Retailer to Retailer: What is Your Policy on Chargebacks and/or Deductions?

Russ Vernon, West Point Market

Yes — it is guaranteed you will have out-of-stocks, shortages, breakage, miss-picks, overcharges, unexpected freight delays, unsellable packaging, best-before dates that expired last August, promotional allowances not passed on, duplication, and substitutions, all adding to the frustration caused by unresponsive representatives or companies. I don't know of a retailer who has completely eliminated those problems; however, over the years, we have established guidelines that help reduce costs and inefficiencies associated with chargebacks and/or deductions.

First, we develop relationships with our vendors built on trust, give and take, understanding the mutual dependency that exists in building business. This means when a problem comes up, we work out win-win arrangements. An example of a win-win arrangement for us was a double order of fruitcakes. Instead of 15 cakes, we received 30 in mid-October. This was not our fault, and for us, that was a lot of fruitcake. We worked out an unlimited sampling allowance with the vendor and moved it all out, while exposing more customers to our best fruitcake. We both won.

Companies that have dealt with us for years understand they can expect reasonableness and fairness. We want to become an important customer to our vendors by paying invoices on time, working with them on promotions, and maintaining a high degree of communication. We work to become a "retailer of choice." If these relationships are good and trust exists, solving problems can be simplified. During a major expansion, we asked for 90-day terms to fill our shelves. Past experience and trust allowed the terms to be granted; we paid better than agreed.

Most of our problems come through receiving at the back door. Unless there are special arrangements for incoming freight, we accept deliveries from 6:00 a.m. to 1:00 p.m. This allows us to fill a 30-hour position to sign our truck drivers in and out, take case counts, check invoices to products, return products cleared for pickup, separate those products requiring immediate stocking, look for damaged product, and provide security. When damages, shortages, miss-picks, etc. are found, it is noted on the invoice, signed off and dated by the driver and the receiver. The company and/or the representative is notified within 24 hours. The signed packing list is then sent to our office attached to the invoice and tracked for proper credits. Now, this comes full circle back to relationships. Chargebacks and/or deductions are not a problem for us.

Renée Behnke, Sur La Table

This issue takes on a very different complexion as a company grows from a few stores to a multimarketing retail operation. As Sur La Table has grown from a two-channel business with stores and a catalog to over 20 stores with an integrated catalog and e-commerce business, this issue grew.

A retailer's expectations can only be met when the goals are outlined in a reasonable policy procedure that helps control expenses on both ends. I feel the optimum word here is reasonable. Many vendors do business with major retailers such as Macy's, Bloomingdale's, and Crate and Barrel, as well as single-store retailers.

Each company encounters the same problems. The main issue is quality control from the beginning. The goal for everyone — retailer and wholesaler — is profit at the end of each day. If twenty percent of the orders received in a distribution center have problems or mistakes reflecting back to a purchase order, the system slows down, which results in lost sales and often huge expenses in dollars and time. The company that does a good job is rewarded because the margin reflects low freight, payment discounts, and the right merchandise to sell in a timely fashion.

To create a company policy on charge- backs/deductions and when these will be taken, the company must first identify the issues and understand how and why they occur. Once these have been listed in order of importance, a value must be attached to each point. It is also important to consider what the retailer can do in the initial process of writing the order and sending it to the vendor to help eliminate each problem.

The problems are universal; the difference is the effect each causes a particular company. Some of the issues affecting margin are related to using the wrong shipper when a company has negotiated lower rates, which can add two to four percent to the cost of an item. When this happens, the company should identify the dollar value attached to each shipment that was shipped improperly. Usually, the difference figured by weight and measure is charged back in full.

The other consideration is the manpower needed to track, record, and charge back each additional expense. The retailer has to decide at what point the expenses warrant adding a stronger policy or additional personnel to track and follow through with each violation.

The often-encountered nickel-and-dime issues are a waste of time. The real issues are worth your energy and should be identified early and worked on to be resolved by the retailer, as well as by the wholesaler.

Nick Giovannucci, Fante's

Our vendors generally do a great job in shipping our purchase orders according to terms. When a vendor's fulfillment is less than desirable, we communicate our concerns and usually come to agreement on how to rectify the situation without the need for chargebacks or deductions.

When a vendor does not respond to our communications, we deduct. Listed in order of frequency, the following represent the types of deductions we have found necessary to charge back over time.

• We deduct for defective merchandise on hand after we notify the vendor and they do not respond within a reasonable timeframe. The deduction forces the few nonresponding vendors to pay attention. Most vendors do respond quickly to us, probably partly because our rate of returns is generally well below the industry average.

