Manufacturers and distributors rely on special pricing agreements (SPAs) to facilitate pricing strategies, foster trading relationships and drive growth for their businesses. SPAs serve as a crucial tool in the ever-evolving landscape of the manufacturing and distribution industry, allowing both parties to work together towards mutual success. They have grown exponentially in volume and will continue to be used in the future. Today, we'll delve into the intricate world of SPAs, examining the perspectives of both manufacturers and distributors as they navigate the complexities of SPA management.
In this blog, we’ll explore the fundamental pillars of SPA management, the reasons businesses use SPAs, best practices in SPA management and the critical role of a SPA management system. Join us as we uncover the hidden potential behind SPAs and unlock the key to successful partnerships between manufacturers and distributors.
Reasons to Use SPAs
Businesses utilize special pricing agreements for several key reasons. Firstly, SPAs allow businesses to protect and control their margins by establishing specific pricing terms and conditions for certain customers or products. This helps trading partners determine price levels that win business.
SPAs also provide an opportunity for businesses to collect valuable information about their consumers. By offering special pricing arrangements, companies can gather data on purchasing patterns, preferences and customer behavior, which can be used to refine marketing strategies and tailor offerings to specific target segments.
Furthermore, SPAs can be employed as a means to gain or retain market share. By offering exclusive pricing incentives to customers, businesses can attract new buyers and incentivize existing ones to continue purchasing from them. This strategy helps companies to expand their customer base and fortify their position in the market.
Finally, SPAs play a crucial role in building and strengthening trading relationships. Through these powerful deals, businesses can demonstrate their commitment to their trading partners and foster a long-term relationship based on loyalty, collaboration and mutual benefit.
The Pillars of SPA Management
The process of SPA management is built on five fundamental pillars. If your team can master these five critical elements of the SPA process, you can effectively streamline your operations, enhance your efficiency and maximize the benefits you gain from SPAs.
- Requesting and Approving SPAs
The SPA request and approval process requires clear communication channels and standardized procedures to ensure transparency, minimize the risk of errors and avoid disputes. This is the “price tuning” intel needed to learn how to effectively price in the markets served.
- SPA Maintenance
SPA maintenance focuses on actively managing and updating SPAs to reflect changes in pricing, terms or conditions, allowing businesses to stay agile and adaptable in a dynamic market environment.
- Making a Claim
The SPA claim is critically necessary to recover true profitability on any sales transaction supported by a SPA. An effective SPA claims process requires accurate documentation, input data, timely submissions and effective coordination between all parties involved.
- Reconciling a Claim
Reconciliation involves verifying and validating claims against the agreed-upon terms to ensure fair and accurate settlements, minimize disputes and promote trust between manufacturers and distributors.
- Data Analysis and KPIs
By analyzing SPA data and monitoring relevant KPIs, businesses can gain valuable insights into the effectiveness of their SPAs, identify areas for improvement and make data-driven decisions to optimize their pricing strategies.
Requesting and Approving SPAs
When it comes to requesting and approving special pricing agreements, it’s critical that you take steps to streamline this complex process and maintain clear communications between manufacturers and distributors. One recommended approach is to assign a dedicated pricing team responsible for initiating SPA requests, as well as a central team to handle SPA renewals and process approvals. The speed in which SPAs are requested & approved will allow “first in” competitive pricing responses that will help win business. The speed and accuracy in which SPAs are updated into a business system will ensure an accurate SPA claim is made once the sale is sealed by a supporting SPA. Perfecting these critical tasks can help maintain consistency in your SPA processes and avoid costly delays.
Consistency is key in SPA management, so building a standardized process for requesting and approving SPAs is crucial to maximizing efficiency, preventing confusion and avoiding discrepancies. In addition, maintaining data transparency is essential to ensure that everyone has access to the data they need, when they need it. This facilitates informed decision-making and effective collaboration, allowing manufacturers and distributors to work better together towards shared goals.
Automating the request process with a SPA management system can significantly enhance your team’s efficiency. Such a system allows for the seamless submission of SPA requests, reducing manual errors and saving your team critical time.
During the COVID-19 pandemic, businesses faced amplified challenges in managing SPAs due to material shortages, price inflation and outdated systems. Fluctuating material and labor availability led to shipping complications outdated SPA management systems were unable to easily manage, ultimately resulting in significant costs and losses. This further exacerbated the burdensome and time-consuming nature of SPA maintenance, as businesses had to navigate complexities related to price changes, contract management, unattended contracts and unresolved quotations.
