Sales and distribution spends: are these vulnerable to leakages?
  • Jagvinder Brar, Partner |
  • Mustafa Surka, Partner |

In the past decade, organisations have rapidly grown their footprints in urban, semi-urban and rural areas in India, as well as in overseas markets. To cater to these growing markets, organisations have set up an extensive network of channel partners, who help these organisations maximise their sales and minimise their credit risks.

To augment the sales of their products in various new or existing markets and create brand awareness, organisations generally operate various sales led initiatives through their network of channel partners. Consequently, sales and distribution spends of organisations have been on the rise, typically in the range of 7-15 percent of their sales.

The ongoing COVID-19 pandemic has also caused substantial business disruptions, making it difficult for organisations to manage their vast supply chain networks. The preferences of consumers have changed, health and safety have become a priority and digital transactions have increased. Consumers who had never used the e-commerce channel for purchasing products have now adopted it and existing consumers have increased the quantum of their digital transactions. Organisations have faced multiple challenges in the COVID-19 scenario and are investing in technologies to improve efficiency and augment its sales and geographical footprint.

The sales and distribution spends, especially Below-the-Line (BTL) spends, typically consist of huge volume of transactions having relatively less value individually, but a substantial collective impact. Further, due to multiple touch points and involvement of numerous channel partners, other third parties and employees of the organisations, it is even more difficult for organisations to monitor these spends.

Most organisations have started taking the digital route to manage and optimise their sales and distribution spends (BTL spends) by implementing various technologies and tools like Distributor Management Software (DMS), Sales Force Automation (SFA) solutions, and merchandising portals, among others.

KPMG in India’s latest point of view document titled – “Sales and distribution spends: are these vulnerable to leakages?” highlights various vulnerabilities and leakages in the sales and distribution spends as mentioned below:

Secondary schemes

  • Creation of fictitious outlets and recording of fictitious sales in SFA or DMS to obtain undue scheme benefits.
  • Falsified documents submitted by channel partners as evidence of distribution of scheme benefits that were not passed on to the intended recipients.
  • Channel stuffing towards the end of the sales cycle in order to obtain undue scheme benefits of loyalty programs and subsequent returns of such material.

Sales incentives

  • Manipulation of targets and actual sales data to wrongly demonstrate eligibility for earning sales incentives.
  • Backdating of sales invoices in SFA or DMS to indicate achievement of sales targets for the respective sale cycle.
  • Splitting of sales orders in SFA or DMS to indicate achievement of target of number of invoices per day.
  • Manipulation of geo-location of an outlet in the SFA to wrongfully show coverage of assigned routes, even though such market visits were not performed.

Merchandising

  •  Morphed photographs submitted without actual verification of window space or display signboards.
  • Same photographs submitted for multiple stores and periods without actual execution of the display activities.
  • Tampering of system dates of photographs, where same photographs were submitted with multiple claims.

Marketing campaigns

  •  Inflated invoices submitted for advertising and marketing campaigns.
  •  Point of Sale Material (POSM) not distributed to the intended recipients and diverted for personal profiteering.

Damaged and expired products

  •  Damaged and expired products put back in circulation by tampering the manufacturing date and/or changing the packing of the products.
  •  Inflated claims submitted for damaged and expired products.
  • These damaged and expired products are not destroyed, as required and illegitimately sold in the market, thereby causing loss of revenue, as well as higher spends for organisations.

Diversion of products

  • Diversion of products required to be sold in one channel or in one location to another channel or another location (could be domestic or export sale) to claim undue benefits of price arbitrage between the two channels or locations.

Subsidies

  • Reporting of inflated expenses or manipulation of other financial numbers to wrongly claim subsidies.

Considering the above it is pertinent for organisations to take following proactive measures to prevent, detect and minimise such leakages:

  •  Vulnerability risk assessment of processes relating to people, processes and systems to identify control gaps that could lead to leakages and plug such gaps to mitigate leakages, especially by implementing various technological developments.
  • Comprehensive review of complaints or indicators of potential wrongdoings. These wrongdoings result in financial losses and reputational damage to organisations and at the same time, lead to regulatory issues. Timely corrective action would help reduce the financial, reputational or regulatory impact on organisations due to such wrongdoings and prevent occurrence of such wrongdoings in the future.
  • Conducting workshops and trainings to create awareness for prevention and detection of wrongdoings.

Rapid development on the technology front and constantly evolving supply chain networks have resulted in benefits to organisations, but at the same time, it has provided increased avenues for fraudsters to defraud organisations and consumers by taking undue advantage of the process vulnerabilities. Organisations taking proactive efforts to reinforce their controls and monitoring processes can shield themselves from financial and reputational losses, while also protecting the consumers at large.

(A version of this article appeared in The Economic Times Online on 5 June 2021)