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Chargeback Reduction: "The Ten Commandments"
Chargebacks, Deductions, Offsets, Fines – no matter what you call them, suppliers consider them unpleasant costs of doing business at best, and unconscionable profit centers for greedy trading partners at worst. Supplier revenues can be reduced upwards of 10% by chargebacks, according to industry reports, making them a serious concern.
Chargeback schemes had their beginnings in the 1980’s as ways for trading partners to recover costs they incur due to supply chain errors on the part of their suppliers. In fact, it is not difficult to understand how mislabeled, mis-packed, late, and wrong-quantity shipments can cause real labor and stock-out costs for retailers competing in a business with thin margins. Cost recovery is also a valid basis for imposing the charges, while purely punitive fines would not be legal.
Since retailers have judged chargebacks effective in giving suppliers incentive to comply with their requirements, they are not going to disappear anytime soon. Consequently, good suppliers are reducing chargebacks using what remains within their own control – the ability to improve compliance with trading partners.
Think of the following “ten commandments” of the retail supply chain as they apply to chargeback factors controllable by suppliers:
- Orders shall conform completely with customer’s EDI specifications
- Orders shall have proper ASN’s transmitted on a timely basis
- Orders shall be labeled correctly
- Orders shall be shipped to the correct location
- Orders shall be shipped on the correct carrier
- Orders shall arrive on time
- Orders shall arrive undamaged
- Orders shall be complete as to product and quantity
- Orders shall be packed and ticketed correctly
- Orders shall be documented and invoiced accurately and completely
The first three commandments are often the focus of chargeback discussions, perhaps due to the daunting complexity EDI and the non-standard nature of trading partner specifications. Compliance with the rapidly-changing details and multiple customer guides can indeed be difficult and result in expensive errors unless suppliers monitor customer websites continuously and react to messages promptly.
EDI-related errors are conceptually easy to eliminate. All you have to do is dedicate experts to the task and provide the resources they need to keep the electronic data flow well tuned. Unfortunately, few suppliers can afford to hire, train and retain skilled staff to self-manage EDI compliance. RedTail’s managed EDI service exists precisely to provide the level of attention required to solve the problem.
OK, great news, EDI-related chargebacks are straightforward to mitigate. But that leaves seven more commandments! The best EDI compliance can’t cure inaccurate product counts. A perfectly printed label can still be non-compliant if is placed in the wrong spot. And shipping errors related to destination, consolidation, routing and timing of order arrival are among the most common reasons for chargebacks. How are suppliers to deal with those factors? Here are come suggestions:
Pay Attention
All levels of the organization, starting with executives, must be made aware of all chargebacks as soon as they happen and focus on mitigation plans. After all, even “out of sight, out of mind,” chargebacks are always out of pocket!
Understand Real Causes
Often the apparent reason for a chargeback is really masking a deeper issue. Following the trail through the entire business process can help root out underlying problems.
Focus on the Biggest Customers
Not only do the large trading partners have more order dollar volume that could be compromised, but they can present the most challenging logistics. Getting the big ones right almost always results in changes that improve performance at all levels.
Enlist Teamwork
There are as many opportunities to deflect blame for chargebacks as there are reasons for them in the first place. Individual departments are seldom the sole cause for chargebacks, and cannot be expected to cure problems in isolation. Total company commitment to problem solving works best.
Demand Continuous Improvement
Chargeback reduction is a constant process requiring perpetual effort. Setting goals, tracking and reporting progress, and rewarding achievements are essential.
Maintain Good Trading Partner Communications
At all levels, talking to your customers is good business. They notice suppliers who demonstrate genuine interest in improving compliance, award them higher scores and place more orders.
Reducing chargebacks can be hard work, but the savings you achieve fall directly to the bottom line. The knowledge you gain about your business processes along the way can be even more valuable in terms of long-term profitability and competitiveness. The first step is to realize that most chargebacks are within your control to eliminate.
My Friends Want to Know Why I Use a Managed Service
People have been hearing more about managed services, but most don’t understand what they are. I sympathize with them. After all, without the customary cryptic acronym, the term “Managed Services” barely seems related to information technology. So when they find out that I am a satisfied user of RedTail’s Managed EDI Service, my friends want me to explain.
I tell them that by my definition, Managed Services are always provided remotely and take responsibility for performing specific processes or functions utilizing both technology and human expertise. In fact, it is that magic combination of computing and subject-matter knowledge that makes my Managed EDI Service indispensable.
I use my Managed EDI Service to address critical functions required to keep my businesses running, but which are not really part of the core competency my company brings to the market. For example, payroll is essential to operate my business, but being a world-class payroll processor would not give my firm a competitive edge as a manufacturer of consumer packaged goods.
I remind my friends that we all use payroll providers such as ADP or Paychex because they perform an essential, but esoteric and messy, business functions in an easy-to-use and dependable way. They have experts who keep up on wage regulations, tax rates, government forms, reporting, and compliance so we don’t have to. They build systems expressly to handle reliable payroll computation, check writing, and electronic funds transfer that we couldn’t afford to replicate. They have processes to ensure timeliness and quality that we can’t staff. All of this focused expertise is shared across their customer base, so we get an economy-of-scale-driven bargain.
Things are beginning to make sense. My associates can see that good applications for Managed Services include those that:
- Require specialized expertise that is difficult to learn and execute
- Deal with frequent changes dictated by big, outside entities
- Are mission critical, but not part of core competency
- Entail sporadic, intense, needs followed by a lower level of (boring) supervision
- Demand precision in order to meet compliance obligations
Since they always hear me complain that EDI is the “non-standard standard,” my colleagues can see that EDI fits the description for an ideal Managed Service perfectly. EDI is challenging to master and difficult to perform. Trading partners insist on unique applications of the “rules,” and punish me with stiff penalties called chargebacks when I don’t comply. Setting up and testing trading partner relationships is tedious and error-prone. Important information in my EDI transactions must be entered into or driven from ERP, making data consistency a nightmare. Consequently, suppliers like me can waste time in EDI minutiae instead of concentrating on our core businesses.
Most importantly, I say to everyone who asks that people are the main reason I use my RedTail Managed EDI Service. EDI is one of those arcane, high-touch applications that require talented people whose are difficult to find, train and retain. I can’t afford to spend what it takes to maintain a first-rate EDI staff, and I couldn’t risk losing them if I did.
RedTail Solutions takes responsibility for my EDI success, including setup, testing and transaction processing using secure, fault-tolerant datacenters. My transactions are monitored constantly so that problems are corrected before they become critical. RedTail links directly to my ERP software, eliminating manual effort and errors. Best of all, everything is managed, maintained and supported by RedTail’s experienced EDI team –and not by me!
When asked how much I pay, I tell folks how I buy RedTail’s Managed EDI Service on a pay-per-use basis. This is great because there is very little up-front cost, and my total costs vary in line with my actual business volumes and growth. When I compare it to what I used to spend doing EDI in house, my cost per transaction is much lower with RedTail.
I use a Managed EDI Service because it makes complete business sense. No matter how many times I tell it, the story ends with the same question – “Why don’t you?”
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