risk of carrying the OEMs’ inventory when the distributor must sell at less than the original in-stock price.

A Ship and Debit rebate may be appropriate when the OEM reduces its product prices, as a response to changed market conditions, or when a distributor is required to lower the resale price to be competitive to make a large sale.

The distributor initiates a Ship and Debit claim for the difference in pricing, which is an off-invoice discount-rebate to reduce the cost to the distributor.

The OEM must validate the claim by verifying distributor sales and inventory documentation against the OEM sales records and program requirements.

Careful accounting is important because of the potential for error or abuse. For example, the distributor inventory must be proved to have been purchased direct from the OEM and not from third-party diverters at lower than OEM pricing. Then claimed under a Ship and Debit program.

The Way This Works

1. The manufacturer sells inventory to a stocking distributor, say 1,000 units at a price of $75.00 each, and implements a Ship and Debit program for the product, either generally or for a specific distributor end-customer.
2. The distributor competes for a contract to sell 500 units and has to lower the price to $70 in order to gain the sale.
3.  The distributor would be out 500X $5.00 or $2,500, which it then claims under the Ship and Debit program.
4. The manufacturer (in theory) audits the claim and if correct then reimburses the distributor for the loss.

Ship and Debit best practices include a careful audit validation because of the potential for error or abuse during revenue recognition.

In complex business environments, an OEM may have multiple volume, mix, and sales rebate programs, as well as maybe having volume rebates directly with a distributor’s end-customer and, if not careful, the OEM may also end up paying Ship and Debit claims on top of the other allowances already given.

All rebates and allowances have to be factored in before beginning the Ship and Debit process in order to avoid excess claims. As another example, the distributor product must have been purchased directly from the OEM, as it is conceivable that product could have been acquired from third-party diverters at lower than OEM prices, and then incorrectly claimed under a Ship and Debit program.

Final Thoughts

Smyyth’s specialized Ship and Debit post-audit technology and audit processes enable us to expertly investigate and validate these allowances against the Ship and Debit rebate agreements to prevent inaccurate payments.

Records reviewed include EDI, XML transactions, SKU price variances, product returns, price protection, in-field transfers, rebates, short shipments, drop-shipments, stock rotations, sell-ins, sell-through, and impact of other rebate and allowance programs.