Reducing Chargebacks

For mid-sized suppliers, conducting e-business while complying with the mandates of retail supply chains can be daunting. Costs for trade non-compliance are significant. Among the biggest potential profit drains are the fees—termed chargebacks (or deductions, or offsets)—that retailers assess for supplier mistakes. Industry reports suggest that supplier revenues can be reduced upwards of 10% by chargebacks, making them a serious concern.

Chargeback schemes began in the 1980’s as ways for retailers to recover costs incurred due to supply chain errors. At the time, many suppliers objected to them as unfair profit centers for large, powerful retailers. In fact, while purely punitive fines are not legal, cost recovery is—so chargebacks quickly became adopted by most retailers. It’s easy to understand how mislabeled, mis-packed, late, and wrong-quantity shipments add up to real labor costs and stock-out problems for retailers. Distasteful as they may be for suppliers, chargebacks make business sense for retailers in a business characterized by thin margins and stiff competition.

Retailers don’t want to make life difficult for suppliers, but they do find them effective—giving hard-dollar incentive to comply with their requirements. Consequently, savvy suppliers are reducing chargebacks by paying attention to factors within their control to improve overall trade compliance.

Here are the ten ways to minimize chargeback costs:

  1. Conform completely to customer’s EDI specifications
  2. Transmit proper Advance Ship Notices (ASN, EDI 856) on time
  3. Label orders correctly
  4. Ship to the correct location
  5. Ship via the correct carrier
  6. Ship on time
  7. Ensure merchandise arrives undamaged
  8. Deliver the correct products, quantities and cartons
  9. Pack and ticket items correctly
  10. Send accurate and complete invoices

The first three factors involve Electronic Data Interchange (EDI) compliance and are often a focus of discussions on chargebacks. Compliance with the rapidly changing specifications and multiple customer EDI guides can indeed be difficult. Expensive errors occur if suppliers fail to monitor customer websites continuously or react to messages slowly.

Conceptually, EDI-related errors are easy to eliminate. In practice, human experts are needed to manage the complex details required to keep the electronic data flow well tuned. Suppliers that cannot afford to hire, train and retain skilled staff to self-manage EDI compliance should seek outsourced assistance.

The remaining seven factors show that it isn’t just about EDI. The best EDI compliance can’t cure inaccurate product counts. A perfectly printed label can still be non-compliant if is placed in the wrong spot. And shipping errors related to destination, consolidation, routing and timing of order arrival are among the most common reasons for chargebacks. How are suppliers to deal with those factors? Here are come suggestions:

Pay Attention
All levels of the organization, starting with executives, must be made aware of all chargebacks as soon as they happen and focus on mitigation plans. After all, even “out of sight, out of mind,” chargebacks are always out of pocket!

Understand Real Causes
Often, the apparent reason for a chargeback is really masking a deeper issue. Following the trail through the entire business process can help root out underlying problems.

Focus on the Biggest Customers
Not only do the large trading partners have more order dollar volume that could be compromised, but they can present the most challenging logistics. Getting the big ones right almost always results in changes that improve performance at all levels.

Enlist Teamwork
There are as many opportunities to deflect blame for chargebacks as there are reasons for them in the first place. Individual departments are seldom the sole cause for chargebacks, and cannot be expected to cure problems in isolation. Total company commitment to problem solving works best.

Demand Continuous Improvement
Chargeback reduction is a constant process requiring perpetual effort. Setting goals, tracking and reporting progress, and rewarding achievements are essential.

Maintain Good Trading Partner Communications
At all levels, talking to your customers is good business. They notice suppliers who demonstrate genuine interest in improving compliance, award them higher scores and place more orders.

Reducing chargebacks can be hard work, but the savings you achieve fall directly to the bottom line. The knowledge you gain about your business processes along the way can be even more valuable in terms of long-term profitability and competitiveness. The first step is to realize that most chargebacks are within your control to eliminate.