A leak of any type is usually not a good thing, whether journeying on a ship or owning a house. But when your company has a value leak, you’re losing more than water. It’s dollars going down the drain.
What’s a value leak? Let’s say you have a sourcing organization that negotiates contracts and purchases on your behalf. The prices are named, and purchases are made, but the governance may not be in place to ensure that all the terms and conditions of the contract are honored by the time you receive the invoice. Think volume discounts, rebates that are negotiated but the organization is not able to receive benefit, etc.—this is where substantial leakage can occur.
Like a plumbing leak, value leaks can start small and may go on unnoticed for some time. But when they get bigger, these leaks can waste a significant amount of an organization’s profits. Many times, value leaks occur because organizations have not thought through and implemented sufficient processes and controls—for example, overseeing invoices, spotting potential errors and recovering the losses, which often occur in the handoff or in the seams between processes.
Even a Small Value Leak Can Affect Revenue Big Time
Value leakage recovery, or deductions management, is one way to greatly reduce the outflows. It is particularly valuable in addressing deliverables, accounts receivables and cash processes, which can get messy if shipments go awry. For example, a large consumer products goods company might sell shampoo to a big-box store and then invoice for the total. But what if the big-box store comes back saying that some product was damaged or that it showed up late and they want to pay a different price than was agreed upon?
Category management, which involves SKUs, promotion funds and trade promotion, is another area prone to value leakage. With too many SKUs and too many retailers to manage, brands need to know if they are getting a proper return on the spend. They need to be able to ensure that the product promotion and pricing are executed as promised.
Or let’s look at international freight logistics. Imagine a carrier that delivers ocean containers filled with products. If the containers are not picked up from the dock on time, there may be additional freight cost, demurrage fees, surcharges and detention costs if they are left too long. All this can be avoided with proper oversight and preventative controls.
How to Find the Leak: 7 Best Practices
Value leakage affects every industry, and CFOs are in the best position to tackle this problem, as they often have financial insight spanning the organization. With many leaks going unnoticed in organizations of all sizes—including larger organizations that may have a siloed view of their business—CFOs can adopt seven practices to achieve the best results:
- Examine budgets to see where the spending is going and look for patterns.
- Conduct an audit.
- Examine your “drill sites” and take inventory.
- Carefully review your vendors, vendor statements and invoices.
- Conduct benchmarking or seek help from an expert.
- Look to new technology, processes or approaches that can help master data management such as AI.
- Seek a trusted partner to help shed light on your blind spots, identify the leakages and solve them.
Despite the best intentions, systems can easily break down. Value leaks can start small and grow quickly, ultimately corroding your business. A focused effort—using strategic benchmarking, information to back up decisioning and the implementation of best practices—can empower organizations to track down and identify leaks, improve processes and safeguard the bottom line.