Retailer Chargebacks

Stephen DeAngelis

July 15, 2010

Last May Enterra Solutions sponsored a Web seminar entitled “Retailer Compliance: Accentuate the Positive, Eliminate the Penalties.” Consumer Goods Technology (CGT) published highlights from that webinar that I republished in a post entitled Reducing Retailer Compliance Penalties. The webinar was the coming out event for the Enterra Supply Chain Assurance Platform (ESCAPE™) that helps manufacturers and distributors reduce chargebacks they receive from retailers. Retailer chargebacks are not new, but they do represent a growing challenge to profitability. The best description of the challenge that I have come across was written nearly seven years ago by Anne Zeiger [“Retailer chargebacks: is there an upside? Retailer compliance initiatives can lead to efficiency,” Highbeam Research, 1 October 2003]. She writes:

“There’s no doubt about it: manufacturers who fail to meet a retailer’s vendor standards can get into financial trouble. After all, shave off $20 here for a short lot, $5 there for a cracked pallet and $10 over here for a mangled shipping label, and before long, it can run into real money. Manufacturers, consultants and trade groups supplying retail businesses are up at arms over these chargebacks, arguing that their profits are being slashed unmercifully–and sometimes unfairly–by retailers claiming noncompliance. In some cases, they say, the requirements are petty, arbitrary or even illogical. What’s more, retailers may change the standards regularly, making it difficult to keep up with what’s required. ‘Even though retailers will swear to you that chargebacks aren’t a profit center, the candid opinion in the industry is that retailers intentionally make compliance difficult to make it a profit center,’ says Norman Katz, CEO of vendor-compliance consulting firm KatzScan Inc., of Deerfield Beach, Fla.”

Zeiger really hits the nail on the head when she notes that “requirements are petty, arbitrary or even illogical” and that “retailers may change the standards regularly, making it difficult to keep up with what’s required.” She later adds:

“Simply keeping up with standards changes, much less meeting the standards consistently, can be difficult, Katz says. ‘There’s no standard for vendor compliance manuals,’ he notes. ‘Everybody is presenting this in a different way, from one retailer to another. It’s a very painstaking, time-consuming process to understand what changes.'”

Keeping up with manual changes is the first challenge tackled by ESCAPE. The first of ESCAPE’s three modules is the “Proactive Module,” which continuously monitors retailer websites for updates, imports updates into the system, and applies analytics to the order fulfillment process. As a result, ESCAPE eases the pain of keeping up with changing compliance requirements. This is important because, as Zeiger notes, “suppliers have little choice but to figure out ways of meeting vendor standards, even if they’re unhappy about them.” Being able to keep up with changing standards places manufacturers/distributors in a better position to negotiate with retailers, especially if requirements are arbitrary or illogical. Another benefit of “playing the game well,” as Zeiger puts it, is that compliance feedback can be used “to improve its supply practices.” Zeiger continues:

“Jennifer Thomas, an account manager with distribution-operations-improvement firm Forte Industries of Cincinnati, Ohio, [says,] ‘Companies who understand compliance and gain business intelligence from it are the ones who will succeed. … Suppliers can make these compliance issues less of a burden and more of a way to make their own operations more efficient.'”

Even though Zeiger was writing nearly seven years ago, she notes that “chargebacks have been the norm for at least 10 years.” Like many supply chain practices, Zeiger traces the imposition of chargebacks to Walmart. She writes:

“The practice became widespread under the tutelage of Wal-Mart’s Sam Walton, who took an early lead in pushing costs onto his suppliers. With retail profits hovering at a slim 1% to 2%, Walton and others saw that getting the right supplies in the right condition–sometimes ready to hit the sales floor immediately–could lower inventory costs and speed the flow of goods. Other retailers agreed, and soon the practice was widespread.”

