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What is Claims Management and How Does it Work

Why is a good claims management process important?

July 30, 2020

The business model of a manufacturer is, in theory, simple: make things, ship them, and get paid for them. But as with most aspects of business — nothing’s ever that simple. Instead, many manufacturers spend vast amounts of time fumbling through a process that either 1) requires a lot of time and personnel/resources or 2) results in the loss of thousands to millions of dollars every year. That process? Claims management.

The business model of a manufacturer is, in theory, simple: make things, ship them, and get paid for them. But as with most aspects of business — nothing’s ever that simple. ”

What is claims management?

Claims management, more commonly known as deduction management, is the process by which a company validates, accounts for, and oversees accounting or payment shortages between the company and its customer. These shortages — typically called a short pay — happen when a company pays less than the full amount of the invoice for any number of reasons, including billing errors or incomplete or damaged shipments.

Generally, there are two types of deduction management that one might encounter — from either Accounts Payable or Accounts Receivable.

A/P Deductions

The most common deduction taken is the Accounts Payable deduction, where an invoice is short paid or not paid in full. There can be many reasons for these shortages, but generally, the most common causes include: a shipment was not received in full or was missing parts, a billing error resulted in a price that was higher than anticipated or agreed upon, or significant damage or error in the product received. Many companies — like Walmart — will use a code system to illustrate their reason for the short pay and signal that a deduction was taken.

A/R Deduction Management

Less common is the Accounts Receivable deduction, where instead of short paying a pending invoice, the company will invoice the manufacturer. More often than not, these will be charges for applied fees more than for products. For example, a company might assess a fine for late shipments, unloading fees, or if they feel they have had to excessively manage shipments of defective or missing products.

Why is a good claims management process important?

Because of the breadth of managing claims — some companies could incur thousands of deductions each month — many companies have entire departments that are charged with verifying, processing, and clearing deductions. Without such a team in place, the company could stand to lose thousands of dollars each month. The best processes not only reduce the required time and energy of managing each claim, but they preserve the customer relationship and prevent the risk of legal action as well.

Still, there are other reasons that a manufacturer should implement a deductions management process, not least of which is the data that it can provide for its own operations. Since most deductions offer some sort of reason and documentation, gathering this data can ensure that you become aware of issues within your processes and operations. It also allows you to identify trending problems as they arise. For example, if ten consecutive shipments short pay because of missing products, it may signal that you need to make some changes in your shipping department.

Finally, consider that not every deduction can be mitigated, and even if they can, they may not  be worth the time and effort to resolve. Statistically, a single deduction costs approximately $97 to process (according to the Credit Research Foundation’s Benchmarking report), so claims under that amount will cost you more than you’ll gain back. Setting benchmarks within a claims management department and sticking to them can help keep you moving forward instead of spinning your wheels on claims that don’t pay.

What is an example of a deduction management process?

Due to the nature of claims management and the various challenges that could crop up, manufacturers or distributors need to establish a process that sets the boundaries and provides a clear path forward to fast, efficient resolutions. In general, there are several steps that this process should follow; however, each company may need to add steps or department input along the way, depending on their own operational guidelines.

Receive and prioritize

As claims (or dispute tickets) are received, they must be logged and prioritized. Prioritization can be set up in any number of ways, but it will typically be based on the deduction amount. It’s a much larger return to spend time on a $5,000 deduction than $500, and someone has to determine whether or not you’ll even attempt to recover a claim for $50.

Gather data

Once you’ve got the claims in place, it’s time to gather data, and there’s quite a bit to collect. From bills of lading to invoices, receipts, and more, you’ll want to ensure that you have everything you need to validate or decline the claim. Sometimes, this will mean communicating with the retailer to determine missing information as well.

Determine validity

When you have everything in place, you’ll need to investigate each issue and determine its validity. Did it happen as reported? Was the mistake easily avoidable or preventable from either side? Determining validity will tell you if you have a case that calls for moving forward in an attempt to recapture lost revenue or if you have a more significant operational problem on your hands.

Approve or deny

Based on validity, you’ll either approve the deduction or deny it. This may require getting supervisory staff up the line to sign off on it as well.

Review with the customer

Upon reaching a final decision, the customer should be notified about the result. If the claim has been rejected, they should be notified, and an invoice for the shortage should be resubmitted. If it is determined to be valid, a subsequent credit memo should be issued.

Adjust your data

Once a decision has been finalized, the manufacturer should ensure that all corresponding data (inventory, accounting, etc.) has also been adjusted to the revised or corrected information.


Finally, you’ll want to keep reports on overall data to ensure you are aware of larger issues, tracking gains and losses, and keeping up with the costs associated with claims management. This data will help you shape the future of your organization’s processes and plans with this information in mind.

If it seems like a lot, that’s because it is. Claims management is a highly involved process with a lot riding on it. Fortunately, there are a number of tools, software solutions, and apps that can help refine the process for companies feeling the weight of dedication management. Along these lines, our Streamline deduction management software can help automate deductions management — resulting in a quick and positive process for all involved.

Ready to see the same results for your company? Let’s talk.

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