• We deduct differences in freight charges when our routing instructions are not followed without prior authorization from us. Because we control the expense of freight costs through a firm which contracts prices with common carriers on our behalf, this requirement is important to us.

• We deduct differences in prices between our purchase order and the vendor's invoice, if we are not notified prior to shipping. When we have an established relationship with a vendor, we expect to be kept current on price changes when they occur. Unanticipated changes can make the product no longer salable to our clientele, or prevent us from the price shopping that might help keep us competitively priced.

• We deduct handling charges when they were not disclosed on the vendor's price sheets. With the exception of broken case packs, drop shipping, and similar published charges, we expect general handling charges to be included in the price the vendor charges for the product. We also try to avoid hidden charges by having our UPS account billed directly when shipping via that method, so that we can audit those costs.

A purchase order is a contract that we establish with the vendor in good faith. I believe we have a responsibility to the vendor to submit orders that are reasonable, that clearly describe what we want, and that are consistent with any prior agreed-upon terms.

As a result of a retailer's growth and changing needs, more stringent terms on purchase orders can often tax smaller vendors. In these and all cases, I believe the vendor bears the responsibility of making sure that the terms they agree to are within their capabilities before they process an order, and to communicate, and probably negotiate, disparities.

In working with vendors for over 20 years, I understand the difficulties they face that can break down effective communication and easily cause errors and misunderstandings to occur. Smaller vendors can be lacking in current technology and may have limited systems for communications. Larger vendors' systems may not allow for digressions to suit every diverse circumstance, while their slim margins may trigger reductions in expenditures for reps and in-house manpower, often making interaction even more difficult.

There was a time when the vendor's rep would be there to help prevent and correct errors. Today, there are few reps, and even fewer who are empowered to intercede and directly resolve problems on behalf of the vendor. And lacking effective communication, problems are bound to occur.

There is nothing quite like personal communication to help make things right. That personal touch seems to be lacking more and more, and not only within our industry. Providentially, there are publications like this that help to educate both vendors and retailers, fill gaps in communication that might otherwise be lacking, and help insure a smoother process in the purchasing arena.

Suzanne Hoffman, The Kitchen Shoppe

As an independent single-store retailer, we have never had to do any chargebacks. Our policy for damages received are as follows:

1. Call or fax the company to notify them about the damaged item(s). This is done within 24 hours of receiving the shipment, which is what most companies require. We request a reply with details on how to proceed with the damage, i.e., deduct from invoice and destroy merchandise, issue a call tag/R.A. for pickup, or determine if a replacement will be sent. Most companies will reply within 24 hours of receiving the call or fax. We usually allow a one- to two-week time allotment for a reply.

2. If we still have not received a reply, we will phone the company and let them know that the invoice will be held until we receive a reply on how to proceed. By withholding payment of the invoice, you get a much quicker response from vendors. We do not take deductions without notifying the company with a copy of the original fax and/or "paper trail" of phone conversations attached to the invoice in question.

This policy applies to shortages as well, with the exception that we usually ask for permission to deduct, unless the missing item was ordered for a special request from one of our customers. For merchandise received incorrectly, we require the company to issue a call tag for pickup. We do not feel it is our responsibility to pay for shipping the incorrect merchandise back to the company since it was their mistake.

We never receive shipments without authorization such as a back order, without the vendor first calling us to see if we still want or need the items remaining on a previous order. More vendors are now canceling all back orders and requesting that you reorder the unshipped merchandise.

If vendors would reply to our requests in a timely fashion — within 24 hours would be ideal since they expect it of us when we report problems, no deductions would be taken without authorization and invoices would be paid within the terms.

Shortages, whether it is one piece from a case of 12 or a whole case, need to be examined at the warehouse/packing facilities. This is the point of origin for the shipment. We are very careful when we unpack a shipment to be sure no merchandise is thrown away with the packing materials.

Substitutions should not be made without authorization from the retailer. If the vendor does not have merchandise to send, they should notify the company immediately upon receiving the order from the retailer. The retailer can then decide on the substitutions. This also aids the retailer when they need a specific item within a timeframe and it is not available. If the vendor would contact the retailer, the retailer can make adjustments (whether the merchandise was for an in-store event or a special order for a customer) and perhaps make a substitution. When we order an item — especially for one of our customers, they expect, as do we, that the item will arrive within a few weeks. When the item still does not arrive after four weeks or longer, the customer naturally grows irritable (especially if this was a "timed" order such as a wedding gift) and the retailer is stuck in the middle. A prompt notification by the vendor of availability and/or expected shipping date would help ease everyone's concerns. There are some wonderful vendors that do follow this rule and we as retailers greatly appreciate this courtesy.