Avoiding Supply Chain Chargebacks

Chargebacks (sometimes termed vendor or supplier chargebacks) are fees charged by a retailer as a penalty for noncompliance within the supply chain. They exist to enforce a standard of excellence among vendors and mitigate costly mistakes in shipping, packaging and delivery.

A chargeback’s total cost to the supplier depends on the retailer’s established standards of service. Some retailers charge a flat fee for errors and service violations, while others may charge a percentage of your gross invoice amount.

The average cost of a single chargeback penalty in 2023 is estimated to be around $190 — however, when multiplied by a year’s worth of shipments, the administrative resources required to manage non-compliance fees, dispute costs and damage to both the supplier-retailer relationship and your brand’s customer service, the extended ripple effect of chargebacks can prove immensely damaging to your supply chain.

What Causes a Chargeback?

Reasons a supplier may get hit with a chargeback vary by industry, and largely depend on the specific standards of service agreed upon with retailers. The most frequent causes for these noncompliance penalties include the following:

• Advanced Shipping Notification (ASN) errors. Incorrect, incomplete or late ASNs cause downstream problems for retailers.
• Documentation errors or missing documentation. Incorrect quantities or SKUs on the Bill of Lading is a common mistake that creates significant delays.
• Failure to meet retailer-specific requirements. Specific packaging requirements help improve retailer loading/unloading efficiency. Shipments that aren’t palletized to retailer specifications will be penalized for the extra time required — or in some cases rejected entirely.
• Shipments arriving late (or early). Missing delivery windows requires shipments to be rescheduled, increasing administrative costs and risking further disruption.
• Mislabeled products. Labels are sometimes placed in a manner making them unscannable, which makes updating inventory exceedingly difficult and time-consuming.
• Poor packaging led to damaged products upon arrival. Damaged products will have to be replaced, which takes time and poses additional costs to the supplier. In the meantime, the retailer’s inventory will be low and could result in stock outs.
• Wrong shipping carrier was used. If the retailer was expecting a shipment via FedEx and the supplier actually sent it via USPS, they can be penalized for providing incorrect carrier information.
• Delivering to the wrong location. Even if a driver is in the right receiving hub, they may be penalized for unloading the truck in the wrong location if a certain building or dock was previously specified.

Reducing Chargebacks Through Supply Chain Visibility

For many companies, chargebacks have become an unfortunate but inevitable cost of doing business. While it’s true that no supply chain is perfect, proper management techniques can correct many of the inefficient processes leading to chargeback fees.

The first key to chargeback management is complete supply chain visibility. Let’s say you received a chargeback for a late delivery — your next step is to figure out why the delivery was late. Did it take an unusually long amount of time to load? Did it leave the warehouse on time? Did the carrier experience any delays? Is this the first time this carrier has made a late delivery, or is a pattern of late deliveries emerging?

Reliable WMS and TMS systems track and process data in real-time so you can quickly identify the root cause of the compliance error.

Be sure to establish clear expectations with retailers when taking on a shipment, particularly if it’s a new partnership. Always read through written agreements carefully before signing, and communicate clearly which actions will trigger chargebacks to avoid nasty “hidden” fees.

Once both parties agree upon a standard of service, be sure to regularly audit your chargeback fees to the standards set in your agreement to make sure you’re being billed correctly.

Boost Compliance Ratings with a 3PL

Both retailers and vendors expect chargeback fees to increase in the near future. A reliable 3PL can help mitigate these rising penalty costs, encouraging strict compliance throughout your supply chain and thus avoid the risk of chargeback penalties altogether. A 3PL will also have technology in place to offer partners complete visibility into supply chain movements — plus, they’re more familiar with how retailers operate and won’t be afraid to challenge retailers on incorrect or unfair penalties.

First Call helps partners cut down on their present supply chain costs and boost shipping and warehousing efficiency. Set up a call with a First Call expert today to learn more about reducing chargebacks and enhancing your company’s logistical processes.