Manufacturers can understand the logic behind the practice, even if they don’t like it. Zeiger reports that “virtually every major retailer publishes vendor-compliance standards and assesses chargebacks against any supplier that it finds to be violating those standards.” Even though Zeiger taps Sam Walton as the father of chargebacks, some retailers had actually surpassed Walmart in defining strict delivery windows. That changed earlier this year when Walmart “joined the ranks of retailers that impose penalties on suppliers that fail to deliver products within the company’s prescribed four-day window. Under the new policy that [went] into effect Feb. 1, suppliers whose products arrive at regional distribution centers before or after that period face a 3% penalty based on the cost of the goods.” [“Wal-Mart Tightens Slack on Supply Chain,” Arkansas Democrat-Gazette, 16 February 2010] Zeiger reports that such penalties can really mount:

“Chargebacks are an everyday event for most manufacturers. According to the Credit Research Foundation, a financial-industry group tracking credit issues, from 5% to 15% of all invoices were affected by chargeback deductions, amounting to from 4% to 10% of all open items on accounts receivable. They’re also a serious expense. Chargebacks typically shave off 2% to 10% of a manufacturer’s overall revenue, according to the National Chargebacks Management Group (NCMG) of Charlotte, N.C.

The second ESCAPE module — the Immediate Module — identifies any orders with potential issues and provides a central communication point for notes, expedites and cancels. Early identification of orders with potential problems provides decision makers with the broadest spectrum of choices for mitigating or eliminating potential penalties. One of the options available when potential problems are identified early is negotiation. Zeiger explains:

“Ultimately suppliers would prefer to short-circuit major chargeback issues before they ship a single pallet. To accomplish this, suppliers should negotiate disputed compliance issues up front, before they become a problem. According to a guide from the Credit Research Foundation, suppliers should form a compliance team in their own organization, including credit, customer service, EDI, shipping, returns, sales and advertising reps. The group’s job is to examine routing guides and other compliance manuals, determine which requirements can’t be met, then ask retailers for a waiver or a compromise. Suppliers should get the waivers or modified agreements in writing and include them in vendor agreements, CRF suggests.”

By dramatically reducing the amount of manpower needed to identify potential problems, ESCAPE can help a company more effectively utilize its compliance team as well as reduce the number of individuals required to be on the team. ESCAPE is an ontology-based platform that recognizes relationships and nuances that other approaches are incapable of discerning. One of the experts interviewed by Zeiger recommended that compliance teams “audit their processes to make sure their systems don’t clash.” ESCAPE can help with such audits because its relational data base can quickly identify such clashes. For example, “if a warehouse system dictates that goods move along a belt one way, and retailers want the goods stacked on a pallet a different way, suppliers may not only face chargebacks but also lost time in their own operations.” By programming ESCAPE with all essential information, those kinds of difficulties can be identified and corrected long before they result in a chargeback.

Zeiger then turns to another difficult challenge for manufacturers: contesting chargebacks they feel were imposed incorrectly. She writes:

“While the uncontested chargebacks are troublesome enough, things can get ugly when a manufacturer feels the chargeback is inaccurate–that they delivered as required, but someone on the retailer’s end made a mistake. ‘There are cases when chargebacks are totally justified, but errors happen in both directions,’ says Ralph Sullivan, executive director of the NCMG. About 10% of manufacturers successfully challenge a chargeback in a given year, but to prevail, they have to have good documentation proving their claim, and it’s not always available, Sullivan notes.”

That is where ESCAPE’s third module — the Reactive Module — comes into play. The Reactive Module downloads appropriate information from carriers (for example, delivery receipts) and saves all other data relevant to a potential deduction. Because chargebacks are often received months after deliveries are made, without a system like ESCAPE that collects relevant data, gathering the information required to challenge a chargeback can be time consuming if not impossible.

It is in the best interests of everyone (manufacturers, distributors, retailers, and customers) to reduce or eliminate chargebacks. They simply have no value-added in the supply chain. ESCAPE helps reduce costs by:

  • Reducing penalties through the identification of issues before an order leaves the warehouse and by continuously monitoring and updating retailer requirements and routing guides.
  • Increasing recovery through the automated collection of information from carriers and retailers that aids in the research of data involving penalties/shortages and through the automated creation of dispute packages.
  • Reducing compliance department costs by removing the manual, time-consuming task of continuously monitoring retailer and carrier websites and by providing templates for penalty and shortage dispute submission.

As Zeiger pointed out at the beginning of her article, retailer chargebacks have now been around for nearly two decades. Fortunately, technology finally gives suppliers a fighting chance to win the compliance game.