Chargebacks: Turning Challenge into Upside Opportunity

By Courtney Folk, Founder and CEO, Renewal Logistics       
                           

Merchants in the B2B world are often overwhelmed with the requirements retailers have in place. Seemingly small errors related to a retailer’s compliance guidelines can cause delays and chargebacks costing merchants valuable time and profit. In addition to this, retailers often assign a quality rating to the merchants on a fluctuating scale. As more errors occur, this rating drops and fees related to errors increase. Reversing this trend provides a significant upside opportunity.

How do chargebacks work?

When working with big box retailers, each brand is assigned a quality rating that plays a key role in what chargebacks and fees are acquired by brands. This rating is used to determine how much product must be inspected when it is received. The better the rating, the less inspection is required, the lower the rating the more inspection is required before products are accepted. If you are a brand with an A rating your inspection rate might be 1% whereas a brand with an F rating might have a 100% inspection rate.  

When a brand has a lower rating each shipment is looked at more thoroughly, and often this reveals more flaws and errors resulting in even more chargebacks. Making this problem even more painful and expensive, once these errors hit a certain threshold set by the retailers, brands are charged even more per chargeback. Small errors add up quickly especially when the costs per chargeback go up.

Retailers implement these chargeback fees and standards based on what their automated systems need for goods to flow. Errors with the goods shipped from brands causes a chain reaction that costs both the retailer and brand time and money, and results in delayed sales as product is delayed hitting the retail floor.

When a brand’s items are received to the retailer’s distribution center, the goals is that  they are immediately cross docked. The ideal way this works is that received products are scanned and put onto a conveyor as they’re being unloaded from the truck. The conveyer takes the scanned case label information and directs the product to the correct truck dock to be loaded. When the items arrive from the brand and have an issue such as a misprinted barcode, this stops the entire automated process for that case. A warehouse employee must instead get involved and  try to ascertain the error and input the product into the system manually, and then they must walk the product to the correct loading dock. This manual process then starts again at the final destination when the items are unloaded and must be manually entered into the system.  

The Economic impact of chargebacks

Retailers have entire departments dedicated to dealing with these chargebacks and enforcing their standards. For a brand, having bad quality on the labeling and packaging requirements can have devastating effects of chargebacks that quickly add up and impact overall profitability. The good news is that small improvements can lead to better things for brands. As the retailers’ standards are met, the brands ratings will increase, inspection rates decrease, and the amount of chargebacks and fees per chargeback will decrease.

Working with an experienced 3PL can help brands start off on the right foot with retailers and can also help brands improve existing low quality ratings. Brands that are already well established but struggling with retail chargebacks often face the decision to work with a new company to help resolve the compliance issues, or continue to try to tackle the compliance issues in house, and a common barrier to outsourcing is the freight cost.

If a brand is paying a chargeback of $800 for one case with a barcode issue, and this contributes to their quality rating dropping,  an option would be to work with a 3PL to ensure your products are being prepared for the retailer properly. This solution might require freight costs to have the products sent to and from the 3PL that are often seen as costly on their own, but compared to the potential chargebacks, let alone brand reputation, they are minimal in the long term.

Example        

A brand with a high quality rating has one barcode error may be paying $100 for that case, but as their rating drops closer to an F rating, suddenly they’'re paying $800 for the same barcode error.

If it costs $3,000 for freight for a brand to roundtrip ship 1500 cases,  of products to a 3PL to be prepared for the big box retailer, they are potentially saving themselves $5,000 -$40,000 in chargebacks. With the right 3PL partner, the brand’s quality rating will also improve, over time, and profitability will then also increase.

Additionally, with a brand’s products prepared and packaged correctly they will be available in the retailer’s inventory nearly upon arrival. Which means a shortened order to cash cycle time for the brand as well as the retailer. Starting with the right processes in place helps keep the supply chain fully functioning and ultimately goods will be purchased by consumers faster.

Recent Compliance Case Study                              

A top 5 global apparel fashion house was doing a large amount of business with a big box retailer, and struggled with their ability to manage the compliance and quality of their Value Added Services effectively. They slowly fell to a 'D rating' and then on track to an ‘F Rating', where they were paying up to $800 per case label or bag tag that was out of compliance.

For this big box retailer, this was a major issue, because their distribution centers are all cross dock operations, meaning that as soon as product arrived, if it was compliantly labeled, within 15 minutes it was loaded on a truck that was headed for a store. When there were compliance issues, this slowed down product sales because the retailer was not set up to 'fix' product in house. Product that should have taken a day to arrive, could be 10 days late due to issues like these. This decreased their order to cash cycle time and at times resulted in not enough merchandise on the sales floor.

They hired Renewal Logistics to execute all of their Value Added Services programs, as well as manage the compliance inspection for their wholesale accounts. In a period less than 1 year, the client had gone from an 'D Rating" to a 'B Rating' with this one big box retailer, and was on track to become an 'A Rated’' brand. Renewal Logistics received the goods daily for all of their wholesale orders that had to ship that week, and Renewal Logistics was tasked to review the compliance manuals for all of their retailer accounts, and meticulously manage the Value Added Services processing of all of the wholesale goods that needed additional handling. This included ensuring the items were folded and  polybagged properly, with hang tags properly placed and labeled, the polybags had the proper bag tags, in the proper location, the case inventories matched the Advanced Shipping Notice exactly, and the case labels were all printed and applied correctly.

This was a meticulous process that involved constant training and a high level of attention to detail in the inspection process.

For this one large program where we helped this one brand go from a ‘D Rating’ to a ‘B Rating’,                                                     

Renewal Logistics Processed Total Units For This Program: 3,946,590

Renewal Logistics Accuracy: 99.996%

Reduced Chargebacks: 97%

As a financial leader in the industry, it is worth taking  a look at your total chargeback expenses and seeing if there is a better way. We can provide an audit of how you are doing today and provide you an analysis of where your upside opportunities are.