Retailer Chargebacks And How to Avoid Them
Landing a PO with a big box retailer is without a doubt a tremendous opportunity that provides an exhilarating feeling. Whether your product is going to be placed on the shelves of the retailer’s stores or your product will be offered on their online web shop, your sales are likely to see a spike just simply due to the exposure. But the moment you receive the retailer’s vendor manual or routing guide, it will become quite apparent that logistics standards of business-to-business transactions are completely different than consumer shipping. The compliance requirements are so stringent, in fact, that many companies find the need to either beef up their internal shipping resources to handle the increased workload or outsource the fulfillment to a professional fulfillment company that is well-versed in business-to-business transactions. As if retail compliance wasn’t intimidating enough, an intense feeling of panic may strike the moment you start reading about potential ‘chargebacks’ for non-compliance with the vendor’s standards.
What are Chargebacks?
Chargebacks are financial penalties for non-compliance with retailer standards and requirements. In other words, retailers charge you when you make a mistake. Each retailer has their own set of standards and requirements, which are usually outlined in their vendor manuals or routing guides. These standards govern how they send your company a PO, how you submit information about a shipment to their organization, and how product is to arrive at their distribution warehouses or to their end customers, among many other things. Because every retailer is different, further complicating the matter is that you’ll be required to perform tasks different for each retailer you do business with. These standards aren’t limited to big box retailers alone – many smaller ‘mom and pop boutiques’ implement their own set of standards as well.
Why Do Retailers Issue Chargebacks?
Retailers issue chargebacks in order to cover the costs of non-compliance with their standards. When retailers receive products or orders that aren’t prepared according to standards, they have to invest time and resources in order to get the product or order in suitable format for processing, which is a direct cost to the retailer. Chargebacks, therefore, are an attempt to offset these costs. For example, if your product arrives at a distribution center without appropriate labeling, their employees will have to re-work the product so that it is ready to be placed on their shelves and sold to customers.
What Are the Common Chargebacks and Fees?
Chargeback fees are typically assessed per occurrence. Here are some examples:
- Submitting an incorrect EDI (electronic data interchange) invoice or ASN (advanced shipping notice) information
- Incorrect or insufficient information on the ASN
- Sending product without a ship notice
- Not using the correct shipping provider
- Sending product to an incorrect shipping location
- Damaged or un-scannable labels
- Missing or incorrect shipping labels
- Labels applied incorrectly on cartons
- Shipment received too early or late
- Labels placed on the wrong carton
- Wrong items in a carton or substituting unapproved product in a shipment
- Non-authorized partial shipments of products
- Products not packaged correctly
- Damaged product
- And the list goes on…
The most frequently assessed chargebacks are due to EDI Invoice/ASN errors, mistakes in labeling, pricing errors, incorrect or insufficient product sent to the retailer, and early or late shipping arrivals. Not surprisingly, chargebacks are punitive and can be hefty. In fact, some retailers charge as much as $50 for not using the correct shipping carrier (plus the cost of any freight differential) or shipping product early or late, up to $100 for missing or incorrect shipping labels, or up to $100 for ASN mistakes. Needless to say, these punitive costs can add up quickly. In fact, most people familiar with chargebacks often complain that retailers seem to over-capitalize on these penalties and turn the process into a revenue source for their organization.
How Do Companies Minimize Chargebacks?
Obviously, the goal is to minimize chargebacks, strengthen your relationship with the retailer, and maximize sales through the channel. Therefore, making the partnership successful will involve a multitude of items, including testing and ensuring proper delivery of PO, Invoice, ASN and other electronic notifications, ensuring that orders are prepared accurately, labeled exactly as specified and shipped flawlessly (to the correct location, via the correct carrier, and on-time without damages).
The key to this process begins with becoming thoroughly knowledgeable of the retailers’ requirements detailed in the vendor manual or routing guide. Companies that manage this process in-house oftentimes have to appoint a single person or group of people that can champion the entire relationship from start to finish. The challenge with appropriately managing a program in-house is that successful business-to-business retailer order processing involves a multitude of departments – information technology for proper EDI and transaction processing, accounting for correct pricing and payment information, customer service for responding to requests timely and accurately, and warehouse staff and management for ensuring the proper build out and shipping of orders.
The next step involved after a thorough examination has been conducted related to the routing guide is to implement appropriate systems (e.g. EDI) and create processes and procedures (along with mechanisms for auditing and/or quality checking) for all of steps involved. The amount of time spent in creating a high-quality process is critical and thought must be given to each step in the process. As a result, most companies will create a manual of its own which it can use to detail all of the steps and quality checks. Successful rollout of a new program will continue with thorough training of all departments related to their unique and collective responsibilities, and some companies go so far as to run a multitude of test transactions through in order to check the processes for any weaknesses which can be changed or updated as needed. Finally, no successful plan is complete without a way to measure performance, with regularly scheduled meetings to discuss challenges, successes, change recommendations, etc.
Frequently, companies choose to outsource this function to a competent warehousing and fulfillment company that specializes in EDI retailer transactions. A company of this nature has extensive experience in the software needed (EDI software) and routing guides, and is highly capable of implementing a program from start to finish with minimal or no errors. In fact, most EDI-capable fulfillment companies, have experience working with a multitude of retailers, giving them the ability cover varying needs and providing them with an ability to adapt well to changes. Furthermore, some outsourced providers will go so far as to guarantee transactions will be completed without error, or else they will cover the costs of chargebacks themselves in order to correct the problems. It should come as no surprise, as a result, that outsourcing this function is highly popular.