Vendor chargebacks from retailers are a serious threat to wholesalers. From the largest retailer on down, almost all have instituted their compliance guidelines, leaving wholesalers who fail to comply with significant losses.
These chargebacks cost wholesalers tens of thousands, even millions of dollars, depending on the infractions. As a result, chargeback reduction is a crucial profit center for wholesalers. Although chargeback recovery can help, avoiding chargebacks in the first place is the best strategy, so quality back-office support is critical to wholesalers.
What Are Vendor Chargebacks?
Vendor chargebacks are financial penalties incurred for wholesale non-compliance with retailer guidelines.
Every retailer has its own set of guidelines and requirements for how they receive their shipments. These are outlined in their vendor manuals or routing guidelines. These standards dictate any one of the many requirements that the wholesaler must follow, and any mistakes can incur fines.
Chargebacks can amount to a substantial amount of money and can be as much as 20% of an invoice, or more, equating to tens of thousands or even millions of dollars in lost revenue for the wholesaler. This is the tip of a large iceberg. For example:
- Late shipment – 10% of the merchandise cost
- Wrong bill of lading – $195/shipment
- Invalid ASN – $10/carton
- Incorrect label – $5/label
Chargebacks: The Sheer Numbers You Wouldn’t Expect
Every retailer is different, so wholesalers must adjust their shipping processes specific to every retailer they deal with. So even if they’re small boutiques or one or two-person “mom and pop” retailers, they will have their standards just like the big-box retailers.
When you receive a PO, with it comes a link to possibly ten different vendor-compliant guidelines. Within these are hundreds of pages of standards wholesalers must adhere to—or face chargebacks. Among these include:
- the size of the font on the side of the carton
- how the items are pre-ticketed
- what kinds of hangers are needed for what kinds of goods
- where to place the labels
- invalid/missing/late ASN
- order fill rate violations
- missing UCC128 labels
- purchase order violation
- pricing error
- early or late deliveries
- shipping to the wrong location
- not being packed to retailer specs
- shipping too late or too early
- wrong items in a carton or substituting unapproved product in a shipment
- non-authorized partial shipments of products
- damaged goods
How to Avoid Chargebacks with Back-Office Support
The back-office team has a lot on their plates when it comes to how to avoid chargebacks. While chargebacks can and will happen, having good wholesale back-office support can greatly minimize them or eliminate them altogether. There are numerous processes and procedures you should take on board. Here’s how to avoid chargebacks using your back-office personnel.
Clarify shipping requirements beforehand
Since every retailer’s requirements and practices vary from company to company, it’s essential to establish clear expectations from the start. This way, everyone on your team is in agreement and working from the same playbook. When you break into a new account, it’s best to get everybody from production down to allocation to discuss and document all of the retailer’s requirements.
Keep a routing master, ideally within your order processing software and keep it up-to-date
It’s important to keep a routing master as part of your ERP or other order processing software. Doing so will enable you to keep track of all compliance information for each retailer. It provides data such as how far in advance you need to route, when to send your ASN, how to put tickets on goods, and how labels should be applied.
If you keep an updated routing master, it will be transparent to everybody involved, so you’re less likely to run into mistakes that can cause chargebacks.
Create a shared knowledge base because nothing substitutes for experience and knowledge
As a wholesale exec, you accumulate knowledge and experience over time. When everybody on your team has a platform to share that knowledge processes and procedures to avoid chargebacks improve over time. When one person is out of the office or you have a new hire, it is critical to have that shared knowledge base so they don’t need to relearn from the mistakes that you already made in the past.
Ensure proper delivery of PO, invoice, ASN, and other electronic notifications
When a good EDI system is in place, it enables all accurate and efficient electronic information such as proper deliveries of your POs, invoices, ASNs, and other electronic notifications. It also provides a means for strong communications between the wholesaler and the retailer.
Analyze past chargeback occurrences
Another way to avoid chargebacks is to analyze prior chargeback incidents regularly. It’s important to understand which ones reoccur and are most costly to your bottom line. You should work with your back-office accounting department to view the previous year’s numbers and then analyze them to see where, when, and why the chargebacks occurred. From there, examine if there are any trends or patterns, then dig deeper to see why they keep happening. By identifying any issues, you should be able to rectify them going forward.
Use a strong 3PL
Having a strong 3PL can be a good ally in avoiding chargebacks. They should have a strong track record of compliance. It’s wise to use a 3PL that’s used to handling anything involving from international shipping to warehousing to transportation in order to ensure consistency and compliance in your company.
Assign compliance person(s)
Since each retailer has its own set of guidelines, you should have one knowledgeable back-office person to specialize in each vendor account. This way, these individuals can develop knowledge, experience, and genuine and personal relationships with their retailer compliance team, resulting in less or no chargebacks. When there are regular communications between both compliance teams, you can ensure any changes in policies or procedures aren’t missed.
Review technology in use
You should periodically review the technology in place to ensure that are no changes in standards and those standards are always met. These should be under review:
- SKUs – The SKUs in your system should always coincide with those in the retailer’s system. The character length of the store or unit codes on the labels should match.
- Fully scannable barcodes – There should be quiet zone margins on the barcodes labels and are of the correct specifications. Barcode labels must be fully scannable and not cut off.
- Test your warehouse printers – Printers must be maintained to avoid label scanning problems upon the retailer’s receipt of goods.
- ASN in the correct format – There should be no errors in your ASNs. The biggest sources of chargebacks are characters of an incorrect length, or late, unreadable, or inaccurate ASNs.
As a wholesaler, you must document everything. Make it a point to assign someone in your back-office support staff who can create a documentation procedure and make it a priority to be diligent and detailed when documenting your shipments. Without robust documentation and failure to ensure procedures are followed, retailers can reject any challenges to your chargebacks.
Accounts receivable department to work with incoming invoices
Analyzing your incoming accounts receivable can tell if retailers have hit your wholesale business with chargebacks. You need your AR department to monitor incoming payments and communicate with the appropriate party in production and operations when chargebacks occur.
Information technology team for proper EDI and transaction processing
For proper EDI and transaction processing, look to your information technology team. They can implement your EDI and create processes and procedures, along with the mechanisms for auditing and quality checking.
Reduce Chargebacks with Effective Plans in Place
How to avoid chargebacks? As you know, chargebacks can weigh heavily on your wholesale business. The key is to use your back-office staff with their abilities to work with a number of processes and technology in place. When working in conjunction with your information technology, development, and data analyst teams, your chargebacks can be reduced or eliminated, helping to increase your bottom line.
Wholesale Executive Insider is a publication dedicated to helping owners of wholesale companies stay up-to-date with the latest industry insights to improve their operations and increase their bottom line.
Our team has in-depth industry knowledge and a network of solution providers that help wholesalers run their businesses more efficiently to maximize profits. If you’d like to get free advice and recommendations on avoiding chargebacks and more, feel free to book a time to speak 1-on-1 with one of our knowledgeable industry advisors today!