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Tackling the Root of Vendor Chargebacks for Improved Operational Costs

For retailers, failure to have adequately stocked shelves due to out-of-compliance shipments means inefficiencies and possible loss of sales from being out of stock. Shoppers may potentially go elsewhere on their smartphones, tablets, or PCs, right to online stores. As a result of those losses, retailers will issue financial deductions against the wholesaler’s invoice. So if a wholesaler fails to comply with the retailer’s guidelines, the costs can be significant, resulting in what is known as a vendor chargeback.

When Do Vendor Chargebacks Occur?

Vendor chargebacks occur when a wholesaler fails to meet the retailer’s guidelines. When this happens, you incur financial penalties for non-compliance with these guidelines.

Each retailer has their own set of standards and requirements. These are outlined in their vendor manuals or routing guidelines. These standards dictate how they send your company a PO, how you submit information about a shipment to their company, and how a shipment is to arrive at their distribution warehouses or their customers. This is only the tip of the iceberg.

Because every retailer is different, you have to perform tasks specific to each retailer you deal with. Even if you deal with small boutiques or “mom and pop” retailers, they will have their own standards just like the big-box retailers.

You receive a chargeback when you’ve violated a vendor guideline, whether they are mistakes with a part, parts, or a complete order. Because the retailer now has to recoup their lost revenue and time, the fine incurred could be a on a certain box, shipment, order, or a flat rate. Chargebacks can amount to a substantial amount of money and can be as much as 20% of an invoice, equating to tens of thousands of dollars on lost revenue for your company. This puts a significant dent in your operational costs as you lose money because of the errors.

When and Why Did Vendor Chargebacks Begin?

Vendor compliance is thought to have begun in the 1970s and continued with the rise of the mass retail channels like Macy’s, Best Buy, Target, KMart, and Walmart and other big-box chains. These companies recognized that their ongoing success depended on moving huge volumes of inventory through their supply chains with maximum efficiency.

As a result, they began using automated warehouses and sophisticated systems that enable products to flow with little human intervention. If non-compliant goods come through like those missing specific types of hangers or tickets, these items require additional intervention and result in greatly reduced efficiency, resulting in retailer costs.

With shipping errors from wholesalers, chargebacks became a way for retailers to control non-compliance issues and keep their supply chains running smoothly.

For example, if you look at Walmart’s U.S. operations, there are 60,000 merchandise suppliers’ shipments flowing through 190 DCs to 4,364 stores. Each one of the DCs services 100 to 150 stores. Errors, no matter how small, would have a great impact.

The Truth About Vendor Guidelines

Vendor chargeback fines for non-compliant shipments are a profit-draining reality for many wholesalers. The truth is that chargebacks aren’t issues just because someone noticed one carton without a label. Automated systems trigger the chargeback due to the missing label. Likewise, if a delivery comes in and its ASN hasn’t, the system automatically issues a chargeback for all the orders on the truck.

Many people are shocked when they learn of the number of retailer guidelines exist. For example, Company ABC is ready to buy an order of t-shirts from you. You may be excited about the size of the order—until this vendor sends you a link of 10 different wholesaler-compliance guidelines. Within those guidelines are literally hundreds of pages containing everything associated with all the ways to prepare the order.

These guidelines cover every single way you need to produce and deliver the goods for and to each retailer. Here is a sampling:

The many violations

It is shocking to most people the number of violations wholesalers face. These include, but are not limited to:

  • the size of the font on the cartons
  • where to place the labels, for example, if price tickets are placed inside the neck of a shirt or through the armpit
  • what kind of hangers are used for what kind of goods
  • missing or incorrect shipping labels
  • a shipment that is received too early or too late
  • incorrect number of goods received
  • sending goods to an incorrect shipping location
  • labels placed incorrectly on cartons
  • wrong items in a carton or substituting unapproved products in a shipment
  • non-authorized partial shipments of products
  • goods not packaged correctly
  • damaged goods

Here are some of the most common causes of chargebacks in detail.

Late/Missing/Invalid ASN

Your ASN is an electronic file (EDI) you must send the retailer before you send the shipment. The ASN lists the contents of the shipment as well as order information such as product description, markings, type of packing, and carrier information.

