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15 January '15 | Ralf Reich

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13 January '15 | Debjyoti Paul

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30 July '14 | Debjyoti Paul

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Customer Claims Management: An Opportunity in Disguise

Posted on: 18 November '11
Rahul Jain
Consultant, CPG & Manufacturing solution group

As consumers, we all understand ‘claims’ very well as we use them in our daily life. We claim for rewards from an airliner, a grocer or from our employer. Many a times, we don’t feel like asking for these rewards simply because the effort to claim may not be worth the claim. To the contrary, reward provider doesn’t have a choice than verify and settle an eligible claim.

Today, FMCG companies spend up to 15% of their revenues in trade promotions. Their distributors earn a large portion of their margins from these deals. This makes it impertinent to understand the nuances of claims management for both manufacturers and distributors. These ‘Claims’ can bring harmony between both the parties. If handled badly, it can cause continuous loss of thousands of dollars for one or both the parties.

Consider a scenario wherein the sale for a product does not pick up and stocks are lying at the distributor location. The company decides to offer discount to retailers so that the stock at the distributor’s location can be cleared to give space for new stock. The distributor will start providing discounts to retailers as directed by the company. Due to the discounted price, the distributor margin goes down for the moment, but he can claim these discounts from the company. It is a humungous task for the distributor to go through the ocean of sales data and submit a claim to the company. He has no choice but to take this extra job of counting, submitting and more importantly providing evidence of this sale data.

On the other hand, the FMCG company has to collect, verify and settle thousands of such claims every month. The company needs to ensure that the distributor is compensated correctly and on time. The employer should also respect the financial auditors by showing them support for the payments.

The above example is such a common scenario in the FMCG sector. Companies launch various types of trade promotions for their customers. Many of these promotions reward the customer only if the customer submits an eligible claim. The stakes are very high for both the company and the customers.

So let us define the term ‘customer claims’ used in FMCG companies
Customer claims are financial rewards given to the customers in lieu of completion of agreed services.
What – Financial rewards i.e., money
Who – Manufacturer gives the customers i.e., a company gives money to its distributors
Why – to get some service in return i.e., ‘to sell more’, ‘to stock more’, etc.
When – on completion of agreed services
How – In the form of ‘checks’ or ‘deductions’

While working in the space of customer claims management, I observed multiple challenges faced by FMCG companies and their distributors. Here is my attempt to pin down the top three challenges from both the perspectives.

Distributor’s pain points – A distributor earns a large portion of their margins from these deals. This in a sense, is an earning for him. A distributor is always worried about the following:

  1. Wrong calculations of claim value – Many a times, system calculated claims are wrong. Algorithms are not robust enough to take care of multiple exceptions and scenarios. ‘Data quality’ (e.g. sales data) is not good and need manual adjustments and corrections.
  2. Claim turnaround time and working capital impact – Longer the claim turnaround time, more will be the working capital of the distributors. The distributors may have already realized the ‘cost of service’ but will have to wait for two or three months to receive the money. This directly impacts the financial stability of the distributors.
  3. Visibility and claims tracking – Distributors have to track the claims in their records and rely on the company’s sales team for the status updates on when the money is likely to be settled. Due to lack of early visibility of the money to be received, distributors have a tough time in managing their finances and cash flows.

Company’s pain points – The FMCG company needs to ensure that every distributor is compensated with the right amount in a timely manner with no space for fraudulent claims. A company encounters numerous challenges as listed below:

  1. Multiple distributors’ multiple ways of working– In a given operating country, distributors in different regions will have different IT systems to capture their sales data. They will have different types of sales force ranging from illiterate to educated, different IT infrastructure (e.g. network connectivity etc.) and so on. Different / Non-standard ways inject inefficiency and extra cost to manage the claims.
  2. Financial treatment and compliance related issues– Companies need to produce evidence of the settled claims as per local and global financial compliance (e.g. SARBOX). Hard copy claims need extra administrative burden and cost of scanning, storage and archival.
  3. Untimely submission of claims causing budgetary nightmares – Many a times, a company receives claims after the period (monthly / quarterly) closure. The problem becomes worse during the cross year. Provisions for the specific deals might have been released and new claims become orphaned for a certain time period.

As we went through the key challenges faced by companies and their distributors, it is evident that claims management is an increasingly important area for both the entities. By effectively managing the claims process, companies can save cost, and at the same time, build healthy relations with their distributors. Effective claims management provides a competitive advantage over the other players.

Based on my experience, these challenges can be countered by taking the following three logical steps:

  • Often, what is not measured is not improved. Claims management should be perceived as a ‘service’.  Service level agreements (SLAs) like ‘claim turnaround time’, ‘accuracy of claims’, ‘percentage of claims with no evidence’ etc., should be clearly defined and agreed with the distributors. This is the first step towards a healthy relation with the distributors.
  • Global companies should have global templates with flexibility for local variations. The IT system in use should cater to local processes with a global view.
  • The claims management solution to manage this ‘service’ should have capabilities such as
  1. Measure and present the related KPIs for continuous improvements.
  2. Integrated approval workflows (on various platforms like handheld etc.) to expedite claim approval and settlement process.
  3. Automatic claim supporting generation.
  4. Comprehensive data integrity checks and robust algorithms to calculate claims correctly.

Rahul Jain

Rahul has around 7 years of experience in Business Analysis and Consulting in CPG and Retail sector. Being part of Manufacturing Industry Group at Mindtree Ltd, Rahul works on IT solutions in defining the business requirements and change management. He has worked in diverse business areas including Trade promotion management, Freight & Logistics and Debt Collections. Rahul holds MBA from BIMM Pune and BTech from NIT Jaipur.

  • mani jain

    very well structured,comprehensive and easy to read