Things to know about Excess Defective Allowances

Background

Walmart’s goal is to fund the cost of defective merchandise and product returns in an accrual built through the Defective Allowance (“DA”). The Buyer and Vendor negotiate the DA as a percentage of the invoice which is documented as part of the Vendor Agreement.

After the first year, and quarterly thereafter, Walmart compares its actual cost of defective merchandise and product returns to the DA Accrual. If Walmart’s costs are less than the DA Accrual, then Walmart keeps the difference. There is no credit back to the vendor. If Walmart’s costs exceed the DA Accrual balance, then Walmart deducts the deficit in a lump sum from the Vendor’s next check. This is an Excess Defective Allowance Deduction. It is an uncoded deduction from Accounts Receivable and cannot be contested through the Accounts Payable Disputes Portal (“APDP”).

Vendors must manage all deductions, including Excess Defective Allowance Deductions. This may seem hopeless, or the effort may exceed the resources that you can dedicate to the problem. Vendor Consulting Group can help.

Excess Defective Allowance Deductions Remediation Checklist:

1. Code 59 Deductions – The Defective Allowance should be included on the invoice. If it is not, you are incorrectly invoicing Walmart. The DA will be taken as a Code 59 Deduction on your remittance checks.
2. Evaluate your actual Defective Merchandise and Product Returns for excessive product or packaging defects. First make sure, that you are not the problem.
3. Evaluate the methods of return in your vendor agreement. The Vendor Agreement will have specific language and instructions on dispositions of returns. Common methods are: Destroy at Store, Return to Vendor and Donation.
   1. Destroy at Store is the least costly, but difficult to corroborate. Stores have an incentive to destroy excess inventory as defective merchandise or returns.
   2. Return to Vendor is more costly because it will include Freight (Code __) and Handling Charges (Code 60). Return to Vendor is also a reverse logistical flow that requires proper procedures and controls. (VCG can help on Reverse Logistics.)
   3. Donations are the most expensive. It is charged at fully loaded store cost plus the Freight and Handling Charges noted above.
4. The Defective Allowance and Return Process is heavily weighted to Walmart’s favor, but that is not the worst thing. Many vendors allow Walmart complete discretion to do anything it wants with the product. Walmart can destroy, return, donate, or even resell your product. Check your Vendor Agreement language and negotiate any language changes. Then make sure the changes are pushed into the execution level version of the Vendor Agreement.
5. When your Excess Defective Allowance Deductions are too excessive, contact VCG. As former Walmart Shared Service Associates, we know the underlying rules and calculations. We can build your case using Walmart’s data and policies to develop a case for you to present to your Merchandise Team.

Contact VCG with your questions or ask us to help.