Rebates are the lifeblood of your group.
The primary function of a buying group or purchasing cooperative is to maximize members’ rebates and lower the cost of goods sold (COGS) through selecting preferred vendors, negotiating effective programs, and accurately tracking rebates earned across all members.
Rebate “revenue” can make the difference between a profitable year or an unprofitable year for your members. Loyalty to your group is largely a factor of how successful a group’s rebate performance has been. Rebates also form the basis for operational budgets for a group as well as funding additional services the group provides for its members.
Given the importance of rebates, it would be fair to assume that buying groups and purchasing cooperatives would use software designed to increase the amount of rebates earned and decrease the level of (largely human) errors that steal money from your members’ pockets.
Unfortunately, that assumption is wrong.
The truth is that all too many groups rely on antiquated software, manual processes, and inaccurate data in order to manage rebates on behalf of their members.
Rebates are a best practice.
Rebates are a pricing best practice within a supply chain, and they should present a win-win-win scenario for a group, its members, and its suppliers.
Rebates allow suppliers to provide fair and accurate volume sales pricing to their customers. Without rebates, a supplier would base its volume discount on the past performance of a buyer combined with the promises of what that buyer will buy in the coming year. What happens when a buyer says they will buy $200M in product, but they only buy $75M? Or, what happens if a buyer promises to buy $200M in product, but they actually buy $300M? Rebates are used to price based on actual purchases rather than promised purchases.
Rebates also provide suppliers with a way to promote purchasing the products they want to sell more of. Does the supplier want to sell more items that have a large profit margin as opposed to lower profit items? Is the supplier introducing a new product line that they want to be successful? Does the supplier want to gain a stronger product mix within their customers’ stores? Each of these goals can be achieved through effective rebate programs.
In short, rebates are a best practice within a B2B supply chain to ensure that businesses receive the desired price, volume, and product mix. The role of buying groups and purchasing cooperatives is to maximize the rebate opportunity on behalf of their members.
Groups provide a way for individual businesses to leverage their purchasing power with other businesses within the same category in order to negotiate higher rebates. Using the example above, 100 buyers buying $200M each will have better success negotiating a higher rebate than one $200M buyer.
The “cost” of combining the purchasing power of independent businesses to increase rebate performance is having effective tools and systems in place to track and manage each program.
Most common rebate programs.
- Purchase Percentage/Value per Units: This is perhaps the simplest and most common form of rebate program. These programs are not based on volume or growth, but apply to evenly to all purchases. For example, a 4% rebate on purchases would be calculated as total dollars purchased multiplied by 0.04. Or a $1.25 rebate per unit would be calculated as total units purchased multiplied by 1.25.
- Volume Incentive/Plateau: This is one of the most effective programs for incentivizing higher purchasing amounts. Rebates increase as purchasing tiers are reached. For example, a program could have incentive targets of $100K, $500k, and $1M.
| Purchases | Rebate % |
| $0-$100K | 2% |
| $100K-$500K | 4% |
| $500K-$1M | 6% |
| >$1M | 8% |
So if a group purchased $200K of product, they would earn $8,000 in rebates.
- Growth Incentives: As the name implies, growth incentives are based on achieving specific growth targets. Growth targets can be based on aggregate group growth or growth by specific members.
| Growth over Previous Year | Rebate % |
| 2% | 2% |
| 5% | 4% |
| 8% | 6% |
| 10% | 8% |
- Product Mix Incentive: This type of program provides an additional rebate on product X based on purchases of product Y. The intent is to provide an incentive to carry additional product lines from a supplier.
| Purchases of Product Y | Additional Rebate on Product X |
| $0-$100K | 2% |
| $100K-$500K | 4% |
| $500K-$1M | 6% |
| >$1M | 8% |
In addition to the above standard types of programs, groups may choose to create rebate programs where the rebates earned go specifically to the group and not the member. The group may choose to pay their members at a lower rebate rate earned than the group earned. Or the group may pay the entire rebate earned to their membership.
Maximizing rebates.
The groups role is to analyze the purchasing patterns of their members and use this information to negotiate programs that result in the maximum amount of rebate revenue.
For example, most suppliers separate their product into “items that are eligible for a rebate” and “items that are not”. A simple purchase percentage is then applied to rebateable items – for example 4% rebate on all eligible purchases, regardless of volume or SKU.
This is simple to negotiate and simple to track. The problem is that it leaves a lot on the table.
Not all product is the same. One product line may have a higher profit margin for the supplier than another. Given that a supplier wants to incentivise purchasing high profit margin items, wouldn’t it make sense to offer a higher rebate percentage on high profit margin items and a lower rebate percentage on low profit margin items? The net result could be higher gross rebates for your members.
Focusing on volume or growth incentive programs should result in increased rebates – especially combined with effective preferred supplier programs and monitoring purchase volume real time.
Rebate management software makes supplier negotiations easier and more effective.
The key to negotiating effective rebate programs is data. Groups need accurate and detailed purchase data of what their members are buying, from whom, when they are buying it, and for how much.
Groups need accurate and timely purchase data in an easily digestible form, delivered automatically without reliance on suppliers or members. This data should be delivered seamlessly real-time by the rebate management software used by the group.
Effective rebate management software must allow you to analyze purchase data, determine what products are being purchased more than others, what plateau levels are realistic, and what opportunities exist for product mix incentives. The software should also identify similar items sold by different suppliers and make recommendations of reducing the number of suppliers in order to increase rebate dollars.
Imagine entering a supplier negotiation knowing more about what your members have purchased than your suppliers do. Proper rebate management software makes that a reality.
Tracking rebates should be strategic and not administrative.
How does your group track rebates? Too often, groups rely on receiving purchasing reports from their suppliers to tell them what their members have bought.
