Unpacking: Supply Chain Chargebacks

August 4, 2016

After we recently looked at the efforts of big box retailers to whip their suppliers into shape and streamline inventory flow, it’s natural that we return to cover the topic of chargebacks.

The term is used to describe the infamous financial penalties that are levied across many different business types, which are especially prominent in the supply chain.

From the outside looking in, you can think of a chargeback as the stick behind the carrot of lucrative contracts with big brands; a supplier should always chase the promise of such business, but must also be ready to pay the price if they consistently fail to live up to expectations.

So what are chargebacks and how can we reduce their impact on operational efficiency?

chargebacks dollar sign

What are SUPPLY CHAIN CHARGEBACKs?

Chargebacks occur in the supply chain when vendors fail to meet previously agreed standards of service. This could conceivably be any important area of operations, from the timely transmission of critical shipment information to poor packaging or incorrect labeling when the goods are delivered.

What chargebacks always mean is that a part of the supply chain process has failed, causing inconvenience and unnecessary costs. 

Here are some of the more common areas that a company might choose to levy supply chain chargebacks:

  • Late or non-transmission of shipment data, such as an Advanced Shipping Notice (ASN), inventory details, or customs documentation.
  • Poor packaging or incorrectly packaged goods, leading to damage and/or delays in receiving products.
  • Unscannable or incorrectly place product labels.
  • Order shortages or incorrectly filled orders (wrong product, incorrect color, size, etc.)

The bottom line is that if an activity is operationally important for the brand, there’s every chance that non-compliance could come with a chargeback.

Supply chain chargebacks are a necessary evil, but they can be damaging in many ways. Aside from the financial penalties, when improperly managed they can lead to arguments and breed distrust between brand and vendor.

Clarifying expectations from the outset of a contract helps to limit this impact, but it’s eliminating errors in the first place that makes for the most effective working relationship.

Assessing inventory chargebacks

Limiting chargebacks

When we cite our 99%+ service levels to clients, we know the effort and experience that goes into achieving those numbers. The reality is there are so many areas in which suppliers must deliver that operations are bound to get stretched in times of peak demand. When it comes down to the sweat and strain of daily operations, there’s always the chance that some errors will creep in.

That being said, sound planning and a well-trained team will help to eliminate the most expensive mistakes. From that base, careful monitoring and regular reviews can help cut out much of the rest.

Here are some of the ways we recommend brands and vendors work together to improve performance, assess quality levels, and reduce chargebacks:

  • Assign dedicated client managers to accounts and ensure they are well versed in the service level agreements and chargebacks included in every contract they manage. In addition to internal objectives and targets, every team member should receive training around their client’s unique requirements.
  • Establish internal chargeback programs that not only record and review individual errors, but also assign responsible parties to dig into the root cause of an issue, assess its risk, and put systems in place to minimize the chance that it will happen again.
  • Invest in systems – or service providers – that offer access to the appropriate technology to manage inventory levels and minimize chargebacks. Examples of this include tier-one Warehouse Management Systems (WMS), enhanced EDI capabilities, and document systems that eliminate manual data entry wherever possible.
  • Review documentation processes to ensure that all activities that incur chargebacks are appropriately logged. No-one wants an argument with an important account, but suppliers should not pay for errors where they are not at fault.
  • Consider a dedicated resource for compliance. Account managers have a key role to play, as we identified earlier, but their duties are broad and can limit their ability to handle non-compliance in larger organizations. An employee (or team) with full knowledge of all account requirements and how they fit into the broader company service guarantees serves as a bridge between the client and internal operations, even when resources are stretched.

Supply chain chargebacks are inevitable in some sectors, but that doesn’t mean they have to dominate your operational planning or destroy your bottom line.

With the right team in place, targeted training, and established procedures to review and remove problem areas, you can limit chargebacks to isolated incidents, rather than a recurring headache.


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