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How One Supplier Used Overseas Audits to Reduce Shipping Errors

Posted By Administration, Thursday, June 9, 2016
Updated: Wednesday, June 8, 2016


by RVCF


It's no secret that shipping errors lead to chargebacks, lower margins, slower time to market, unhappy customers, and friction in the trading partner relationship. But what do you do when the source of the problem is on the other side of the world?

This is a conversation we had with Stu Levitt, a supply chain compliance executive from a major merchandise supplier. Based on scorecarding from various retailers, it was obvious that there were serious problems with shipments received from overseas factories, especially prepacks. Anything that could go wrong did go wrong – from incorrect prepack ratios to missing units to missing tickets.

Of course, the problems went deeper than chargebacks. The supplier's relationships with its retailer customers were suffering. When your shipments consistently have major compliance issues, you can forget about asking for a waiver, a change in a shipping window, or any leeway whatsoever. If you expect to maintain a strong relationship, the least a supplier can do is ship what the retailer orders.

When shipments arrived in the U.S. from the factories, the supplier could audit the shipment, which costs time and money and disrupts the flow of goods through the supply chain. They could send the shipment along to the retailer, unaudited, and hope for the best. Obviously, neither of these solutions is viable or desirable.

The only way to fix the problem was to address it overseas at the point of origin. Only the factories have the units, the tags and anything else required to make each shipment whole and compliant.

Making the Case
The supplier's compliance department knew it would have to make a strong case to get senior management buy-in, as well as cooperation from the factories. They used retailer scorecards and feedback to determine where the majority of issues that triggered chargebacks were occurring. They came up with a priority list of factories – the worst offenders, so to speak.

This information was presented to senior management. The CIO was also involved because the initiative would involve deploying technology at home to support and monitor the overseas solution. The decision was made to bring in a service provider that had a permanent presence near the overseas factories. This meant the supplier wouldn't have to set up its own team overseas, purchase the hardware, or train factory personnel.

The factories slowly began to agree to an onsite auditing process. After all, the supplier wasn't gouging the factories – they were simply transferring the chargebacks that the factories created. The supplier's compliance and sourcing departments had to hammer home the fact that implementing a solution at the factories would reduce chargebacks. Some factories simply refused, but most of the high-priority factories agreed to move forward.

At the end of the day, everyone needed this – the supplier, the factories, and the retailers.

Implementing the Solution
One of the problems was the fact that each unit wasn't being properly reviewed before it was packed in the carton. For example, if a carton required 10 units, the factory worker would simply count 10 units and assume the stack they were given was correct. They weren't verifying proper size or color, or the presence or proper placement of a tag. The step that was added to the process was the mandatory scanning of each unit that went into a carton.

Of course, a packer can circumvent this process by simply scanning the top unit 10 times. The key is to make sure the supervisors are doing their job so the packers don't take the easy way out. The computer system will then tell you if a carton is packed with the correct units and the correct number of units. You then create a database of what is going into the carton, which can be used to create reports that prove how a carton was packed.

The implementation of the processes and technology was overseen by the supplier's sourcing personnel, while the service provider continues to monitor the process on an ongoing basis. The supplier held weekly conference calls with the factories and the service provider to discuss the progress. The IT department was also able to monitor the implementation from the U.S.

Today, several dozen factories have implemented this factory-based auditing process.

The ROI
The supplier noticed marked scorecard improvement and a consistency in lower audit failure rates within two months. The most significant progress came in shipments to large retailers. The supplier's quality control group conducted outbound audits as well. Quality control and compliance also saw obvious improvement within two months.

The supplier was able to reach out to retailers to show that investments in process improvements and technology were being made to solve the problem. Because of these efforts, retailers were willing to negotiate settlements and issue reversals on chargebacks.

The Lesson
By the time incorrect shipments from overseas factories arrive in the U.S., it's often too late to fix them cost effectively. The only way to solve the problem is to go directly to the source. Rather than passing along chargebacks to the factory or simply accepting chargebacks as a cost of doing business, RVCF encourages supplier members to collaborate with retailers. Pinpoint the cause of shipping errors and work with service providers if necessary to implement permanent solutions. This is the most effective way to reduce shipping errors and chargebacks, preserve profit margins, avoid unnecessary audits in distribution centers, delight customers, and improve trading partner relationships.

For inquiries about how this process was implemented, Stu may be contacted at stulevitt23@gmail.com.


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Tags:  Audit  Concealed Shortage  Shortages 

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Concealed Shortage Allowance

Posted By Administration, Thursday, September 10, 2015
Updated: Wednesday, September 9, 2015

by Robert Prather for RVCF


There is a push coming from a well-known retailer to put its vendors on a "concealed shortage allowance." On the surface this seems like a very good idea. As the literature reads, it's being sold as a "better more efficient way to handle shortages." However, without understanding certain aspects of this initiative and their consequences, it could be a nightmare for a vendor and a huge profit making tool for the retailer.

Here are three of the most obvious concerns:

  1. Will the retailer take into account ALL reversals when determining your shortage allowance percentage?
    1. In the documentation provided the retailer stated that they plan to calculate the shortage allowance percentage by starting at 3-4 months back then 12 months after that so reversals can be taken into account. However, during a workshop held by the retailer, they advised that reversals are not taken into account when determining shortage percentage on the vendor scorecard – reversals had to be presented to them in order to have the scorecard reflect them.
    2. If that is also how this percentage is going to be calculated, it's likely the allowance percentage stated will be much higher than it should be.
    3. Also keep in mind that a retailer can be six months or more behind when working and reversing claims, meaning 3-4 months back does not begin to capture all the reversals.
  2. The shortage allowance will be determined by the buyers.
    1. Because the buyers will be determining the shortage allowance percentage and presenting the initiative to sales, it will circumvent the one department (A/R) in your organization charged with managing this information correctly.
    2. This can be used as a sales allowance without giving thought to the long-term financial effects due to the fact neither party really knows the true dollars involved.
  3. The shortage allowance percentage can be adjusted if audits show improved accuracy.
    1. Who controls the timing of these audits?
    2. Can they increase the rate at any time or will increases also be within the timeframe of these audits?
    3. Are audits random or will they be regularly scheduled (quarterly, for instance)?

If you are considering a "shortage allowance" it is imperative to:

  1. Immediately speak to your sales team and let them know you want the chance to review all documentation and information being used in determining your shortage allowance percentage.
  2. Make sure reversals have been factored in when establishing a historical benchmark. Ask for a detailed breakdown by date and claim. Compare it to your records and ensure no reversals were missed.
  3. Verify that audit dates are mutually agreed on and that increases cannot be made without mutual agreement.
  4. Confirm you have the right to be taken out of the program at any time if the shortage allowance percentage is not serving your best interests.

By doing asking questions and gathering the appropriate documentation upfront, an educated decision can be made as to if the proposed concealed shortage allowance will be advantageous or unfavorable for your business. In any event, don't go in blind – get the facts and protect your bottom line.


For over 26 years, Robert Prather has served as a chargeback and deduction management consultant for a myriad of top retail brands. His passion for educating merchandise suppliers on the proper tactics for claim resolution and supply chain compliance has made him a sought after resource for companies that need to take back control in this arena. Robert can be reached at robertprather69@yahoo.com or (626) 736-3588.

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Tags:  Concealed Shortage 

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