Retailer Chargebacks Remain a Problem

Stephen DeAngelis

June 15, 2016

Retailer chargebacks against vendors are not new, but they do represent a growing challenge to profitability. The staff at Supply Chain 24/7 reports, “Vendors like Target and Walmart continue to increase vendor chargeback fines, leaving shippers exposed, and some retailers count these fines as up to 13% of their account revenue.”[1] An article published over a dozen years ago underscores the point that chargebacks are a chronic challenge. The article, written by Anne Zeiger, states, “There’s no doubt about it: manufacturers who fail to meet a retailer’s vendor standards can get into financial trouble. After all, shave off $20 here for a short lot, $5 there for a cracked pallet and $10 over here for a mangled shipping label, and before long, it can run into real money.”[2] Zeiger continues:

“Manufacturers, consultants and trade groups supplying retail businesses are up at arms over these chargebacks, arguing that their profits are being slashed unmercifully — and sometimes unfairly — by retailers claiming noncompliance. In some cases, they say, the requirements are petty, arbitrary or even illogical. What’s more, retailers may change the standards regularly, making it difficult to keep up with what’s required. ‘Even though retailers will swear to you that chargebacks aren’t a profit center, the candid opinion in the industry is that retailers intentionally make compliance difficult to make it a profit center,’ says Norman Katz, CEO of vendor-compliance consulting firm KatzScan Inc., of Deerfield Beach, Fla.”

Zeiger really hits the nail on the head when she notes that “requirements are petty, arbitrary or even illogical” and that “retailers may change the standards regularly, making it difficult to keep up with what’s required.” She later adds:

“Simply keeping up with standards changes, much less meeting the standards consistently, can be difficult, Katz says. ‘There’s no standard for vendor compliance manuals,’ he notes. ‘Everybody is presenting this in a different way, from one retailer to another. It’s a very painstaking, time-consuming process to understand what changes.'”

To address this “painstaking, time-consuming process,” Enterra Solutions® developed the Compliance Management System (CMS). The CMS continuously monitors retailer websites for updates, imports updates into the system, and applies analytics to the order fulfillment process. As a result, the CMS eases the pain of keeping up with changing compliance requirements. This is important because, as Zeiger notes, “suppliers have little choice but to figure out ways of meeting vendor standards, even if they’re unhappy about them.” Being able to keep up with changing standards places manufacturers/distributors in a better position to negotiate with retailers, especially if requirements are arbitrary or illogical. The Supply Chain 24/7 staff recommends that every vendor implement a chargeback program. The staff explains:

“If it’s not on your radar already, you’ll want to watch how vendor chargebacks impact your supply chain spend. Walmart, Target and other retailers have been putting together plans to impose tighter controls on suppliers. It’s part of a growing trend and it underscores a very, very significant business reality: if your company doesn’t have an effective program for handling chargebacks, you’re going to lose a lot of money.”

Enterra® developed its Compliance Management System half a dozen years ago along with Conair®. During a 2010 Enterra-sponsored webinar, John Mayorek, senior vice president of Operations for Conair, explained how Conair and Enterra Solutions partnered together to create a process that keeps track of retailer requirements and automatically checks new orders to identify potential fulfillment challenges. “It is important to remember that every customer has different guidelines, requirements and procedures, and to follow these manually is very difficult,” Mayorek told webinar participants. The CMS has enabled Conair to reduce deductions, increase recovery of deductions taken, and reduce compliance staff costs. Conair continues to learn how chargeback issues can be addressed pro-actively, when orders are taken, as well as being better equipped to challenge chargebacks after they have been assessed. Mayorek told webinar participants that retailer penalties don’t have to be a continuing “cost of doing business.” The Supply Chain 24/7 staff notes, “Great chargeback programs can identify the root cause for the chargeback. For example, if your customer is failing to unload the trucks in a timely manner, or arbitrarily delaying the transit times by failing to provide appointment times, why should your company be penalized for their inefficiencies and ineptitude?” Another benefit of “playing the game well,” as Zeiger puts it, is that compliance feedback can be used “to improve its supply practices.” Zeiger continues:

“Jennifer Thomas, an account manager with distribution-operations-improvement firm Forte Industries of Cincinnati, Ohio, [says,] ‘Companies who understand compliance and gain business intelligence from it are the ones who will succeed. … Suppliers can make these compliance issues less of a burden and more of a way to make their own operations more efficient.'”

Analysts from Weber Logistics report, “With some invoices easily totaling hundreds of thousands of dollars, vendors can get hit with chargebacks of $20,000 or more at a time. These chargebacks are not payments requested by retailers; they are automatically deducted from the supplier’s invoice.”[3] Over time hits like that can dramatically affect a vendor’s bottom line. A study by VCF notes that the most frequent sources of chargebacks are:

 

1. Early/late delivery
2. ASN/EDI violation
3. Improper label
4. Purchase order violation
5. Pricing error
6. Shortage in product shipped
7. Ticket issue

 

Analysts from LEGACY Supply Chain Services note, “Since avoiding chargebacks 100% of the time is an unlikely prospect, it helps to understand what current chargebacks are costing the bottom line and how much those can be reduced, by investing in the right systems, people or processes.”[4] Companies that implement processes like the Compliance Management System have a much better chance of getting a handle on vendor chargebacks. LEGACY analysts add, “Documentation is key to being able to successfully refute chargebacks. Create a documentation procedure and make it a priority to be diligent and detailed when documenting shipments.” The CMS can also help with the documentation problem by automatically saving and storing documents and making them easier to retrieve whenever a chargeback is disputed. Reducing or eliminating chargebacks is in everyone’s best interests (manufacturers, distributors, retailers, and customers) since they have no value-added in the supply chain. The Compliance Management System helps reduce costs by:

 

  • Reducing penalties through the identification of issues before an order leaves the warehouse and by continuously monitoring and updating retailer requirements and routing guides.
  • Increasing recovery through the automated collection of information from carriers and retailers that aids in the research of data involving penalties/shortages and through the automated creation of dispute packages.
  • Reducing compliance department costs by removing the manual, time-consuming task of continuously monitoring retailer and carrier websites and by providing templates for penalty and shortage dispute submission.

 

I agree with staff at Supply Chain 24/7 — every supply chain needs vendor chargeback program.

 

Footnotes
[1] Staff, “Why Every Supply Chain Today Needs a Vendor Chargeback Program,” Supply Chain 24/7, 23 May 2016.
[2] Anne Zeiger, “Retailer chargebacks: is there an upside? Retailer compliance initiatives can lead to efficiency,” HighBeam Research, 1 October 2003.
[3] Weber Logistics, “How to Reduce Chargebacks in Your Vendor Compliance Program,” Supply Chain 24/7, 23 May 2016.
[4] Legacy Supply Chain Services, “11 Ways To Reduce Chargebacks in Your Supply Chain,” Supply Chain 24/7, 16 July 2015.