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The Value of Pre-Deduction Notifications

Posted By Administration, Thursday, September 18, 2014
Updated: Tuesday, September 16, 2014


Chargebacks are a frustrating reality in the world of retail.

A chargeback is the deduction taken by a retailer when a supplier fails to comply with their guidelines. For example, if a label doesn't scan properly, a label isn't coordinated with the advance ship notice (ASN), the barcode on a price ticket isn't accurate, or the contents of a carton don't match the purchase order, the retailer will charge the supplier an expense offset since they must correct the non-compliant shipment before it can be shipped to their stores or end consumers. Depending on the severity of the problem, the retailer may not accept the shipment at all.

However, many retailers provide pre-deduction notifications to inform the supplier that a violation has been committed so the supplier has the opportunity to research the issue before the deduction is taken. After looking into the notification, they can either dispute it or identify the cause of the problem and correct it.

The Notification Process
In order to facilitate pre-deduction notifications, the retailer will typically require the supplier to set up a group e-mail address – for example, – for notifications to be forwarded to. The supplier then has to make sure all appropriate personnel in the company are associated with this e-mail distribution. Another method of communication may be through the retailer's web portal.

If a supplier doesn't meet a retailer's guidelines, the retailer will send a pre-deduction notification that includes a short description of the violation or a code that indicates the type of violation. If the notification is sent via e-mail, it usually has an attachment with more detailed information about the violation. For example, the ASN said 10 blue shirts should be in the carton, but the carton actually contained 10 red shirts.

At this point, it's up to the supplier to research the issue. If the supplier can produce evidence that proves the reason for the deduction is invalid, they can dispute the claim and potentially avoid the chargeback.

How Suppliers and Retailers Benefit
The key benefit of a pre-deduction notification is that it gives suppliers the opportunity to identify and correct an issue before anything else is shipped. This is extremely important if the supplier has other purchase orders with similar issues in the queue. If the problem is fixed before those orders ship, the supplier can avoid additional chargebacks.

When compliance issues arise, shipments must be manually processed in some manner at the retailer's receiving facility. This requires a significant amount of time, money and labor to manage what should have been an automated process. That's why retailers provide pre-deduction notifications – so that suppliers can recognize errors quickly, thereby preventing additional shipments from suffering similar delays. After all, the ultimate goal is to make sure merchandise flows through the supply chain to increase speed to market. When suppliers and retailers collaborate to resolve these issues, everybody wins.

Making Pre-Deduction Notifications Work
A delay of a few days is like an eternity in the retail supply chain. In order for pre-deduction notifications to work, supplier compliance departments need a formal process in place for immediately reviewing notifications and getting problems fixed. Notifications need to be monitored and logged, and detailed records must be kept.

Unfortunately, many suppliers are unable to take advantage of pre-deduction notifications because no formal process exists or the compliance department lacks the manpower to research the notifications. Many suppliers are drowning in actual deductions and don't have time to investigate pre-deduction notifications, so purchase orders go out incorrectly when errors could have been prevented.

Another key factor to making pre-deduction notifications work is informing senior management of how investigations are being handled, the issues eliminated by these investigations, and how much money is being saved. In many cases, this isn't happening, and compliance departments are often woefully understaffed as a result.

For example, let's say the compliance department is on top of the situation. When they receive a pre-deduction notification, they conduct extensive research, make sure the problem is fixed and, in many cases, get the retailer to waive the deduction. They have the process down cold.

Three years from now, when the company isn't receiving nearly as many deductions, senior management may decide they don't need as many people in the compliance department. Because nobody is accounting for the work of the department in preventing these deductions in the first place and deductions aren't being factored into operational expenses, senior management may not realize what the compliance department has accomplished.

Next Steps
Suppliers should answer the following questions in order to determine whether pre-deduction notifications are being fully leveraged to move merchandise to store shelves as quickly as possible and reduce operational expenses:

  • How are you handling pre-deduction notifications? Do you have a formal process?
  • If notifications are consistently resulting in deductions, why is this happening? Are you lacking manpower? Are you unsure of the best way to handle pre-deduction notifications? Are you not receiving notifications when you should be?
  • Are you logging each pre-deduction notification? Are you keeping reports about how research is conducted, the results of that research, and money saved?
  • Is this information being shared with upper management and considered when the compliance department is reviewed?

We encourage supplier members to use the forum boards on the RVCF website to start a dialogue about how to best utilize and benefit from pre-deduction notifications. Share your concerns, ideas, strategies, success stories and horror stories. By collaborating and addressing these issues head on, we can solve problems and move forward together.

Supplier members can find instructions for utilizing the forum boards on the "Site Aids" page of the site. Not a member? Click here to learn how you can benefit from membership.

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Tags:  Chargeback  Compliance Management  Pre-Deduction Notification 

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