In a perfect world, merchandise deliveries would never arrive late, be mislabeled, or contain the wrong product or quantity. But ours is not a perfect world. So to protect their interests and keep incoming inventory snafus to a minimum, merchants levy chargebacks, or fines against their vendors for not complying with agreed-upon requirements.
The Credit Research Foundation, a Columbia, MD-based organization that conducts research in the area of commercial credit and collections management, recently completed a customer deduction survey to which 424 vendor companies responded. According to these companies, the top five compliance-related chargebacks are
- freight and routing issues, such as incorrect carrier, incorrect ship-to location, and multiple same-day shipments.
- early or late deliveries.
- concealed shortages.
- errors in advance shipment notification (ASN) or electronic data interchange (EDI).
- ticketing and labeling issues.
Most of these chargebacks “are completely controllable by the vendor,” observes Jessica Butler, principal of Ridgewood, NJ-based deduction management consultancy Attain Consulting Group, who worked with the Credit Research Foundation on the survey. “If vendors simply study the retail manuals and enter the right information into their systems, they can significantly reduce chargebacks.”
But it’s not a one-way street. Ideally merchants and vendors would work together so that both sides understand the terms and reduce the need for chargebacks. Indeed, one problem that rests with the clients is that not all multichannel merchants have a formal chargeback program in place.
“The retail industry is much more aggressive in this area than the catalog industry in general,” says Curt Barry, president of F. Curtis Barry & Co., a Richmond, VA-based consulting firm specializing in operations. “In fact, a lot of these concepts for chargebacks came out of large retailers, such as Dillard’s, Federated, the May Co., Wal-Mart, Kohl’s, and Target,” he says. “The catalog industry has been slow to embrace this. They absorb these costs, which they shouldn’t.”
No failures to communicate
Each multichannel merchant has its own system and special requirements for compliance, making it challenging for vendors to keep track of the myriad requirements. The program itself should be fair and balanced. In some large retail organizations, Barry says, “they make chargebacks a profit center and look for every opportunity they can to charge back.”
Attain’s Butler believes few retailers are out to defraud vendors via chargebacks. “If there are situations where the vendor is being charged back for things that are not valid, it may just be an honest mistake on the part of the retailer,” she says.
But don’t let fear of being accused of fraudulent practices prevent you from expecting vendors to pay for what it costs to fix their mistakes, Barry says. “Otherwise, you end up absorbing costs in your own organizations. You can’t create a win-win relationship by absorbing someone else’s responsibilities.”
If you’re not sure what constitutes fair expectations, industry organizations such as the Vendor Compliance Federation (VCF) and the National Retail Federation can help you implement a compliance and chargeback program. The VCF, for instance, has created a guideline for structuring vendor compliance manuals in a consistent way.
In fact, keeping your chargeback program consistent and simple should be another of your key goals. At the same time, you will no doubt find it necessary to frequently update your routing guides and compliance manuals. When you do, you must make vendors aware of the changes and updates. To that end, the VCF has put together a compliance clearinghouse that tracks changes in routing and vendor guides. (See “A view of the Vendor Compliance Federation,” at the end of this document.)
A printed compliance manual is vital, but it need not be the only way you communicate your requirements to suppliers. “Besides providing routing manuals to vendors,” Jose Li, retail and e-commerce industry manager for Memphis-based parcel carrier FedEx, “some retailers also post their routing requirements on their Websites, so you have to keep up with the changes by going to their Websites.”
Merchants can also provide more-detailed information during the quarterly reviews that many of them schedule with vendors to discuss performance. “Some of these discussions may revolve around routing-guide compliance,” Li says. “It makes sense [for vendors] to pay attention to this information.”
In addition to ensuring that your vendors know what you expect of them, you have to communicate the information to everyone in your organization who is involved in activities that impact compliance and make sure all updates are passed along to them.
Minding the businesses
If you’re a business-to-business merchant that acts as a vendor to resellers, not only do you need to learn about the changes introduced by your clients, but you also need to integrate the changes into your own systems.
“It can be difficult to comply with everything, because each retailer has its own requirements, and these requirements change frequently,” Barry says. “As such, vendors need really good systems to keep track of everything.”
That may necessitate investing in additional technology to store and retrieve compliance information from clients’ routing guides. “These days you can’t operate with a bunch of sticky notes taped up on the walls,” cautions Mark Taylor, president/CEO of Taylor Systems Engineering Corp. a Plymouth, MI-based operations consultancy. “You need to build routing-guide information from all of your customers into your computerized shipping system.”
