Get in charge of YOUR CHARGEBACKS

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

1. freight and routing issues, such as incorrect carrier, incorrect ship-to location, and multiple same-day shipments.

2. early or late deliveries.

3. concealed shortages.

4. No failures to communicate

   errors in advance shipment notification (ASN) or electronic data interchange (EDI).

5. 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.”

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,” right.)

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.”