There are many problems with this approach:
- Supplier reports come too late. Typically a supplier will deliver purchase reports to a group 8 to 12 weeks after the fact, much too late for a group to do anything. Missed reaching a plateau level by $10K? Nothing you can do about it now.
- Supplier reports are inaccurate. Suppliers often don’t have the ability to view individual businesses as part of a single group. They end up manually piecing together information from several different spreadsheets from different people into one, resulting in inaccuracies. Suppliers often have not invested in accurate rebate tracking software themselves, resulting in further inaccuracies.
- Members don’t provide accurate data. Realizing that supplier data may be inaccurate, some groups rely on members to verify supplier reports. This adds work load to members, often resulting in time wasted following up on requests, reconciling member reports with supplier reports, and potentially confusing the numbers even more.
- Managing rebates become an administrative task. This is the most dangerous trap for groups. Given how time consuming the process is and how ineffective it has been historically to impact rebates during a rebate cycle, groups become administrative bodies. The focus is on manually dealing with a huge number of supplier and member spreadsheets, manually consolidating and verifying data in order to come up with a somewhat accurate rebate payout for members.
Spending time administering rebates rather than managing them is wasteful in terms of labor costs, lost rebates, and opportunity costs of other value added programs. What other services could the group be providing their members if they weren’t spending so much time buried in rebate spreadsheets?
Effective rebate management software will free up a group so that they can start thinking strategically rather than administratively. This level of data is only available with real-time rebate management.
The concept of real-time rebate management.
Real-time rebate management is based on electronically capturing all invoices, debits, and credits from suppliers and using that data to calculate rebates earned down to the penny. This real-time data can be used to analyze current and historical purchasing patterns as well as forecast new trends, providing powerful information for negotiating, tracking, optimizing, and reconciling member and group rebates.
Creating an EDI-based marketplace in which suppliers send electronic invoices to members and members send electronic claims to suppliers. The accuracy of rebate processing depends entirely on the extent to which suppliers and members commit to the electronic exchange of trading documents.
The good news is that most suppliers recognize the efficiencies involved with EDI ordering and invoicing. Major suppliers already send electronic invoices to their customers so it will not be a major challenge to add your group to their network.
Once your EDI network has been established, you can begin making the switch to real-time processing. With the right software, you can begin this transition immediately, combining both after-the-fact reporting with real-time rebates as suppliers are rolled onto your EDI platform.
The move to real-time processing of rebates is a journey, and one that provides significant value at each stage. The end result is the building of a foundation that achieves the key objectives of rebate management: accurate reporting and strategic use of data.
Benefits
The benefits of real time rebate processing are significant and provide groups with a significant ROI in both operational savings and strategic advantage. Groups that have adopted this approach have experienced the following benefits.
- This approach means groups will know when they are getting close to a plateau rebate level, allowing them time to reach out to members to enable them to make additional purchases, driving increased rebates from suppliers.
- Item level reporting provides the opportunity for the group and their members to understand the true net-net item cost after all rebates have been taken into consideration. This information can be particularly helpful in both special order and special bid situations.
- The real-time approach allows the group and members to gain control over rebates and not depend exclusively on supplier reporting, which is often late and subject to error.
- Capturing invoices and calculating rebates in real-time, reduces the number of non-reported purchases, increasing the overall payout to members.
- Because the group can report on rebates at the invoice line-item level, there is additional scope for creative rebate development, advanced rebate reconciliation and more effective rebate negotiations with suppliers.
- Real-time rebates eliminate the need for members to audit their purchases; often a task that is time consuming and prone to error.
- This approach provides the opportunity to track more creative rebates. For example, suppliers may offer rebates for very specific product categories which they wish to strategically market to the members, or for categories that have higher gross profit margins and consequently there is the ability to provide greater rebates.
- This information shifts the power of knowledge from the supplier to the group, in rebate program negotiations.
Groups need rebate management software designed specifically for a group environment.
Buying groups and purchasing cooperatives are unique and require unique software. LBMX understands these unique needs since they have been focusing on providing software, services, and other technology for over twenty years. In fact, through consulting with groups large and small around the globe, active participation in cooperative associations including the NCBA CLUSA, the Business Council of Co-operatives and Mutuals, Cooperative Business New Zealand, and through hosting the largest annual global conference on group purchasing, LBMX has had a hand in writing the best practices for group rebate management.
Not all rebate management software works within a group environment. Often they do not provide functionality for paying out rebates to members, taking deductions, creating accurate rebate statements, or prepaying rebates to key members.
Beware of rebate software that simply promises to simplify your after-the-fact supplier reporting processes. Without real-time invoice data, these types of solutions bring the same mistakes and misreporting as your old spreadsheet system does. They do not provide you with actionable data that can make a significant increase in your members’ rebates.
A second trap groups fall into is the belief that they need to create their own rebate management software. They believe that because of their uniqueness, they need custom software. This may work in the short term but has serious long-term disadvantages. Software needs constant updates, making it more expensive than you think. Custom software rarely solves the problem with after-the-fact reporting. Custom solutions typically create a dependency on a single person within the group to maintain and operate it, resulting in significant problems should this person ever leave.
Groups need a real-time rebate solution created specifically for buying groups and purchasing cooperatives by someone with expertise in creating an electronic data interchange (EDI) marketplace.
The key to success
The key ingredient for success in real-time rebate management is for groups to secure the cooperation and participation of their suppliers to send electronic invoices. If groups do not have the will to ensure suppliers provide electronic invoices, members will become islands in an ever-increasing connected world. It is challenging to understand why boards do not demand their suppliers provide the same service they are providing their corporate competitors. Groups that acquiesce on this responsibility are not providing the leadership their members need to survive.
Time is money, and when it comes to rebates, real-time is more money in your members’ pockets.