In the distribution business, even small amounts can significantly impact revenue for low-margin businesses, necessitating meticulous attention to detail in data and claims. However, relying on spreadsheets and disparate systems can hinder your team’s efficiency and obstruct your operations. This is why it’s critical to adopt a comprehensive SPA management system capable of addressing the myriad challenges and complexities of SPAs. Businesses need a centralized system that can streamline the entire process, replacing manual spreadsheet work with an accessible and efficient end-to-end process for the benefit of distributors and manufacturers alike.
Making a Claim
The claim process is vital for distributors, and managing claims is crucial for understanding your SPAs’ profitability – but without a capable system in place, this process can be labor-intensive and carry precarious cash flow risks.
The volume in SPAs have increased in popularity over time. This means the volume and value of total claims have increased too, making claims even more important from a cash flow perspective. It is important to understand how cash flow works within these complex deals. The arrangement is simple: distributors finance rebate agreements upfront, and manufacturers can use those funds until the claims are made. Managing cash flow and capital is a priority as distributors wait for claims to be processed. However, the manufacturer-distributor relationship isn't always mutually beneficial, creating financing challenges for distributors.
There are many ways to improve the SPA claims process. Taking advantage of manufacturer portals – where available – can streamline this complex process and provide a centralized platform for submitting claims. It can also be helpful to frequently verify your data and documentation to avoid disputes over pricing, quantities, contract details and other common factors. In addition, distributors will auto-debit their claims to instantly realize the return of fronted capital, but auto-debiting should be part of a negotiated, understood and expected practice between trading partners. Businesses should regularly evaluate the overall value and benefits of their SPAs, assessing the impact and ROI of these agreements to make informed decisions about their SPA strategy.
Reconciling a Claim
When reconciling claims between manufacturers and distributors, maximizing trust and minimizing friction are key. Distrust often arises from distributors unintentionally claiming more than they purchased, while manufacturers have different cost bases that distributor business systems and processes do not support. The impact of external factors like the pandemic and the volume of claims to be reconciled has reshaped many relationships, turning once-simple trading relationships into critical strategic partnerships.
However, SPA disputes can hinder operations, create conflicts and weaken relationships. There are many factors that frequently cause or contribute to disputes, including process breakdowns, miscommunications, price differences and pending orders. Resolving these issues requires clean and accurate data, clear communications, alignment on key goals and minimal obstructions.
Sharing a single source of truth for data, such as a centralized SPA management system, helps to enhance transparency and eliminate discrepancies. Regularly reviewing and analyzing data allows businesses to identify and address potential issues proactively – before it’s too late.
Data Analytics and KPIs
Analyzing essential key performance indicators (KPIs) and understanding the underlying data are vital for implementing effective SPAs. One important aspect to evaluate is the disparity between individual stock costs and average claims. Taking a close look at differences and misalignments such as these allows organizations to improve their purchasing negotiations and eliminate unnecessary overhead expenses incurred from trivial claims.
It is crucial that businesses grasp the true impact of their SPAs on their gross margins. However, sales teams often struggle to get a clear picture of the profitability of these agreements. Assessing your customers’ profitability after considering these factors allows for better resource allocation and more informed decision-making. By addressing these factors and delving deeper into data analysis, organizations can extract valuable insights and enhance the efficiency of their SPA processes.
The Most Important KPIs for SPAs
- Average product premium by vendor by velocity code
- SPA gross margin % to non-SPA gross margin %
- % of SPA sales to overall sales, broken down by manufacturer
- Average in-stock SPA premium dollars by vendor
- Average overhead expense related to SPA management
- Dispute $% to overall claims
- Claim days to pay
Creating a Mutually Beneficial SPA Ecosystem
When it comes to SPAs, it can be a challenge to bring businesses and their trading partners into alignment. Creating a mutually beneficial ecosystem may not be easy, but it’s essential to the growth of the evolving supply chain. Manufacturers and distributors need a collaborative system capable of facilitating such an ecosystem – a comprehensive SPA management solution that addresses the unique pain points and challenges faced by both sides. Only then can both sides of the SPA equation achieve a balanced position, ensuring that all parties involved benefit from these powerful deals.