These are unprecedented times; the rules keep changing? What to do?
Manage the important things that you can control, vendor compliance. How are you doing?
The past few months and weeks have been unprecedented. Macro and micro economics, domestic and international policies are all changing under our feet. And they will continue changing, often without notice.
What are you to do? Especially if you are a small and medium-sized business that cannot afford to lobby Washington for exceptions.
Focus on what you can control. Focus on the important things. Execution and customer experience are important. Vendor compliance is also important.
If you are a supplier selling on Amazon, Walmart, Target, Wayfair, Overstock, or through other retailers you most certainly have been given a variety of standards, rules, and goals. These vendor compliance programs may include 150 or more rules documented on hundreds of pages. Each market place or retailer has their own rules.
While chargeback fees are common with larger retailers, smaller brick-and-mortar businesses have adopted the practice to protect themselves too. This incentivizes suppliers to deliver the same attention to detail to every retailer they serve large or small.
Market places and retailers impose rules defining levels of performance to ensure their customers have great experiences and their operations are running at peak efficiency. Errors have been estimated to cost retailers more than a billion dollars annually.
Some retailers view charge backs as another revenue stream, investing significant resources to monitor and cite violations. Teams are created to scrutinize and find every exception. Financial penalties can be levied upon suppliers for one or more violations on a single invoice.
What Are Vendor Chargebacks?
Chargebacks are applied against common supplier errors such as incorrect invoices, shipping delays or damaged products.
Additional examples include errors in:
- The purchase order process
- Shipment arrival (late and early) and delivery placement
- Packaging and labeling
- Using the wrong carriers
- Shipment information formatting
- Sending accurate ASNs (Advanced Ship Notice) timely
- Damaged goods
- Products delivered not shelf-ready
- Too few or too many items, or the wrong items shipped
- Incorrect UCC128 labels, perhaps with the wrong price
- Missing Bills of Lading
- Sending an accurate invoice timely
The Financial Impact of Chargebacks
Retail chargebacks can eat into profit margins in a number of ways, there’s the chargeback fee itself, which needs to be paid. Then there’s the cost of fixing the error, which could involve writing off or re-shipping goods.
According to the Credit Research Foundation, a financial-industry group tracking chargeback issues chargebacks are an everyday event for most suppliers. From 5% to 15% of all invoices are affected by chargeback deductions, amounting to from 4% to 10% of all open items on accounts receivable. You may be charged a flat fee or 1% to 5% and upward of 20% of an invoice when products don’t meet their standards.
Penalties for violations are typically percentage-based, where a predefined percentage of the rejected order’s value is added as a fee to the supplier’s invoice.
Walmart, for example, currently issues 3% chargebacks on late or missing deliveries in its On-Time in Full program.
Retailers can charge B2B suppliers anywhere from $50–$100 per shipment for infractions such as not using their specified freight carrier, early or late deliveries, missing or incorrect shipping labels and invoice mistakes.
When you consider the high-volume of shipments to big box stores like Home Depot or Target; small mistakes could add up and cost a supplier thousands or even millions of dollars in penalties every year.
Here are some additional examples of chargebacks:
- A typical charge for carton (labeling) violations is a minimum of $100.00 per shipment, versus $5.00 to $7.50 for every carton in the shipment.
- The placement of the packing slip, when required, is important and varies from retailer to retailer. A violation here could cost $250.00 per shipment with some retailers.
- Failure to comply with the correct bill of lading (format) could trigger a $150.00 charge per shipment.
- Multiple violations on a single purchase order can result in multiple chargeback deductions. A 100-carton order with a misplaced packing slip, bad carton labels and no VICS Bill of Lading could cost you a deduction of $1,150.00.
- Not getting the ASN in a timely manner is a major reason for a chargeback. One national retailer charges $5,000 for a missing ASN. At one missing ASN a month, you might fund the entire annual cost of an OPAL subscription.
If a supplier spends $10 on compliance labor to avoid a retailer’s $1 chargeback – the margin from that retailer may have totally disappeared.