In addition, Taylor says, whenever you sign up a new client or whenever requirements change, someone at your company needs to be responsible for entering the new data into the shipping system.
The “someone” is very important, says Larry Willett, president of California Distribution, a Santa Fe Springs, CA-based third-party logistics provider: “One of the most important keys to success in reducing chargebacks is to designate someone in your company to be in charge of vendor compliance.” This can be on either a full-time or a part-time basis, depending on the size of your business and the number of clients you have. As is the case among merchants, as a vendor you need to convey clients’ requirements to your employees, so they know what is expected of them. “Then there has to be follow-up to make sure everything is being done correctly,” adds Willett. “This is especially important if you use a lot of temps at certain times of the month or year.”
On the retailer side, most catalogers can arrange for one person—typically someone in the accounts payable department—to oversee vendor compliance and manage chargebacks on a part-time basis, says Barry. Large retailers may need more than one person to handle chargebacks, he adds.
William Atkinson, a freelance writer based in Carterville, IL, has written for Apparel and Risk Management magazines, among other publications.
Merchants can be focused on trying to get every cent they can in chargebacks to vendors. At the same time, vendors want to make sure all chargebacks are viable and avoid paying for what’s not their fault.
How do vendors review chargebacks? Jessica Butler, principal of Attain Consulting Group, starts by identifying a vendor client’s biggest chargebacks. Then she helps the vendor create or improve an internal communication system to make sure that everyone who needs to know the retailers’ requirements do know them and that all parties involved work together to ensure that the requirements are followed.
Butler also looks for chargebacks that seem to be the vendor’s fault and helps the vendor resolve these. Then she encourages the vendor to contact the retailer to report on the recently made improvements and ask for some of the money back that the retailer had levied as chargebacks for those errors.
“If you admit that you were wrong and then emphasize that you have solved the problem, retailers may be willing to return some of the chargeback charges,” Butler explains. In one case, she was able to help a vendor reduce chargebacks 77% by applying some basic reporting structure and discipline to its compliance efforts.—WA
A View of the Vendor Compliance Federation
It behooves companies that sell to chain retailers to become involved with the Vendor Compliance Federation (VCF), a New York-based organization composed of manufacturers and distributors that sell to retailers, as well as the resellers themselves. “The most common cause of chargebacks is a situation where the retailer and the vendor are out of sync,” says VCF founder Kim Zablocky. “Our goal is to synchronize all of the touch points along the way of the sales cycle.”
When Zablocky was president of New York Credit & Financial Management Association, he frequently heard stories from consumer-product companies about retailers “picking their pockets” with deductions. In response, Zablocky surveyed the top 100 consumer-product companies and found that 87%-94% of the deductions were allowable.
“I realized that retailers weren’t picking their pockets, but that they might be taking advantage of the vendors because of their inability to fill and ship orders properly,” he says. “You need to do what your customers ask you to do. What I found was a lot of lack of communication in the vendor organizations in sales, order fulfillment, shipping, and settlement.”
With this in mind, Zablocky helped to create the VCF seven years ago to help suppliers improve their purchase order fulfillment. One of its first activities was to create best practices for the vendors, retailer by retailer. “When retailers realized we were preaching their gospel, they started to participate with us,” he adds. Today the VCF has about 500 vendor members and 43 retail members. It also has alliances with the American Apparel and Footwear Association, the International Housewares Association, and the Footwear Distributors and Retailers of America.
The VCF has a number of initiatives in place to help vendors and retailers work together to reduce chargebacks. For instance, in 2003 it created the Retail Compliance Council. One of this body’s first actions was to create a guideline for structuring vendor compliance manuals in a consistent way. It also created the Retail A/P Directors Council in 2006 to teach vendors how to manage remittance advice on payments from retailers.
“When we started, we realized one of the vendors’ biggest issues was managing change,” Zablocky says. “Routing and vendor guides could change constantly.” It used to be standard practice for retailers to print guides and give them to vendors. With the advent of the Internet, more retailers began putting their guides online, but vendors are often too busy to download all the information and to check for changes.
In response, the VCF created a compliance clearinghouse that tracks changes in the routing and vendor guides of 155 major retailers. The system informs everyone in the vendor organization who needs to know: the logistics manager, the IT manager, the customer service manager, the operations manager, the finance manager. “Whenever there is a change, we communicate that to the vendors within 12 hours,” says Zablocky.
The VCF also created a database of compliance issues and members’ techniques for addressing them. At its conferences, the VCF sets up meetings where each vendor can meet with its 10 largest customers one on one. What’s more, the Federation is currently conducting a study on what constitutes “the perfect order.”—WA