If the ASN guideline is violated, you can expect a chargeback that ranges anywhere from a few dollars per carton to hundreds of dollars per ASN. When retailers are reliant on their 856 for notification and receiving of goods, a late, missing, or invalid ASN is penalized quickly and you can expect to see a chargeback. In order to avoid a chargeback, make sure your ASN is correct.

Missing/Inaccurate/Defective/Un-scannable/Improper Placement of GS1-128 (UCC128) Labels

The UCC128 barcode is the “DNA” of a shipping unit’s characteristics that tells the retailer about what they’re going to receive. The information in this unique barcode must match the data in the accompanying ASN.

If the information fails to match because the label is un-scannable or contains incorrect information, a chargeback can be expected. Improper placement of labels can incur a chargeback. Even if the carton moves through a conveyor belt through the retailer’s sophisticated automatic networks, if the barcode scanner is unable to read the code due to improper placement, the vendor compliance violation will result due to delays in receiving. This often leads to expensive chargebacks. Always make sure your labels are correctly placed with correct barcodes.

Missing/Inaccurate/Defective/Non-scannable/Bad ticketing

If you want to minimize chargebacks, make sure your goods are ticketed correctly. They should be marked with the correct retail price. You also have to ensure that the ticket contains the correct UPC, item number, description, color, and/or size codes.

Order fill rate

Expect a chargeback if you violate the order fill rate with short shipments or unauthorized item substitutions. You can be hit with a penalty of 5%-15% of the merchandise cost.

You’re still out of profit if you ship too many goods. While you probably won’t incur a chargeback, the retailer has additional goods–at your expense.

Late or Early shipment

When you receive the retailer’s PO, it’s ship window will indicate a start data and a cancel date. While some retailers may allow you to ship early or as close to the window as possible, you don’t want to ship too early. You definitely don’t want ship beyond the cancel date. Expect a chargeback.

Choosing the wrong carrier

Retailers tend to work with certain carriers over others, especially when it comes to LTL shipments. However, some LTL carriers go to large retailers and grocery store DCs daily, some once a week. The ones that go often are known as preferred carriers. These preferred carriers help large retailers meet their strict Must Arrive By Dates (MABDs).

Preferred carriers provide better service and can deliver on retailer-specific demands, removing the serious problem with missing a due date. Had you missed the delivery deadline because you’ve used a different carrier, you’re charged a percentage of the total value of your shipment. The charges can be as high as $3,500-$5,000 for the late shipment.

How Do You Minimize Chargebacks?

There are several ways to minimize your chargebacks.

Use superior Enterprise Resource Planning (ERP) software

If you want to minimize chargebacks, having a superior software system can help. ERP software can help you create smart internal processes with checks and balances. It helps track the operational requirements that can help reduce chargebacks. However, your data must be up-to-date and accurate.

Create a routing master

In order to keep your data current and accurate, you should include a routing master. Your routing master tracks all critical compliance information for each retailer. It will provide you with insights on things like how far in advance you need to route, when to send your ASN, where to put tickets, and how labels should be applied.

If you keep an updated routing master, you’re less likely to run into mistakes that cause vendor chargebacks.

Assign someone to oversee compliance

Not a lot of wholesalers keep a routing master. If that’s your case, you should assign a go-to expert to your team for each major retailer. Each person would be responsible for the creation, implementation, and enforcement required to meet all retail compliance guidelines.

Make it this person’s full-time or part-time job. This should be someone who knows Retailer X’s compliance guidelines very well.

Invest in an advanced warehouse management system (WMS)

You won’t be one step ahead of retailer compliance requirements without an advanced WMS. If you’re using a paper-based process, this will always take a significant amount of human time to remain compliant, and this won’t eliminate human error. Using a WMS will automate your distribution and data transfer tasks. When you use barcoding and radio frequency identification (RFID), this ensures high levels of accuracy, and errors in picking and shipping are automatically identified.

Advice to small-medium size wholesalers

What happens if you’re a small- to midsize wholesaler and you want to minimize or eliminate your chargebacks? This might be a lot to handle, so it’s good if you go with a back office outsourcing company that can handle all of your compliance needs.

Closing Thoughts on Vendor Chargebacks

The list of retailer guideline violations is long, and non-compliant shipments impact your profit in a big way. As the number of vendor chargebacks continues to grow, wholesalers can take preventative measures. By recognizing your current processes and what tasks you should implement, you can reduce or eliminate vendor chargebacks altogether.

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