Chargebacks typically shave off 2% to 10% of a supplier’s overall revenue, according to the National Chargebacks Management Group (NCMG) of Charlotte, N.C.
A few chargeback fees per retailer per year is inevitable. However, you must be careful if you are assessed too many penalties the consequences can be much more harming than hits to your margin. Your top line revenue numbers may also be impacted.
You may lose future sales opportunities from those retailers. You may lose business to your competitors. Your reputation in the market could be damaged.
Your business may also be adversely affected due to:
- Wasted time and effort. Not just the time spent on picking, packing, and prepping that order. Your team now has to handle the returns processing of those items, restocking, fixing or breaking down the pallets.
- Your inventory position is also an issue. If a large B2B order is returned because of a compliance problem, you suddenly have more stock than you expected. This unplanned inventory ties up capital and warehouse space.
- Your product may lose its position on a retailer’s website or store shelf resulting in fewer future orders, or even being displaced by your competitors’ products.
What To Do
There is an old adage, an ounce of prevention is worth a pound of cure. You’re better off being proactive avoiding violations than reactively responding to them.
Here are some things you could do:
Implement a quality assurance program:
- Hold individual employees responsible for your company’s quality standards
- Small mistakes from each employee can add up to huge chargebacks
- Assign or contract a compliance requirements expert for each department
- Requirements frequently change
- Conduct quality reviews tied to an incentive program
Ensure your price includes all of your investments for that order:
Measure what it really costs you to ensure compliance not just your cost of goods
Include your cost to serve, these may include value added services such as
- Including catalogs or additional documents in each shipment
- Adding special labels to specific locations on the packaging
- Adhering to strict delivery instructions
- Conducting additional quality control steps such as double counting
- Expediting last minute orders
Be sure to analyze and measure these. You can only manage what you measure.
Understand your contracts
- Read through your contracts with each retailer carefully
- Keep a list of each retailer you work with and their specific rules regarding chargebacks
- Or contract with a partner that understands your customers compliance programs
Manage your supply chain
- Your customers are demanding accurate and precise order delivery
- You must manage your own supply chain:
- Track your product lead time
- Forecast for demand shifts
- Understand your overall supply chain
Automate your digital transactions (EDI)
If you are doing any volume, you will not keep up with manual processes. Find a technology partner with deep industry experiences, preferably with pre-built interfaces with your customers
Invest in speedy fulfillment and accuracy
Invest in a robust order management, warehouse management, and shipping system that incorporates quality checks and automates every step except steps where you touch your product. Utilize technology to supplant the manual steps – including product barcode scanners, automated weight checks, and digital checklists to perform value added services (VAR).
Your software solution should help enforce specific packing rules, generate compliant labels and documentation, and even optimize order fulfillment based upon each retailer’s preferences.
Continuously Monitor Compliance
Planning to meet compliance rules isn’t enough. Regular audits and performance reviews are essential to pre-emptively maintain your compliance. Track and analyze your chargeback data, identify patterns or recurring issues and address them.
Conduct Post-Chargeback Analysis
When a chargeback occurs, it’s important to investigate it. Often a violation is described by its symptoms and not its root cause or causes. Focus upon the root cause(s) of each chargeback. Was it a simple human error, a systemic issue, or a misunderstanding of the retailer’s guidelines? Once identified, develop and implement corrective actions to prevent similar incidents in the future.
Be sure to maintain open lines of communication with your customers. If you notice an increase in chargebacks or have challenges meeting certain guidelines, be sure to reach out and discuss the situation. Many retailers are willing to work with vendors to improve compliance and reduce chargebacks, as it ultimately benefits their operations too.
All of this may sound daunting at first. Being a retail supplier is hard and drop shipping even more so. Automate all that you can, computers are high speed idiots. They are great at performing complex tasks over and over. Consider your systems a strategic investment to maximize your margins and grow your revenue.
OPAL is a solution designed for you, designed for the problems of today. It is a blend of software and services curated for you. OPAL knows retail, it knows your customers compliance programs. Don’t be surprised if it pays for itself just from your savings in compliance or EDI.
